Accounting & Auditing
FASB, IASB Plod Toward Convergence on Revenue
By Colleen Cunningham based on a balance sheet approach. This control.
Compliance Week Columnist contrasts with the existing model, which What constitutes a transfer of control,
is more of an income statement, or earn- precisely? The proposal isn’t clear on that,
F or an economy that isn’t seeing enough
revenue these days, the United States
certainly does have a lot of ways compa-
ings “process” approach. Today compa-
nies generally recognize revenue when it
is realized (or realizable) and the earnings
and it may not reflect the economics of the
underlying transactions or provide use-
ful information to investors. The related
nies can try to recognize it. process is complete. The approach in the costs of executing that two-year contract
Currently, U.S. Generally Accepted discussion paper is based on changes to may be recognized long before the rev-
Accounting Principles and GAAPs’ re- customer contract assets and liabilities. A enue; the matching concept is not consid-
lated guidance have more than 180 rules contract comprises rights and obligations. ered in the proposal. For some companies
for revenue recognition (including the Any unperformed rights and obligations that have long operating cycles, this can
ones that conflict with others). Contrast should be reported on a net basis as either create significant volatility in the financial
that with International an asset or a liability. The transfer occurs statements and cause a mismatch between
Financial Reporting Stan- when the customer receives control of the revenues and expenses.
dards, where the opposite goods or services. Costs were scoped out of the discus-
is true: IFRS has almost no All contracts with customers, whether sion paper, but many comment letters
guidance for some transac- written or oral, would be analyzed for suggested that we can’t talk about one
tions. contract assets (the right to receive pay- side of the equation without addressing
Both extremes cause ment for goods or services) and contract the other, particularly as it relates to long-
diversity in practice. liabilities (the obligation to perform un- term construction and programs.
That’s alarming, because der the contract). Revenue would be rec-
when you look at common ognized when the contract asset increases Where We Can Agree
reasons for restatements,
revenue recognition is frequently the
primary reason. Companies that have to
or the contract liability decreases—that is,
when the company satisfies performance
obligations to a customer by transferring
M any believe that a universal ap-
proach to revenue recognition may
not make sense. Most also agree, however,
comply with myriad, complex rules may goods or services. that the current plethora of approaches
make honest mistakes. Improper revenue While this approach sounds straight- isn’t the right answer either. Perhaps two
recognition is also a nifty way to commit forward, it is very theoretical and much or three models may be more appropriate?
fraud. Clearly, clarification and simplifi- harder to apply in practice. This new con- In particularly, a separate model for long-
cation is needed. cept will introduce more estimates into the term contract accounting may be neces-
In December 2008, both the U.S. Fi- financial statements. Companies are going sary for the reasons discussed above. Try-
nancial Accounting Standards Board and to have to identify all of the performance ing to s