Auditors are starting to worry about the implications of changes to the sweeping new standard on revenue recognition if U.S. and international rulemakers start debating new views and reaching different conclusions.
The Financial Accounting Standards Board and the International Accounting Standards Board determined this week they will take up their respective staffs’ recommendations to revisit aspects of the new standard where confusion or uncertainty is making implementation difficult. Both boards agreed with staff recommendations to take a fresh look at the rules on how to account for revenue arising from licenses of intellectual property and how to identify performance obligations in contracts with customers.
Although both boards agreed in a recent joint meeting to consider changes, they didn’t agree on what those changes should be, or how they should be timed. EY warned its clients that convergence could be at risk. “If the Boards act on the views they expressed at the joint meeting, we may see some diversity in practice between US GAAP and IFRS preparers,” EY said in an alert on the changes that could be in store.
With respect to licenses, the boards agree they want to clarify the nature of an entity’s promise in granting rights to intellectual property, which will help companies make the critical determination of whether they should recognize revenue at a given point in time or over the life of the arrangement. The FASB determined it wants to require entities to classify intellectual property in one of two categories -- determined based on whether the IP has or does not have significant standalone functionality -- then require point-in-time or over-time revenue recognition based on that categorization. The IASB prefers to simply clarify and expand on the principles in the standard without requiring classification of licenses.
EY is showing some early preference for FASB’s approach. “We believe that both of the boards’ approaches would enhance the operability of the guidance and result in more consistent application,” EY wrote. “However, the FASB’s tentative decision should require less judgment in this area.”
As for performance obligations, the FASB determine it wants to changes the guidance in the second step of the revenue recognition model to address questions about whether the standard requires identification of deliverables that are not identified as deliverables under existing rules. The FASB wants to add new language that would tell entities they can disregard promises that are considered immaterial to the contract. The IASB does not want to make such a change to the rule under International Financial Reporting Standards.
The FASB directed its staff to draft proposed accounting standards updates that would be issued for public comment and enacted perhaps as early as the third quarter of 2015. The IASB is waiting for more staff direction on other issues that might also require further standard setting before moving forward. The board is targeting a proposal perhaps in June, with final guidance perhaps by the end of the 2015.
FASB is still expected to meet early in the second quarter of 2015 to discuss whether they should delay the 2017 effective date of the standard.