FASB Revenue Recognition Draft Still Sticky for Some
While financial executives largely seem pleased with proposed standards, they’re called “onerous” for some sectors.
With a March 13 comment deadline approaching for the revised Proposed Accounting Standards Update -- on Revenue Recognition (Topic 605) –- the trickle of comments received by FASB so far has been generally positive. But for some CFOs, the remaining problems are sticky.
The proposed five-step model contained in the draft, consistent with original proposals released in June 2010, would simplify revenue recognition for many companies. It would do so by eliminating the need to determine, if possible, vendor-specific objective evidence, or third-party evidence, in the quest to document the amount of revenue to book for a given item or service.
The revised draft -- to go into effect as soon as 2015, with full retrospective application going back to 2013 -- would further simplify revenue-recognition accounting by allowing entities to combine two or more contracts and treat multiple goods and services as one performance obligation provided certain conditions are met.
Stephen Rivera, worldwide senior director of financial compliance and procedures at Johnson & Johnson, says the new rules would be a “big win” for life sciences companies and for the film industry, both of which employ extensive use of partnership arrangements.
“Under the old rules, it was not clear that collaborations between companies were a revenue transaction,” says Rivera, a member of Financial Executives International’s committee on corporate reporting. “As a result, payments received from partners were not recognized to offset expenses incurred from each other.”
But the standards setters, trying to construct a “revenue model that covers all industries,” may have replaced sector specificity with what Rivera calls “onerous disclosure requirements” that are likely to lengthen financial statements.
Michael J. Brenner, CFO of the Related Companies L.P., a real estate developer and owner with about $4 billion in projects under construction, believes that the proposal got things wrong for his sector. “Contracts for sale of condominium units in the U.S. rarely have ‘pay as you go’ provisions,” he wrote in a Jan. 6 comment letter, one of 10 posted to the FASB website. “Most of our income is usually derived from a handful of major development projects which span 2-3 years. As proposed, our income will be understated in the early phases of construction, when the most economic value is created, and overstated in years of transfer of title to customers.”
