Revenue recognition – new standard requires a change in mindset

28 May 2014

The FASB and IASB have issued their long-awaited standard on revenue recognition. It will affect most entities – but how much will it really change practice?

The core principle of the new, fully converged revenue recognition standard is that companies recognise revenue depicting the transfer of goods or services in amounts that reflect the payment which that company expects to receive. Its setters say that it will improve the financial reporting of revenue and the comparability of financial statements – but there are suggestions that its application will not be that different, and that convergence may suffer down the line.

The release of IFRS 15 Revenue from Contracts with Customers marks the culmination of a long-running joint project between the International Accounting Standards Board and the US Financial Accounting Standards Board. In total, over 1,500 comment letters were received throughout the consultation process, and though the new standard will be effective from 1 January 2017, experts say that there is a great deal to learn in the meantime.

As well as recognising revenue to depict performance obligations (promises to transfer either a good or service that is distinct), the new standard will also, according to the joint press statements from the boards, “result in enhanced disclosures about revenue” and provide guidance for transactions that were not addressed comprehensively previously, as well as “improving guidance for multiple-element arrangements”.

Experts say that companies will have a lot more to think about. The current IFRS standard says very little about complex revenue transactions and there is limited or no guidance on such areas as variable consideration and licenses. Practice has developed around these issues and preparers will now have to think about more than commercial effect, fair value and risk and rewards.

One of the primary objectives in constructing the new standard was to achieve convergence on revenue recognition between IFRS and US GAAP. “For the most part, that has been successful” said Andrea Allocco, a director in PwC Global Accounting Consulting Services. “That said, US GAAP preparers will likely have a totally different experience with implementation. Many will have to move away from industry specific guidance to a single principles-based model for all revenue transactions. There will be some preparers who want more guidance,” she added.

The boards have established a joint transition group in order to aid companies in their shift to the new standard. But the group is expected to have a limited life. After that, issue resolution will likely revert back to the IFRS Interpretations Committee (IC) and the Emerging Issues Task Force (EITF) in the US. The latter has actively issued guidance over the years, while the IC seems to be less inclined to address industry issues or specific transactions. “The success of the convergence element of the project will be more ‘wait and see’” said Ms Allocco.

The impact and interpretation of the new standard is one of the topics under discussion at this year's Meet the Experts event. See Meet the Experts for more information.