Revenue recognition realized: U.S. companies--long calling for revenue disclosure that was less prescriptive and principles-based--may question what they wished for when the new standard is adopted.

• Author: Cheney, Glenn Alan
• Position: Financial Reporting

After 10 years of work, thousands of meetings, and a lot of trans-Atlantic head-scratching, companies around the world are getting their first look at a new accounting standard on revenue recognition.

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are issuing virtually identical standards that do away with literally hundreds of bits of scattered guidance, replacing them with ptinciples-hased guidance that could be challenging to United States-based companies.

Much of the current disparity results from disparate standards set for various industries. One objective of the new standard is to do away with industry differences, resulting in more comparable revenue disclosures.

U.S. companies have long called for standards that are less prescriptive and based more on principles. But the judgment required for a principles-based standard may leave corporate and public accountants questioning what they wished for.

FASB board member Marc Siegel is optimistic. "The new standard will replace industry-specific guidance with a single and comprehensive framework for recognizing, measuring and disclosing revenue," Siegel says. "That single framework will apply across companies and capital markets, making it much easier for financial statement users to compare the final statements of companies across different industries."

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Complex Shift in Accounting Practices MI for U.S. Companies

The goal of establishing a single framework for something as variable as revenue for all companies--public, private and not-for-profit--in all industries and in all countries has been an unprecedented challenge. Though the new guidance is simpler to grasp, for many companies the change will mean a complex shift in accounting practices and the need to explain the basis of judgment calls.

Once that shift has been made and the bugs have been ironed out of the guidance, however, the accounting should be simpler. According to FASB, the application of a single set of principles should result in more stable guidance that not only has fewer rules but rules that remain consistent across industries, jurisdictions and capital markets.

Financial Executives International (FEI) tasked its Committee on Corporate Reporting (CCR) to provide cross-industry views on the FASB proposals. The committee includes members from 21 public companies in manufacturing, accounting, software, information technology, health, automotive, petroleum, banking and telecommunication.

PwC LLP partner Chad Kokenge warns that though the standard is not effective for public companies until years beginning after Dec. 15, 2016 (nonpublic entities will have an additional year to comply) organizations need to start understanding the ramifications now.

"Small changes in revenue recognition can lead to big impacts throughout a company's...