The new standard on revenue recognition was the product of a long joint development effort by the Financial Accounting Standards Board and the International Accounting Standards Board. The standard is principles-based and provides a sound model and objective. Differences between the versions issued by the two boards are largely inconsequential. After working with the new standard and serving on the FASB/IASB Joint Transition Resource Group for Revenue Recognition (TRG), my initial support for the standard has only grown stronger.
FASB and IASB correctly realized that a broad, principles-based standard covering such an important area of financial reporting would need more than the normal amount of time to implement. The TRG was formed to discuss implementation questions, identify areas where more guidance might be helpful and, importantly, to increase the chance that the converged standard actually leads to converged and consistent accounting. While the implementation efforts are moving along well, the planned responses to certain implementation issues provide a case study in the different ways we handle things in the United States compared to those abroad.
Where We Agree
The TRG has met three times so far and discussed more than 20 issues, some of which had many sub-issues. Those discussions have shown that we understand the principles in the standard in the same way regardless of where we live, as there haven’t been any issues where the view of the requirements of the standard differed between the U.S. and non-U.S. members. We owe that, at least in part, to the careful drafting of the standard done by FASB and IASB staff.
Going further, no questions have arisen where U.S. and non-U.S. members of the TRG differed on whether the new standard was clear about how the question should be handled. And when we have concluded that the standard is unclear, we have all agreed, at least directionally, on what we thought the standard should say, or on how it should be applied in the absence of clarity.
My biggest concern is that, despite the stated intentions of reaching the same accounting, different words will inevitably lead to differences in journal entries over time. Any other belief is, I fear, a delusion.
So U.S. and non-U.S. accounting experts seem to have similar understanding of the new revenue standard and similar views as to where that understanding could be improved. This makes me more optimistic that converged standards, if based on sound principles, are likely to lead to converged and consistent accounting—which is, of course, the real goal.
Where We Don’t Agree
At the last TRG meeting, we were merrily rolling along knocking off issues. We had several issues where the general consensus, on both sides of the Atlantic, was that a small amendment to the standard could eliminate potential diversity. Everybody seemed comfortable with that path forward, until the vice-chairman of IASB raised a concern that we too often suggested amending the standard to clarify something. IASB’s subsequent actions have been consistent with his concern.
In several areas, FASB is leaning toward amending the standard to clarify certain points, while IASB has decided to leave the standard alone, relying on practice and the record of the TRG meetings to ensure that diversity in practice doesn’t develop. Both the vice chairman’s comments and IASB’s subsequent decisions on moving forward show a reluctance to amend the standard to make clarifications, even though IASB agrees that the treatment FASB intends to clarify is in fact the treatment the boards intended when they drafted the standard—and even though TRG members seemed to agree that clarification would help.
This surprised me, especially given that IASB has long had a useful practice (called “Annual Improvements”) of making minor changes to standards that are intended to clarify, but not change, the principles of the standard. Several areas where FASB has decided to pursue clarifications, but IASB has not, would be Annual Improvement candidates if they had been raised after the standard was in use—it seems odd not to provide the clarification simply because the issue was raised before adoption.
In two other areas, FASB intends to amend the standard to help practitioners more efficiently handle issues that will generally be immaterial. These relate to shipping of goods where title transfers when the goods leave the shipper’s facility and what we would today consider “inconsequential or perfunctory” performance obligations. IASB, however, believes no further guidance is needed.
In both cases, the problem that FASB has decided to address doesn’t relate to the standard, but rather to how practice would likely deal with what should be a minor matter. The new standard doesn’t specifically provide for either (1) ignoring minor promised goods or services; or (2) treating shipping of goods owned by the customer as a cost, rather than a performance obligation.
In the absence of specific guidance on this point, accounting practices along these lines, which many companies would like to implement for convenience, would be treated as departures from GAAP. While their effects would almost certainly be immaterial, the concern (which I wrote about here two months ago) is that auditors in the United States would be held to a standard of evaluating these accounting conventions that would require their effects to be calculated and evaluated. The result: a fair amount of non-value added cost and effort.
FASB has tentatively decided to attempt to assist in this matter by exempting shipping and small promises from being considered promised goods or services. As such, not treating them as performance obligations wouldn’t be a departure from GAAP at all, so there would be no need for further evaluation. IASB, in contrast, received no indication that its practitioners would have similar difficulties, and therefore isn’t intending to amend its version of the standard to address this matter.
I have preferences as to how these matters should be handled, but pushing my views is not the reason I wrote this column. I think it’s interesting to consider why FASB and IASB react differently to similar matters, especially since the two boards have made clear that despite different paths in dealing with some of the issues that have been raised, they expect (except on one matter related to licenses) the same accounting outcomes.
As I stated above, this isn’t a matter of people reading or understanding the standards differently. Nor do the differences lie with different views on what the accounting should be. Instead, it appears that external factors are weighing on board members. As the external factors faced by the two boards are different, we are getting different reactions.
For IASB, there is great concern about stability in the standards. IASB standards must be “endorsed” before they become part of the official accounting standards in many jurisdictions. In some cases, Europe has raised concerns about endorsing standards or has endorsed standards late. Changing a standard might well increase the chance of endorsement problems like these.
In addition, IASB has consistently worried about being seen as anything other than “principles-based,” as that might lead to resistance. There is a fine line, perhaps, between clarifying principles and writing rules. I saw both of these concerns lead to decisions on standard-setting matters while I was serving as a member of the IFRS Interpretations Committee, and I have no doubt they are in play here.
FASB board members, on the other hand, have heard the same things from the staff of the Securities and Exchange Commission that the rest of us in the United States have heard: that consistency in application is important, and the SEC will issue guidance to that end if necessary. Board members have also heard about practice concerns relating to immaterial items and may fret that the standard may be blamed for inefficiencies.
Since “endorsement” isn’t an issue FASB needs to worry about, there aren’t similar concerns on that front. And while FASB board members might share similar concerns to some IASB board members regarding amendments to the standard possibly leading to calls for extending the effective date, calls for extensions are already pretty loud in the United States. That’s not the case overseas.
So here we sit, with agreement on what the standard says and what the accounting should be, but different views on how best to achieve that accounting. My biggest concern is that, despite the stated intentions of reaching the same accounting, different words will inevitably lead to differences in journal entries over time. Any other belief is, I fear, a delusion.