IASB and FASB developing joint proposal for converged revenue recognition standard following decade of documented corporate revenue recognition problems
19 January 2012
Research from the Grant Thornton International business report, which surveys 2,800 businesses globally, finds only 37% of respondents believe that existing accounting standards on revenue recognition need to be improved or replaced, despite a documented history of high-profile corporate revenue recognition problems. In the United States, revenue recognition issues resulted in 10% of reported restatements in 2010 and the United Kingdom’s accounting regulator has challenged several companies’ revenue recognition policies and disclosures.
Almost two-thirds of the respondents thought that the latest joint proposals would lead to increased costs (62%) and more complexity (65%).
Underlying the global findings, there are some significant regional variations. Support for change was notably low in the U.S. (30% believe that improvement is needed and 72% believe it will lead to increased complexity), the U.K. (33% believe improvement is needed and 44% believe it will lead to increased complexity), and South Africa (32% believe that improvement is needed and 64% believe it will lead to increased complexity). Support was greatest in India (59% believe improvement is needed), the ASEAN countries (56% believe that improvement is needed) and Latin America (48% believe that improvement is needed).
Only 35% were aware of the upcoming revenue recognition changes, findings consistent with the recent Grant Thornton commissioned lease accounting global survey, which found only 45% aware of the pending changes in reporting leases.
Ed Nusbaum, CEO of Grant Thornton International said: “Revenue is a key performance measure for every business and a single, global accounting standard in this area is critical.
“Although some argue that the current standards aren’t broken, we do think there are serious problems. The two main IASB standards are based on different principles and lack guidance in important areas such as multiple element arrangements. The U.S. literature suffers from the opposite problem of excessive guidance - much of which is specific to particular industries. The regional variations in attitude to the Boards’ proposals are no doubt affected by these different starting points.
“There is understandable concern about increased cost and complexity, but we believe that the IASB and FASB are moving in the right direction, and we’re pleased they’re moving together. The Boards and their staff have been doing a great job of engaging with their constituents in their outreach, and the results are evident in the new proposals. The decision to re-expose is also very positive.”
The IASB and FASB have amended their proposals to simplify application and reduce unnecessary disruption to established accounting practices. For example, the latest exposure draft is expected to result in most construction and services sector businesses continuing to recognise revenue as they perform under a contract, much more in line with current practice. The Boards have added practical expedients to simplify application in some areas, including contracts with embedded financing and onerous obligations.
“We also see revisions to specific proposals such as variable consideration, credit losses and product warranties that will reduce the extent of change faced by businesses,” said Nusbaum. “Despite these revisions, the proposals will change the amount or timing or revenue in some cases, although the impact will differ for companies applying IFRS and U.S. GAAP. Areas that may be affected include multiple element arrangements, sales incentives, contingent pricing arrangements and contracts with a significant financing element.”
Many of these revisions represent a trade-off between a purely principle-based approach and a pragmatic assessment of costs and benefits.
“We’re working through the details and will assess whether we think the Boards have found the right balance,” continued Nusbaum. “Although our survey shows that the Boards still have more work to do to convince constituents, we hope that businesses will get more comfortable as they assess the latest proposal and continue to engage in the outreach.”
The IASB and FASB’s joint latest proposal was published in November 2011, following a previous Exposure Draft in June 2010 and a Preliminary Views document in 2008. The comment deadline is 13 March 2012. Grant Thornton will submit a global comment letter on or before that date.
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Notes to editors
The Grant Thornton International Business Report (IBR) For more information, please visit: www.internationalbusinessreport.com. Data collection is managed by Grant Thornton International's core research partner - Experian. IBR is a survey of both listed and privately held businesses. The data for this release are drawn from interviews with 2,800 businesses across the globe conducted in November/December 2011.