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Get ready: FASB is dumping some big items on your to-do list

The Financial Accounting Standards Board has a bunch of resolutions that affect many companies. The board is offloading some of their weightier projects that have taken up a lot of time (several years!) on their docket.

Fortunately, they are giving financial statement preparers a lot of time to come to terms with the changes ahead, providing a couple of years to implement new standards for lease accounting and the classification and measurement of financial instruments.

The most highly anticipated one—the new leasing standard—will result in some companies looking more leveraged on their balance sheets, starting with their 2019 financial reports (privately held companies get an extra year). Companies that lease any property and equipment for one year or more will be impacted. This will be a really big deal.

In the works for a decade (the SEC called for a revamped standard in 2005), the new leasing rule created a rift during the ongoing convergence effort between FASB and the International Accounting Standards Board, leading the two boards to come out with two different standards. Call it a divergence if you will.

The IASB recently released their final standards and the FASB’s is expected this quarter. Companies will appear to be burdened by more debt than they do now, as disclosing leases only in footnotes will no longer be acceptable under GAAP. Studies estimate that the changes will raise the reported liabilities of U.S. public companies by $1.5 trillion to $2 trillion.

It is expected that the new rule will take more effort to put in place than the new revenue recognition standard (and that’s saying something). Consider that every lease must be reviewed with assumptions updated each reporting period. Under the new guidance, lessees will be required to present right-of-use assets and lease liabilities on the balance sheet.

FASB has passed down a couple of other big agenda items when it released its rules concerning financial instruments last month. Although not in the works as long as the pending changes to lease accounting, this project was also divisive for FASB and IASB. For FASB’s part, the board will require companies to follow new rules on classifying and measuring financial instruments in 2018 and financial instrument impairment in 2019.

FASB’s standard for how to classify and measure financial instruments will be relevant to most companies, in particular those that have equity method investments that are not currently measured at fair value. Current fair value measurements and disclosures can be confusing to investors, and the new rules are intended to simplify things. Companies can adopt parts of the standard early if they wish.

As for the new revenue recognition standard, the Joint Transition Resource Group had its last scheduled meeting in Q4 2015 and will reconvene if new issues arise around implementation of the new rule. The FASB is expected to finalize proposed amendments to the standard this quarter. So the rules are settling, and there is no more reason to delay your implementation efforts. You are already in the first fiscal year that will be effected by the new standard when you implement in 2018.

FASB’s agenda will appear a bit thinner by the second quarter of 2016, while yours has grown. Let the fun of implementation begin!

Diana Gilbert has been a member of the RoseRyan dream team since 2008 with almost 30 years of professional experience. Frequently tapped for her insights by Compliance Week, Diana excels at technical accounting, revenue recognition, SOX/internal controls, business systems and process improvements.

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Revenue recognition: Are you in denial?

After more than a decade in the making, the FASB and the IASB finally issued new revenue recognition rules. Now if the boards needed that kind of a runway, how hard will it be for companies to implement? This is what management should be asking themselves.

But I get a sense that some are just in shock and aren’t asking the questions that need to get asked — maybe because they thought the guidance would never be issued or maybe because it’s just one more thing on the corporate plate right now. I get it. When anyone is in a state of shock, they tend to adopt a couple of go-to coping techniques — denial and procrastination. It’s been just over three months since the rules have been issued, and I have been witness to those coping techniques as companies battle implementation shock. What’s developed is a culmination of misconceptions, which we dispel below.

6 common misconceptions about the new rules

#1 The new rules don’t impact my business.
The new rules will apply to all entities that enter into contracts with customers, including long-term contracts and licenses. You cannot determine the impact until you truly evaluate each of your revenue models under the new guidance. Companies should also look ahead to how their business is growing and changing, and consider the new rules in connection with possible changes in their sales models between now and the adoption date. And, at the end of the day, even if your conclusion is “no impact,” you’ll also need to document your evaluation, vet it with your auditors, and update your financial statement disclosures and policy documentation so that they coincide with the new guidance.

#2 The implementation date is far away, so I can afford to wait.
While the standard is effective Q1 2017 for calendar-based public companies, the guidance does not allow for prospective adoption. You have some choices in terms of adoption methodology, but no matter what you decide you’ll still be looking back to 2016 and possibly 2015 if you choose full retrospective adoption…and 2015 is just around the corner. As a result, you will need to assess current contracts and those that commenced several years before the effective date. Then, when you begin to consider systems, processes, financial planning, investor communications, that date will no longer look so far off — especially when you know implementation duties will be in addition to your day job.

#3 Implementation of the new rules is just an accounting exercise.
So many people believe that it’s something that their accounting department will handle. Quite the contrary! Consider the following: debt covenants (treasury), sales incentives (HR), customer contracts (legal), investor communication (IR), systems (IT), and internal controls (internal audit). Companies big and small will need to think operationally where these rules are concerned. A successful implementation should be a collaborative effort across the organization.

#4 The standard only impacts the timing of revenue.
The fact is the new standard is comprehensive and changes the way we look at contracts with customers, the concept of delivery as well as many other aspects of the revenue process. For example, some of the collaboration revenue of life science companies may be excluded from the revenue guidance if the other party to the deal is not considered a “customer.” The new guidance also considers whether there is a financing component when an arrangement extends beyond one year. And any company opting for the modified retrospective adoption approach may have to record a cumulative effect of a change in accounting principle, which means it goes into the “black hole” of retained earnings, skipping the P&L, never to be seen again.

#5 My financial systems are savvy and can handle the rule changes.
With the complexity of contracts, there is no simple “flip-the-switch” scenario that can be employed. All types of revenue models will need to be evaluated. The new standard utilizes estimates and judgments, which can pose challenges in terms of automation. Companies may also want to look at additional reporting functionality to support their estimation process. And with all of this, internal control processes both in and around their system capabilities will need to be reviewed and updated.

#6 These changes always get delayed.
While some of us remember fondly the days when the internal controls part of SOX kept getting delayed, keep in mind that SOX was a U.S.compliance initiative. The new revenue rules, on the other hand, were developed in collaboration with the IASB in an effort to move closer to a single set of global accounting standards. The boards took great pains in developing the new standard and laying down the transition date so that reporting of revenue would be consistently applied on a global basis. So while companies may continue to lobby for postponement, this could result in nothing more than wishful thinking. Investors are going to want their companies to plan ahead — the “wait and see” approach will put delayers at high risk for financial misstatements and delayed filings.

In the face of a sweeping standard that could have extensive implications, it’s easy to understand why anyone would deploy coping strategies and try to look the other way. But as you can see from this list, there’s a lot to be done and only a certain amount of time to get it done right. The best approach is to tackle one step at a time. Start with assessing the impacts to your business — financial, operational and external. Then develop a plan. Knowing what needs to happen and how you can get there is certain to to take you away from the depths of denial to a clear path to compliance.

Kelley Wall leads RoseRyan’s Technical Accounting Group, which provides technical accounting and SEC expertise to public and private companies on complex accounting matters and implementation of new accounting pronouncements.

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How the new revenue recognition standard may affect your company

We’ve been hearing about it for years. Finally, the result of the joint project between the FASB and the IASB to update and consolidate accounting standards for revenue recognition into one global standard is just about here. They’re expected to issue it by the end of this month.

This is when the fun begins. While there is time before companies have to issue financial statements under the new standard (which we’ll see in the first interim period of 2017 for public companies with fiscal years beginning after December 15, 2016), they will need to disclose the expected impact of the new standard right away. And they will need to be tracking transactions under the new principles beginning in 2015.

The biggest change is the shift from industry-specific guidance to the application of general principles across all industries. Companies will need to re-think how revenue will be recognized for their transactions, and in some cases they will be able to record revenue earlier than they do now. Here are my thoughts on what our clients should be considering in the months ahead.

If you work at a life sciences company
The revenue standard applies to all contracts with customers, including some collaboration arrangements for life sciences companies if they are in effect transactions with a customer. Collaborations might fall outside the scope of the new revenue guidance if the collaborator or partner is not in substance a customer, such as when a biotechnology company and pharmaceutical company have an agreement to share equally in the development of a specific drug candidate as well as the risk that comes with it.

Another change that will arise with the new standard is that variable consideration (such as milestone payments) may be included in the transaction price allocated to deliverables as long as the company has relevant experience with similar performance obligations and, based on that experience, they do not expect a significant reversal in future periods. Changes to these estimates will have to be allocated to performance obligations based on that initial allocation, unless a payment relates to a specific element and is consistent with the amount expected to be entitled for performance of that obligation.

When life sciences companies license their drugs to commercialization partners, they can estimate and recognize sales-based royalties when the partners’ subsequent sales occur and will not have to wait, as they do now, until each partner has reported such sales. These estimates can include only the amount that has a low probable risk of significant reversal.

Another change that will result in earlier recognition of revenue for life sciences companies is the recording of sales of new products when they ship, minus the estimates for returns. Currently, companies have to delay recognition on a sell-through basis if a pattern of return has not been established.

If you enter into license agreements
The new standard’s emphasis on when control transfers to the customer may change the timing of revenue recognition on licenses. A license is the right to use an entity’s intellectual property, such as software and technology, patents, trademarks, copyrights, music and movie rights and franchises. In some cases, a license is a promise to provide a right, which transfers at a point in time. In other cases, it is a promise to provide access to a right that transfers to the customer over time, such as if a licensor has continuing obligations under the arrangement that do not otherwise qualify as separate performance obligations, or if the licensor must actively make the IP available on a continuous basis during the license period, or if the licensee benefits from changes over time.

If you have software arrangements
For software arrangements, VSOE (vendor-specific objective evidence) guidance is no longer required, resulting in earlier recognition of revenue for licenses that lacked it for undelivered elements, including future upgrades, additional product rights or other vendor obligations. Companies still need to allocate revenue to each of the deliverables in the arrangement based upon best estimated selling prices (BESP). It simply allows for alternate methods of determining BESP beyond VSOE.

If you sell software as a service
You will need to assess software license and hosting services to determine if they represent distinct performance obligations. It is unclear what criteria will apply to determine whether a typical SaaS arrangement will qualify for service accounting treatment (over time) or if the software element should be recognized separately (at a point in time).

In addition, provisions entitling the customer to a refund if undelivered elements are not successfully provided — an issue that currently delays recognition — will be a part of the estimate of variable consideration, resulting in earlier revenue recognition in some arrangements.

If you’re a contract manufacturer
In contract manufacturing situations, the timing of revenue recognition will no longer revolve around when units are delivered but instead when a service is performed and when the control of goods are transferred to the customer over time. This change may require contract manufacturers to modify their systems and processes to recognize revenue in the new way.

If you work in the technology sector
Distributors and resellers tend to require price protection or right of return from manufacturers of technology products to protect themselves from obsolescence and price reductions. Manufacturers currently delay recognition of revenue from these transactions because of the possibility they’d have to give money back or accept product returns. Under the new standards, fees that are currently not considered fixed and determinable can be recognized to the extent the company can estimate the amount that has a low probable risk of significant reversal. This will result in earlier recognition of revenue for manufacturers.

When companies license their technology for use in tangible goods or services, they can recognize the royalties when sales or usage occurs to the extent they can estimate the amount that won’t reverse (subject to the constraint on variable consideration). Today, recognition is typically delayed until such sales are reported by the licensee.

What everyone should do in the meantime
These are just a few examples of impacts in certain industries. When the new standard is released, we encourage you to evaluate its impact on your company and business model. Don’t underestimate the subtleties the new principles guidance will change in revenue recognition. Without bright-line rules, there will be room for judgment but also room for differences in interpretation and implementation, particularly between you and your auditor. Let the fun begin!

Diana Gilbert has been a member of the RoseRyan dream team since 2008 with almost 30 years of professional experience. She excels at technical accounting, revenue recognition, SOX/internal controls, business systems and process improvements.

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A single set of global accounting standards seems like a dream, but there’s a sliver of hope

During my time in public accounting in Canada and throughout my experience in the U.K., differences between various countries’ generally accepted accounting principles were often front and center. There were continual discussions of a shared GAAP around the world—a utopian world for accountants, auditors and investors alike.

Initially, given the seemingly insurmountable challenges of converging disparate approaches, I was among the skeptics who thought reconciling differences between GAAPs would take a lifetime. I knew international standards were in the works and had spent enough time reconciling Canadian to U.S. GAAP for SEC filings to see the complexities of converging standards. Over the years, my outlook for converged GAAP has grown more optimistic. The challenges (politics, prioritization, variances in application and enforceability, cost and so on) continue, but the need for an international approach is greater than ever. Canada adopted International Financial Reporting Standards (IFRS) for most public companies for financial years beginning Jan. 1, 2011, and companies whose securities are publicly traded in the U.S. have the option of using U.S. GAAP. Canada does not get the benefit of a single accounting system until U.S. GAAP and international GAAP converge.

Fast-forward to 2013, and it is a time for celebration. The FASB has voted to move forward with the long-awaited final revenue recognition standard. (For details, read Diana Gilbert’s How the New Revenue Recognition Rules Should Help Global Businesses.) Joint FASB-IASB standards are expected in the areas of financial instruments and leasing.

IFRS has been adopted by 14 of the G20 countries for all or most companies in their public capital markets. The U.S. permits, but does not require, IFRS for foreign issuers. Investors and other stakeholders still need to know if U.S. GAAP or IFRS has been adopted, depending on the capital market. This makes things very complex: investors need to reconcile adjustments and disclosures for investments and subsidiaries, but also account for local variations in interpretations, applications, enforceability and audits. When implementation of aligned revenue standards is complete, that will be real progress, as investors will have confidence that they are comparing apples with apples on the top line.

Will this progress continue? How long will it take? The revenue standard was 11 years in the making, and priorities constantly shift. However, there is a new model for collaboration going forward. In April 2013, the creation of the Accounting Standards Advisory Forum (ASAF) was announced. This group of national accounting standards boards (including FASB) and regional bodies with an interest in financial reporting will provide both technical advice and feedback to the IASB. The ASAF had its fourth meeting Dec. 5 and 6. The agenda items included the 2013 Lease Exposure Draft (IASB) and the 2013 FASB Accounting Standards Update. ASAF received over 600 comment letters, and there are some significant differences in opinion. Leases will need to be re-deliberated, and there is skepticism about the chances for agreement on a converged approach.

Still, I am hopeful that the new ASAF will be successful in improving alignment. FASB Chairman Russell G. Golden has outlined a vision for more common and comparable financial standards, which he describes as a “new, decentralized, multi-lateral model of international standard setting that is consistent with the goal of promoting greater convergence in global financial accounting standards.” It is going to take time to find the right model, and hopefully the next 10 years will be more successful than the past 10.

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How the new revenue recognition rules should help global businesses

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.)

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Latest revenue recognition guidance: throw out the recipe box

It’s been more than a decade in the making, but the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are in the final throes of issuing a global revenue recognition standard to replace all others, including the mirage of industry-specific guidance the United States follows today. The new guidance is “principles-based,” so you’re not going to find specific rules or instructions—no more recipes for that special occasion. Instead, the new guidance is about substance, judgment and transparency.

The core principle is “recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” The FASB provides a five-step process to achieve this: (1) identify the contract with the customer, (2) identify the separate performance obligations, (3) determine the transaction price, (4) allocate the transaction price and (5) recognize revenue when the performance obligation is satisfied. The objective: enable companies to recognize revenue based on the substance of the transaction with the customer, while providing enough guidance to help ensure consistency with other companies. This is a difficult balance, as evidenced by how long this guidance has been in the cooker.

Lots of judgment required, but no measuring cup
Principles-based guidance requires judgment—lots of judgment! Have you entered into a new contract with a customer or modified an existing contract? Which of the performance obligations can or should be separated? Not all will qualify. Special terms and pricing arrangements can create variability in the amount of revenue a company is entitled to receive, and probability has to be assessed. Companies will need to estimate the stand-alone selling price for each performance obligation—that means you too, software companies. Performance obligations are satisfied when control is transferred to the customer, but for companies that provide services, this is more complicated—services don’t come in a box, so delivery is more theoretical and an appropriate measure of progress needs to be evaluated. Finally, revenue has to be “reasonably assured” to be recognized. That’s a qualitative threshold—no measuring cup required.

Disclosure is hot: share your secret sauce
And it should come as no surprise that where significant judgment is applied in accounting, especially for revenue, transparent disclosure is vital to understanding the financial statements. At the bottom of the statements the footnote should read, “See accompanying notes to the financial statements … seriously.” The level of disclosure continues to be a hot topic as the guidance makes its way through the comment process, and the latest exposure draft also includes enhancements to interim disclosures as well. Companies will need to disclose their secret sauce, providing qualitative disclosures, including a description of the judgments involved, and also quantitative disclosures, which may require additional financial system reporting requirements. While it may be more difficult for the SEC to question the judgment applied in recognizing revenue, you can bet that they will be all over companies that do not provide adequate disclosures. For companies currently employing a “less is more” disclosure process, this will be a dramatic change.

Want to see what’s cooking? Download a PDF of the latest exposure draft from the FASB website. Comments are due March 13, 2012, and a final standard is expected in the second half of 2012. The proposed effective date is 2015.

Think you have time to prepare?
Think again. In its proposal stage, the guidance requires full retrospective application, so public companies presenting three years of financial statements will also have to present 2013 and 2014 for comparative purposes. Don’t let this overwhelm you—give us a call to see how RoseRyan can help make the transition easier.

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IASB vs. FASB: What’s the difference?

The SEC is expected to issue a recommendation before the end of the year that may require publicly held companies to adopt international accounting standards issued by the International Accounting Standards Board (IASB). If this happens, it’s not clear how the IASB and the Financial Accounting Standards Board (FASB) would work together to support and issue future international accounting standards. In a recent speech, FASB chair Leslie F. Seidman stated that FASB “should continue to have a strong role in influencing what goes on the international agenda, the process by which these issues are analyzed, the level of implementation guidance provided, and the outreach that is conducted in the United States.” Although IASB and FASB are similar—both establish and improve standards of financial accounting and reporting—there are some distinct differences.

The FASB is part of the Financial Accounting Foundation (FAF), which is overseen by a board of trustees, and is independent of all businesses and professional organizations. It is funded by fees paid by issuers. The IASB is overseen by trustees as well, but it is accountable to a Monitoring Board of capital market authorities. It also is funded by market participants, but is funded by relevant regulatory authorities as well.

The FASB currently has seven board members appointed by FAF’s board of trustees, and each may serve up to two five-year terms. The IASB currently has 15 members appointed by trustees through an open and rigorous process that includes advertising vacancies and consulting relevant organizations.

The biggest difference: post-implementation
Probably the most distinct difference between the two organizations lies in the area of post-implementation of standards. The FASB has no formal process for reviewing the effect of a newly issued accounting standard. Post-implementation issues can be dealt with through an SEC action (Staff Accounting Bulletin) or an American Institute of Certified Public Accountants action (EITF), which may result in an update to the Code. The IASB, on the other hand, has a formal, two-year post-implementation review on all standards it issues.

Last, the operating budgets for 2011 for these two organizations are vastly different. For the FASB, its budget is $53.3 million USD. For the IASB, its budget is £20.1 million (approximately $31.4 million). These amounts are incongruent given the relative size of each organization’s board.

What does it all mean?
We don’t really know how the move to international standards, with the attendant IASB oversight, will affect U.S. public companies. The IASB does have the same purpose as the FASB, but I would note the IASB has more structure when it comes to evaluating new accounting pronouncements. I think this additional structure is something public companies would welcome. It also seems that the IASB is able to operate in a streamlined manner!

 

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On the menu: IFRS and “diet” IFRS

Ever thought moving to International Financial Reporting Standards (IFRS) would make financial reporting easier for small private companies? Think again. In 2009, after several years of due diligence, the International Accounting Standards Board issued a less-robust set of accounting guidance—kind of a “diet” IFRS—for small and medium-size entities (SMEs). Just recently, the IASB requested feedback on draft implementation guidance on IFRS for SMEs. Progress.

As for the United States, it’s a slow grind. We have long been considering whether there should be a separate set of accounting guidance for private companies, sometimes referred to as “baby GAAP.” The FASB established a Small Business Advisory group in 2004 and a Private Company Financial Reporting Committee in 2007, both of which were supposed to help develop new standards, giving consideration to private companies. Neither has been very successful. In 2009, the Blue Ribbon Panel was formed, composed of members of the FASB, American Institute of Certified Public Accountants, and National Association of State Boards of Accountancy to address private company reporting needs. The panel issued a formal report last January, and based on those recommendations, the FASB has been taking steps to further address the need. Earlier this month, the Financial Accounting Foundation published a plan for addressing private company financial reporting, but the proposal doesn’t include establishing a separate board for private companies, as suggested by the Blue Ribbon Panel. And so we wait. Ho-hum.

But now (at last) the much-anticipated SEC decision regarding incorporating IFRS into the U.S. reporting structure is expected by the end of the year, which may have private companies heaving a sigh of relief. What’s different about the less-robust IFRS guidance? For one, they’ve eliminated topics that aren’t relevant for smaller entities, including EPS guidance, quarterly financial reporting and operating segment disclosures. In addition, where full IFRS guidance allows accounting policy choices, IFRS for SMEs allows only the easier option. Probably the most notable difference is simpler standards for recognizing and measuring assets, liabilities, income and expense items, such as amortizing goodwill and expensing all borrowing and R&D costs. Along with simpler standards come fewer disclosures too! And to further reduce the burden to smaller companies, the revisions to these IFRSs are limited to once every three years—an accounting guidance sabbatical, if you will. Nice.

IFRS transition guidance for SMEs is still a work in process, and that guidance may limit some of the options, but nonetheless would still mean less accounting and reporting rigor by private companies. So for U.S. private companies, relief may come from the incorporation of IFRS, before “baby GAAP” ever comes to fruition … and unexpected benefit of IFRS.

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A mismatched set of semi-global accounting standards—was that our goal?

Conceptually, a single set of high-quality global accounting standards sounds great: every company in every country follows the same rules and reports financial information in the same light. And with a growing number of countries adopting International Financial Reporting Standards (IFRS), it’s no wonder that IFRS is touted as “the” set of standards that can help us accomplish this goal. But the design and execution of this concept has presented insurmountable challenges, and the solutions being offered up leave much to be desired in terms of accomplishing the original goal … a single set of standards.

Adoption turns to endorsement. The SEC’s proposed roadmap issued in late 2008 considered adoption of IFRS, while the most recent SEC staff paper issued last May is considering an endorsement protocol, which would allow the FASB and SEC to cherry-pick the standards issued by the Internal Accounting Standards Board (IASB) and possibly supplement them with additional guidance.

Convergence becomes less converged. The FASB and IASB have been working together to converge the guidance of newly issued standards since they entered into the Norwalk agreement in 2002. However, some of the boards’ first major joint projects, including stock-based compensation and purchase accounting, resulted in substantial convergence upon issuance of the final standards—most of the guidance is the same but key differences remain. While their respective drafts of the proposed revenue recognition guidance are very close (after more than 10 years of effort, I might add), there are a number of differences of opinion in terms of other standards in the works, including leases, consolidation and insurance contracts. Speculation is that the best we’ll get here is also substantial convergence … if that.

Input adds to confusion. In early July, the SEC held a roundtable session to help evaluate the possible incorporation of IFRS into the U.S. reporting structure. The roundtable consisted of three panels of investors, smaller public companies and regulators. The result: a very mixed bag of reactions. The investor panel generally supported incorporation of IFRS but raised concerns about consistency in the application of the IASB’s principles-based standards. The panel of small public companies said the costs of such a substantial change outweighed the benefits. And then there was the regulatory panel, which ranged from cautiously supportive to very much against IFRS incorporation.

The SEC is still expected to make a decision by the end of this year about whether to incorporate IFRS and if so, how and when. Although nothing has been decided yet, it appears we are headed toward IFRS—International Financial Reporting Sometimes.

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FASB & IASB: a match made in heaven or a recipe for disaster?

The lofty goal: To develop a single set of high-quality, international accounting standards that companies worldwide would use for both domestic and cross-border financial reporting.

Last month the FASB and IASB issued a progress report on their convergence projects. Although the boards have made a commitment to issue final standards for the items they consider to be most critical (financial instruments, revenue recognition, leases, fair value measurement and statement of comprehensive income), they have put four projects on hold—the most notable being the financial statement presentation project.

Exposure drafts have been issued for all of the priority projects, with revenue recognition currently getting the most attention. Why is this? Of the exposure drafts that have been issued this year as a part of the convergence effort, the proposed standard on revenue recognition from contracts with customers could arguably have the biggest impact on the most companies.

This exposure draft proposes a single principles-based model (we’ve heard it a million times—we’re getting away from a rules-based model!) under which revenue is recognized as the performance obligations in contracts are satisfied.  The obligations are deemed satisfied when control of the promised goods or services is transferred to the customer. The final standard would replace all existing guidance, including all industry-specific guidance. Thirty-six technology companies provided comment letters to the boards during the commenting period deadline. In general, they support the proposed single revenue recognition model.

The following concerns, however, were noted:

  • Recognizing revenue based on an estimated transaction price in a contract that has a variable transaction price may be difficult to apply in practice.
  • Including credit risk as a factor in measuring revenue does not seem appropriate.
  • Retrospective application is a huge undertaking, where the cost of tracking and reporting could outweigh the benefits (two-thirds of those who submitted comment letters disagreed with the full retrospective application of the standard!).

Last month the IASB and FASB held four public roundtable discussions, both in the United States and abroad, to further understand the concerns about the items presented in the exposure draft. We should expect a final standard on revenue recognition by June 30, 2011.

This seems like quite a task for the IASB and FASB to undertake, and there are four other areas for which final standards are due to be issued during 2011 (financial instruments, leases, fair value measurement and statement of comprehensive income). Will the two boards be able to compromise? Will they listen to the concerns of the public?  Will the convergence of the IASB and FASB be a perfect marriage?

Only time will tell! We’ll keep you posted.

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