New standard form of reporting revenue will allow for "global" comparisons of financial statements

Out-Law News | 03 Jun 2014 | 10:59 am | 1 min. read

A new standard method of reporting revenue will improve companies' financial reporting methods and make it easier for investors to compare results from companies based all over the world, international accounting regulators have said.

The new requirements are the result of 12 years of work by the Financial Accounting Standards Board (FASB), which is responsible for the US Generally Accepted Accounting Principles (US GAAP); and the International Accounting Standards Board (IASB), which is responsible for International Financial Reporting Standards (IFRS). IFRS applies to all EU publicly listed companies. The different requirements each of these bodies currently apply often result in different accounting for transactions that are economically similar, the regulators said.

"The revenue recognition standard represents a milestone in our efforts to improve and converge one of the most important areas of financial reporting," said FASB chair Russell Golden. "It will eliminate a major source of inconsistency in GAAP, which currently consists of numerous disparate, industry-specific pieces of revenue recognition guidance."

"The issuance of this standard is a major first step, but it is not the end of the process. Through the transition resource group and a robust implementation period, the FASB and the IASB will work to ensure that reporting organisations are able to make a smooth transition to the new requirements by 2017," he said.

The Norwalk Agreement, signed by the FASB and IASB in 2002, committed the two bodies to work together towards converged US and international accounting standards. According to a joint statement, they received more than 1,500 comment letters in response to their revenue reporting work. The current IFRS was seen as lacking sufficient detail, while the US GAAP requirements differ for different sectors were considered to be overly prescriptive.

The new standard will result in companies in some sectors where certain types of transactions are more common changing the point at which they record their revenue. It is based on companies recognising the consideration that they expect to receive for goods or services at the point that those goods or services are transferred to the customer, based on the consideration which the company is entitled to. It will particularly affect sectors where services such as maintenance contracts are 'bundled' together with goods, and will result in those companies booking less revenue up front and more later to cover those service costs. The new standard applies to all contracts with customers except leases, financial instruments and insurance contracts which are covered by other accounting standards.

According to the announcement, the new standard will also result in enhanced disclosures about revenue, provide better guidance for multi-element contracts and supply guidance for the first time for transactions that were not previously addressed comprehensively, including service revenue and contract modifications. The FASB and IASB intend to establish a joint transition resource group to help companies prepare to implement the new standard from 2017 and will announce more details shortly, they said.