On July 9, 2015, the Financial Accounting Standards Board (FASB) officially deferred implementation of the landmark global Revenue from Contracts with Customers recognition accounting standard by one year. On July 22, 2015, the International Accounting Standards Board (IASB) followed suit on, despite fewer complaints about the new guidance from companies that follow International Financial Reporting Standards (IFRS). This article provides an overview of the converged guidance and explains why the extension was granted.
Years in the Making
Revenue is considered one of the most important measures of a company’s financial health, and proper implementation of the standards is high on the FASB’s list of priorities. In May 2014, the FASB published Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The standard was largely converged with IFRS 15, Revenue from Contracts with Customers, and is considered one of the most important standards the FASB has released in recent years.
The converged standards are the result of more than 12 years of work and are expected to usher in a major change for many companies, especially for those in the software, media, and telecommunications industries. ASU 2014- 09 replaces nearly 180 pieces of individual guidance under U.S. Generally Accepted Accounting Principles (GAAP) with a single principles-based model for recognizing revenue from customer contracts worldwide.
The American Institute of Certified Public Accountants (AICPA) formed 16 task forces in the following industries to help companies interpret and apply the new standards. Industries covered included: aerospace and defense, airlines, asset management, broker/dealers, construction contractors, depository institutions, gaming, health care, hospitality, insurance, not-for-profit, oil and gas, power and utility, software, telecommunications, and timeshare.
Each task force will create an industry-specific accounting guide on revenue recognition, including illustrative examples of how companies should apply the new guidance.
The original effective date for the converged guidance was January 1, 2017, for calendar-year public companies. Early adoption wasn’t allowed for public companies. Private companies were given an extra year to implement the new rules, or they could opt to implement them at the same time as public companies.
Unrealistic Implementation Schedule Forces New Timeline
To implement the new guidance, most U.S. companies intended to revise their financial reporting systems so they could report adjusted revenue totals and income statements for 2015 and 2016 with their 2017 first-quarter filings. The presentation of two prior years of results isn’t required under the standard, but it’s favored by investors and analysts because it helps them assess a company’s long-term performance.
To accommodate such retrospective adoption, companies would have to have been making entries into their financial reporting systems using the new accounting methodology as of January 1, 2015. A nine-month delay in publishing the final converged standards meant there were barely seven months to make the systems changes for one of the most significant accounting standards in recent memory. Many U.S. companies told the FASB that the implementation schedule was unrealistic.
Approval of a One-year Deferral
In late April, the FASB proposed delaying the Revenue from Contracts with Customers recognition standards by one year to give companies more time to digest the changes. Three of the FASB’s seven members originally said that a one-year delay wasn’t enough time for companies to get ready. Instead, they favored a two-year delay.
The IASB also proposed a one-year delay. But the international board was less enthusiastic about proposing a deferral of the implementation date and didn’t consider a two-year deferral in its proposal. The three IASB members who voted against proposing a one-year deferral said delaying the standard set a bad precedent and that the standard-setters had given companies ample time to adopt it.
One reason the IASB received fewer complaints about implementing the new standards is that companies outside the United States generally are more familiar with the principles-based accounting employed by the new revenue standard. Conversely, U.S. companies are accustomed to more prescriptive industry-specific revenue accounting standards under GAAP.
New Deferred Implementation
Dates to Know Under the extensions approved by the FASB and IASB, public companies, certain employee benefit plans and some not-for-profit organizations can wait until the fiscal years that start after December 15, 2017, to apply the new Revenue from Contracts with Customers recognition standards. They’ll also apply the standards to the quarterly reports and other interim-period reports issued for that year.
Private companies can adopt the standards for annual financial statements for fiscal years that start after December 15, 2018. In addition, private companies can apply the standards to quarterly reports and other interim-period reports for fiscal years that start after December 15, 2019.
The deferred standards also give companies the option of adopting the standard on the original effective date.
Additional Amendments Currently Under Consideration
For companies that engage in contracts with customers, the converged standards call for sweeping changes to revenue, a fundamental barometer of companies’ financial health. The FASB and the IASB have been fielding numerous questions from the public about these standards, and they’re considering amendments to clarify various portions. Although these amendments won’t necessarily amount to major rewrites, they could lead to slightly different interpretations under GAAP and IFRS — leading to even more confusion about the new guidance.
For many companies, implementing the new standards means revising their accounting controls, processes, and systems. So, don’t let the one-year deferral of the Revenue from Contracts with Customers recognition standard lull you into complacency, especially if you choose to provide the three-year comparison required with retrospective application.
Contact your Untracht Early advisor if you are in need of additional guidance on how the deferred implementation and revised timelines of the Revenue from Contracts with Customers standard update might impact you.