The Financial Accounting Standards Board plans to propose a one-year delay in the effective date of the new revenue recognition standard while also allowing adoption as of the original effective date for companies that are ready to move forward.
After reviewing staff research on how ready companies are to implement the new standard by the current 2017 effective date, it was simple for FASB to agree that the new revenue recognition standard should be deferred. “It seems to be a pretty easy call for me that we ought to defer for several reasons,” said FASB Vice Chairman Jim Kroeker in a FASB meeting to discuss the issue. It was more difficult, however, for the board to determine where to set a new effective date. The board was split 4-3 on whether to give companies one additional year or two. Ultimately, the board determined it will ask for a one-year deferral with a 30-day comment period, but with an invitation to explain why a two-year deferral is warranted instead.
Staff research revealed the majority of companies are not ready to meet a Jan. 1, 2017, effective date for a variety of reasons, including uncertainty over guidance from FASB that is still pending, unavailability of software solutions as vendors wait for FASB guidance before finalizing their products, and logistical issues in reviewing customer contracts. Staff research also found companies have concerns over designing and implementing internal controls for new revenue recognition requirements and educating personnel throughout the organization, both within and beyond accounting staff, about the new requirements.
FASB member Daryl Buck said initially he was skeptical about the wisdom of delaying the standard. After meeting with companies in the media and entertainment sector in recent months, however, he came to appreciate the enormity of the concerns and advocated for a two-year delay in the effective date. FASB is still working on developing guidance related to how companies would recognize revenue from licensing of intellectual property, a huge source of revenue for companies in that particular sector, he said. “The guidance is still in a state of flux,” he said. “It would be very difficult to expect them to comply with the existing effective date.”
Larry Smith, another member of FASB, said he saw through meeting with companies that software vendors are delaying the issuance of new products that would facilitate compliance with the new standard pending FASB’s completion of implementation guidance, which the board expects to complete by the end of 2015. “It’s fairly obvious there are no broad-based computerized solutions that are available right now,” he said. “And we don’t expect vendors will complete or even start to complete their packages until we finalize the standard sometime later this year. If you believe retrospective application is the best application, that naturally causes you to say you need a two-year delay so you can run parallel for a couple years prior to implementation of the standard.”
FASB Chairman Russ Golden was unmoved by concerns over software or pending implementation guidance. He said he supported a one-year delay because it took FASB nine months longer than expected to issue the standard in May 2014, making the effective date too ambitious even then. “Is the implementation effort going slower than expected?” he asked. “I don’t think so. The level of questions from the Transition Resource Group is not surprising.” Guidance FASB is considering now would actually make the standard even easier to implement, he said, so he doesn’t view the pending guidance to be problematic.
A two-year delay while also permitting 2017 implementation for early adopters would create too long a period of noncomparability, said FASB members Tom Linsmeier and Marc Siegel. “I observed in our outreach a great deal of variety of preparedness in going forward with implementation,” said Linsmeier. “Some companies are way out front. Others, not so much. In general, in implementation, people find the deadline and work toward the deadline.”
The board also discussed whether, if they were to consider a two-year delay, to also require all entities to adopt retrospectively, meaning providing three years of historical financial data as if the standard had been required for all three years. Ultimately, FASB decided not to pursue that avenue.