One of the issues global companies have always faced is how to manage a global sales force in an environment where local accounting rules for revenue recognition vary. Countless times, sales teams have vented to me because U.S. GAAP doesn’t allow us to recognize revenue when IFRS does. My response has always been that accounting rules should inform us, but they don’t define good business. Ultimately, the sales team needs to negotiate the best deal for the company (only one consideration of which might be whether or not we can recognize revenue), and we accountants will advise them on the best way to structure the deal and, ultimately, figure out how to account for it.

The new revenue recognition rules, expected to be issued simultaneously by the FASB and IASB in Q1 2014, will create a new global environment with enhanced comparability across industries and geographies. Global companies will be operating on the same playing field, which should give them some relief. OK, sales guys—time to stop venting and focus on making good business deals.

Judgment is a double-edged sword
The beauty of the proposed new rules is that they allow for judgment. However, that’s a double-edged sword, since filers have abused “judgment” in revenue recognition in the past and caused regulators (the SEC, EITF, AICPA, et al.) to respond by drawing “bright lines” in their issuance of “clarifying literature” (staff accounting bulletins, technical practice aids, EITF interpretations) to provide consistency in accounting and reporting where the FASB hadn’t drawn those lines. It will certainly be interesting to see how well regulators embrace this principles-based approach to accounting for revenue with this complete converged rewrite of international accounting standards.

Under the new revenue recognition rules, the five basic steps for accounting are:

  1. Identifying the contract with the customer. (Yes, sales team, you still need to include all of the deal in the contract. We still don’t like verbal side arrangements.)
  2. Identification of the separate performance obligations in the arrangement. (Similar to current multiple-element arrangement rules, these don’t need to have a price spelled out in the contract.)
  3. Determining the transaction price.
  4. Allocating the transaction price to the separate performance obligations in the contract. (This will require significant judgment, thus the need to thoroughly document the basis for your assumptions.)
  5. Recognition of revenue when each separate performance obligation is delivered.

The latest clarifications from redeliberations have added back a requirement for collectibility to be probable—and note that this is the one minor nonconverged compromise point in the standard; there are minor differences in the FASB and the IASB definitions of “probable.”

For those who aren’t yet familiar with how the new rules will roll out, we are expecting the new standards to be effective for fiscal years beginning after December 15, 2016. For most calendar-year companies that means 2017, and one year later for private companies. With a retrospective presentation of prior periods, companies will be considering and evaluating the new revenue recognition rules for 2015, 2016 and 2017 transactions—which gives them 2014 (one year—next year!) to figure out how they’re going to track this. Alternatively, companies may elect to apply a modified retrospective approach by recording the cumulative effect of the change and providing supplemental disclosures for comparability of prior periods.

Whichever approach companies take, it will be a significant endeavor with complex arrangements. This change will require support from more than just the accounting team. For example:

  • Evaluating and refining IT systems to support the new revenue recognition process and considerations
  • Updating sales team tools and legal business forms
  • Enhancing accounting processes to document the basis for judgments made
  • Designing internal control procedures to address new risks under the new rules

At the end of the day, the global convergence of revenue recognition rules should provide more flexibility in how companies do business. But they don’t remove their responsibility to ensure consistency of accounting and reporting across industries.

Editor’s note: ComplianceWeek interviewed Diana for its article on the new rev rec rules in today’s edition. (Subscription required.)