The FASB and the IASB have been formally working on a revenue recognition project since September of 2002. This joint effort culminated in an exposure draft, Revenue from Contracts with Customers in July of 2010, and subsequently, two additional exposure drafts. The purpose of these exposure drafts has been to clarify revenue recognition principles and develop a common standard for US GAAP and IFRS. The necessity for this project was the result of perceived flaws in both US GAAP and IFRS related to revenue recognition. Common complaints relative to US GAAP were that industry-specific requirements resulted in different treatment for similar transactions. In contrast, the main revenue recognition standards of IFRS have been criticized for being difficult to understand and difficult to apply to complex transactions.
The core principle of the exposure drafts is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve this principle, an entity must apply the following five steps:
• Identify the contract with a customer
• Identify the separate performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the separate performance obligations in the contract
• Recognize revenue when (or as) the entity satisfied a performance obligation
Also, included in the exposure draft is a discussion regarding “the Constraint.” When the consideration is variable, the proposed guidance limits the amount of revenue recognized only to the amount to which the entity is reasonably assured it is entitled.
In a joint Board Meeting on November 19, 2012, the FASB and IASB contemplated the location of the Constraint, among other topics. Ultimately, the Boards decided the location of “the Constraint” should tentatively be applied at Step 3 rather than Step 5. The impact of this decision is that the Boards have indicated that entities should only recognize revenue to the extent the amount recognized will not be subject to significant revenue reversals.
Board deliberations are expected to continue during December of 2012, and the FASB expects to issue a final document in the first half of 2013. Based on this timing, the final revenue standard would be effective for periods beginning on or after January 1, 2015. The FASB has indicated that early adoption will not be permitted, while the IASB decided early adoption will be an option.
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