The FASB's and IASB's New Revenue Recognition Standard: What Will Be the Effects on Earnings Quality, Deferred Taxes, Management Compensation, and on Industry‐Specific Reporting?

• Date: 01 October 2016
• Published date: 01 October 2016
• DOI: http://doi.org/10.1002/jcaf.22188

43

© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22188

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The FASB’s and IASB’s New Revenue

Recognition Standard: What Will

Be the Effects on Earnings Quality,

Deferred Taxes, Management Compensation,

andon Industry-Specific Reporting?

Robert W. Rutledge, Khondkar E. Karim, and Taewoo Kim

EVOLUTION OF THE

NEW CONVERGED

STANDARD

ON REVENUE

RECOGNITION

“The revenue

recognition stan-

dard represents

a milestone in

our efforts to

improve and con-

verge one of the

most important

areas of financial

reporting. It will

eliminate a major

source of incon-

sistency in GAAP,

which currently

consists of numer-

ous disparate,

industry- specific

pieces of revenue

recognition guid-

ance. The issu-

ance of this stan-

dard is a major

first step, but it is

not the end of the

process.”

Russell Golden,

Chairman of the FASB

In 2002, both

U.S. and interna-

tional standard

setters suggested a

new standard for

recognition of rev-

enue was needed that

would be applicable

for a wide variety of

circumstances. The

Financial Account-

ing Standards Board

(FASB) and the Inter-

national Accounting

Standards Board

The Financial Accounting Standards Board (FASB) and Inter-

national Accounting Standards Board (IASB) have been

working for 13 years on a significantly different, converged

standard for revenue recognition. The new standard was

finally approved by both boards in 2014, and was to be effec-

tive for calendar-year companies beginning in 2017. On July

9, 2015, mounting concerns from preparers resulted in a

one-year delay in implementation. An important consideration

to examine is “what are the major indirect effects that may

result from the adoption of the new revenue recognition stan-

dard?” Wediscuss such effects on earnings quality, deferred

taxes, management compensation, and on industry-specific

reporting. Earnings quality may be reduced because the new

standard will increase deferred tax balances, and provide

executives with increased opportunity to manage earnings.

Alternatively, the consistency in generally accepted account-

ing practices (GAAP), and comparability of revenue recogni-

tion practices across industries with similar transactions may

improve earnings quality. The likely cumulative effect on

earnings quality is not yet determinable. Second, manage-

ment may have more opportunity to manipulate earnings

through judgments and estimates, and accelerate earnings-

based compensation. Thus, the standard may impact man-

agement compensation. Finally, we discuss industries that

are likely to be the most impacted from the new standard.

© 2016 Wiley Periodicals, Inc.

Refereed (Double-Blind

Peer Reviewed)