Revenue recognition gets a new look
August 10th, 2010 by Pam SintrosAccountants, auditors, and corporate entities alike, take notice: the exposure draft recently issued by the Financial Accounting Standards Board (FASB) promises that big changes are in store. Weighing in at 170 pages, the proposed new revenue recognition standard is designed to improve and align the financial reporting of revenue from contracts with customers and related costs.
The draft is a joint effort with the International Accounting Standards Board (IASB), and if adopted would create a single revenue recognition standard for International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP) to be applied across various industries and capital markets.
The two groups have four objectives for the new standard:
- Remove inconsistencies and weaknesses in existing revenue recognition standards and practices;
- Provide a more robust framework for addressing revenue recognition issues;
- Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and
- Simplify the preparation of financial statements by reducing the number of requirements to which entities must refer.
In a podcast posted on the FASB website, board member Leslie Seidman said the current system was developed over many years on an ad hoc basis, creating a “very complex, inconsistent, and incomplete set of standards.” The proposal, she said, “will make accountants’ jobs easier when new types of business arrangements emerge because they’ll have one standard to look to on how to recognize revenue for the arrangement.”
If both groups can sort through and incorporate the various feedback received – the comment period ends on October 22nd – the final standard is expected in the second quarter of 2011. Assuming it is adopted, the FASB has produced a chart outlining the five steps companies will need to follow to apply the revenue recognition proposal.
While it still has a long way to go, the new standard represents a significant improvement over the current system. When combined with other projects in the works to reconcile GAAP and IFRS, they will collectively amount to a single set of high quality, global accounting standards.
