by Cydney Posner
According to FASB’s “Tentative Board Decisions,” the FASB board decided yesterday to defer the effective date of the new revenue recognition standard by one year. As a result, public companies will need to apply the new revenue standard for annual reporting periods beginning after December 15, 2017 (i.e., starting in January 2018). Privately held entities would apply the new revenue standard for annual reporting periods beginning after December 15, 2018 (i.e., starting in January 2019). Public companies will need to apply the new revenue standard to interim reporting periods beginning in the first interim period within the year of adoption. Nonpublic companies would apply the new revenue standard to interim reporting periods within annual reporting periods beginning after December 15, 2019 (that is, a nonpublic entity would not be required to apply the new revenue standard in interim periods within the year of adoption).
Companies may, however, early adopt the new revenue standard, but not prior to the original January 2017 effective date for public companies. In that event, a public company would apply the new revenue standard to all interim reporting periods within the year of adoption, but a nonpublic entity would not be required to do so.
The new standard, agreed upon by FASB and IASB, was designed to increase comparability across industries and capital markets and to enhance disclosure. See this post. The model involves a five-step process for deciding when and in what amounts to recognize revenue as well as extensive new disclosures. See this post and this FASB summary. One decision for companies has been whether to elect a retrospective approach, applying the standard to both current and prior years, or to take the cumulative approach, applying the standard only to the first year under the new standard. The new standard has implications across multiple procedures and systems, and implementation of the new standard has turned out to be a much more complex and involved process than many had initially anticipated, requiring a multi-departmental approach. For example, companies have needed to consider not only the impact of the new standard on revenue itself, but also the impact of changes in revenue on financial metrics used in a variety of types of contracts, from loan agreement covenants to sales agreements to compensation plans and arrangements. (For a discussion of the impact of the new standard on compensation arrangements, see this post.)
According to BNA Accounting Policy & Practice Report, the FASB board vote was four to three in favor of the one-year deferral. All board members apparently favored some type of deferral, The debate was centered on the appropriate length of the delay, with some members preferring, consistent with the views of the staff accountants, a two-year delay for public companies. One member is reported to have suggested a hybrid-deferral that would have allowed a one-year delay for cumulative effective adoption and two-year deferral for full retrospective application. The deferral was prompted by requests from many companies that contended that they did not have sufficient time to implement the necessary changes, especially where retrospective application was elected. BNA reports that, in light of “the volume of transactions for some companies and the importance of revenue, the board didn’t want companies to be rushed and therefore compromise the quality of information being provided to financial statement users, the discussions indicated.” Among issues the board is reported to have considered were the extent of preparedness among companies, as well as concerns about the potential for noncomparability across companies. Another factor was the FASB board’s concurrent decision to issue a new exposure draft regarding licensing revenue, which could have significant effect on some companies and impact their ability to comply with the new standard on a timely basis.
