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Why Should We Change Revenue Recognition Standards?

Revenue recognition as it relates to the FASB has been a topic for quite a while. I work in the construction industry which is slated to have a very big change in the way its revenue would be recognized. Most of the people against changing the revenue standards stand by their assessment that the training it would take to implement the new standards would be too much for many contractors. The issue of revenue recognition isn’t only for the construction industry. There are other industries that work on a contract basis. Intellectual property is also a hot topic as it relates to revenue recognition. On October 31, 2014, just 10 days away, the IFRS and FASB will be holding a joint meeting focusing on customer options for additional goods and services and nonrefundable upfront fees, presentation of a contract as a contract asset or a contract liability, determining the nature of a license of intellectual property, distinct in the context of the contract, and contract enforceability and termination clauses. What are you anticipating from the meeting of the two boards? What are you looking forward to, or hoping doesn’t happen? Are these changes even necessary? The boards talk about company transparency for investors, but are investors so abreast in the details that these changes matter? What are your thoughts?

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I've said this before, but it's worth repeating:

Are changes in Rev Rec (or any GAAP item) making understanding, comparing and contrasting easier or more transparent for the entity doing the investment.

Typically the answer in my opinion is no. It increases the burden on the company, raises revenues for the public accounting and certain legal businesses and the end result is the only people who really know are those who are doing the nitty gritty of the audit, not the intended audience.

However, I did learn a tremendous amount of information by taking the Jeff Tchir Rev Rec course on Proformative and he's giving a FREE webinar on Oct 23rd which may provide some answers and raise other questions.

The New World of Revenue Recognition: Industry Impacts and Transition Options
https://www.proformative.com/events/new-world-revenue-recognition-industry-impacts-transition-options

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

1. The training/implementation argument is a weak argument. They should at least present their arguments against the rules itself or propose their implementation plans.
2. The IFRS and FASB meet is essential if we want to have a standard way of understanding/examining companies across the board. Imagine 2 similar companies with different revenue recognition rules.
3. I don't expect much. The US of A is still not using the metric system (good or bad).
4. Revenue models are changing, evolving and maturing. The rules are just catching up and making some (more?) sense of things.

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Wayne and Emerson - Thanks for responding. Do you think that having a modified GAAP for SME companies makes sense? After all convergence between IFRS and US GAAP doesn't make much sense if a company doesn't wish to expand globally, nor is large enough from a revenue standpoint to sustain the cost of implementation?

I have to disagree that training and implementation is a weak argument, especially for smaller companies that aren't publicly traded.The standards the IASB and FASB are seeking convergence on are being imposed on all companies regardless of revenue, size, public or private.

I think Wayne is onto something by mentioning the new standards raising revenue for public accounting firms and certain legal businesses. My speculation is that the boards are getting push back from business owners, boards of directors, and others involved in the expense recognition side of the equation. Alternatively, the boards are getting support from the entities that have the most to benefit in regards to revenue recognition on their own books.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

I'm not sure if I favor multiple sets of rules. Why? two words, "tax code". Look how complex our federal (forget about the states and other localities) our tax code is because we have such "solution" in place. Different rules for different entities, based on who had the most money to spread around in Congress...

Who actually won? The Tax prep and tax legal industry. If everyone paid a flat tax (even if it were graduated), more tax would be generated at a lower cost of total operation (for the taxpayer and government).

Multiple rules for GAAP has the same issues involved. What happens when the SME graduates and becomes public or is no longer a SME? Do they need to restate everything, do have they have a do over?

I just don't beleive it is a practical solution.

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