Revenue recognition: comment letters help shape future guidance.

• Author: Triplett, Lynne
• Position: Accounting

Demands on the time of corporate financial executives are enormous. So when regulators and accounting standards setters, such as the Financial Accounting Standards Board, ask for comments on proposed regulations or accounting guidance, it makes sense to consider whether investing the time and effort really makes a difference and merits an executive's response.

FASB's work with the International Accounting Standards Board on several recent proposals focused on converging U.S. generally accepted accounting principles and International Financial Reporting Standards demonstrates that constituent feedback does indeed influence the boards' redeliberations, which often lead to changes to proposed guidance.

In fact, the boards' responsiveness to comments should assure executives that time invested in the comment letter process is valued and could help prevent unintended consequences of standard setting

A case in point is the impact of constituents' feedback on the development of revenue recognition guidance. Few financial reporting topics affect as many businesses as revenue recognition, and the boards have been working for several years to develop a single global revenue recognition standard.

Since issuing their preliminary views on amending the existing revenue recognition guidance in 2008, the two boards have performed extensive outreach to solicit feedback from various constituents, including businesses that must comply with the new guidance when it is finalized.

The boards have considered written comments from constituents in response to both their preliminary views and their 2010 Exposure Draft, and have discussed the proposals with representatives from various constituent groups at numerous roundtables.

In many cases, the boards have incorporated into the proposed model changes suggested during the roundtables and in constituents' comment letters. In fact, due in part to the extent of the amendments to the 2010 ED, the boards decided to reexpose the revised guidance for further comments.

The following examines some of the comments that have resulted in changes to the proposed revenue recognition model to date, as well as comments that warranted consideration but were ultimately not incorporated.

Impact of Feedback on Revenue Recognition Model

The impact of respondents' feedback is visible in many areas of the proposed revenue recognition guidance, including control transfer, separate performance obligations and product warranties.

Control Transfer for Services. According to the 2010 ED, an entity would recognize revenue when it transfers a promised good or service to the customer. Transfer occurs when the customer obtains "control" of a good or service, which is defined as an entity's "ability to direct the use of, and receive the benefit from, the good or service."

While the 2010 ED included guidance on measuring revenue in a situation where goods or services are " continuously" transferred to a customer, respondents suggested that the boards should clarify which service contracts...