The Financial Accounting Standards Board has voted to propose to defer the effective date of the new revenue recognition standard by one year after hearing feedback from constituents.
FASB met Wednesday to discuss the results of staff research and outreach regarding the effective date of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, which it converged last year with the International Accounting Standards Board. The board discussed both a deferral of the effective date and an “early adoption” provision. The FASB board members decided to defer the effective date of the new revenue standard by one year. As a result, public entities would apply the new revenue standard to annual reporting periods beginning after Dec. 15, 2017. Nonpublic entities would apply the new revenue standard to annual reporting periods beginning after Dec. 15, 2018.
Public entities would apply the new revenue standard to interim reporting periods within annual reporting periods beginning after Dec. 15, 2017 (that is, a public entity would be required to apply the new revenue standard beginning in the first interim period within the year of adoption). Nonpublic entities would apply the new revenue standard to interim reporting periods within annual reporting periods beginning after Dec. 15, 2019 (that is, a nonpublic entity would not be required to apply the new revenue standard in interim periods within the year of adoption).
In terms of an early adoption provision, FASB decided to permit both public and nonpublic entities to adopt the new revenue standard early, but not before the original public entity effective date (that is, annual periods beginning after Dec. 15, 2016). A public entity would apply the new revenue standard to all interim reporting periods within the year of adoption. A nonpublic entity would not be required to apply the new revenue standard in interim periods within the year of adoption.
The board has directed the FASB staff to draft a proposed Accounting Standards Update for a vote by written ballot that will include the tentative decisions reached by the board on Wednesday. FASB decided on a 30-day comment period for the proposed update.
The International Acccounting Standards Board has so far seemed less interested in deferring the standard under International Financial Reporting Standards, but it already allows companies to adopt the new standard early. Both FASB and the IASB have been working together in a Joint Transition Resource Group on implementation of the standard, listening to feedback from constituents about problems they are encountering and areas where further guidance is needed.
“I have no doubt they got a lot of input, going through a lot of people and the SEC’s staff views,” said former FASB chairman Bob Herz, at an event at Baruch College in New York on Wednesday evening. “It sounds like they went through a thorough process before making that decision. I think it’s important that standard get implemented well. It is probably the most important single line in the financials.”
Former IASB chairman Sir David Tweedie, speaking at the same event, pointed out that IFRS 9, the IASB’s financial instruments standard, was also deferred because many people weren’t ready for it. “For a lot of people the revenue recognition standard won’t change anything,” he told Accounting Today. “It will just be straightforward. But for some industries it will be a big change. If acceptance takes a bit more time, fine, give them more time. But you don’t want to keep pushing the thing out too far. Hopefully it will stop with that.”
He acknowledged that the IASB has allowed for early adoption of the revenue recognition standard. “That’s traditional, and it’s on the grounds that, well, if you think this is better accounting policy, why don’t you let people do it instead of keeping the old one,” said Tweedie.
Companies that were part of the group had many questions about the new standard.
“When you read the minutes of Transition Resource Group you see that there are a lot of unanswered questions,” said Joseph Howell, executive vice president of strategic initiatives at the compliance software company Workiva, during a phone interview. “Those unanswered questions create a problem, which is what information do people need to collect in order to satisfy the rules. The lack of clarity in the rules, which have been more principles based, falls in a period where you would ordinarily think that’s the reason why you apply judgment. But the issue that people are concerned about now is the recent history of disclosure controls that have for many companies have resulted in changes that are a surprise to them. When they think they have agreement from their external auditor and potentially even through separate conversations with the SEC on the way that they’re handling something and they have laid out clear arguments about why they’re treating a particular issue in a particular way, they often have run into situations where somebody changes their mind along the way and suddenly what they are doing is no longer the preferred or the appropriate way to account for a particular transaction. As a result they end up having to disclose a material weakness or a potential material weakness in their disclosure controls, which is something that many companies have either experienced or they know others who have. Any amount of uncertainty about these rules in this environment creates an enormous risk that companies really want to minimize to the extent they can, which means they’re going to push extra hard to get bright lines where they can, or demand that there be bright lines so that they don’t end up later being put into a situation they have to claim that they had a material weakness in their disclosure controls.”