Convergence Collaboration: Revising Revenue Recognition: The “revenues” line holds the single biggest number in the income statement. (Except for the occasional goodwill writedown in excess of revenues.) It’s one of the most crucial financial measures investors will ponder, and it’s often the focus of management mischief: think of the accounting chicanery to which investors have been subjected in the last decade.“Round-tripping” of contracts, done to bloat them and add to investor appeal.“Buy-and-hold” transactions where early customer purchases were not really sales at all. “Principal vs. agent” transactions where transactions were reported on a gross basis for say, a ticket price, when the real revenue earned only amounted to a commission on that gross price. And those are just a few examples.
Maybe because it’s the single most important number in the income statement - after all, nothing happens until someone sells something - or maybe because rascally revenue recognition erupts every few years, the U.S. accounting standards dealing with revenue recognition have multiplied like rabbits. The section of the U.S. accounting standards codification covering revenue recognition is composed from more than 140 pronouncements issued over the years. Some of it is very specific to certain kinds of transactions; some of it is very specific to certain industries. Oddly, none of it contains general guidance on revenue recognition for services. Revenue recognition issues have been frequent agenda items for the FASB’s Emerging Issues Task Force, indicating that the current standards are substandard, themselves: if the accounting principles were effective, they wouldn’t need such frequent interpretation. How frequently? Two of those EITF consensuses became effective within just the last month, though their genesis began several years ago.
Since 2002, the FASB has worked with the IASB on a joint project to improve revenue recognition standards. On the FASB side, the greatest improvement would be a comprehensive set of revenue recognition principles that don’t require constant repair and maintenance. On the IASB side, the greatest improvement would be more consistent principles that could be applied in more specific situations. For example, there’s little guidance on revenue accounting for arrangements containing multiple elements. Both sides have something to gain from this project, and developing a joint standard is a meaningful standards convergence step. Here’s how the joint proposal will work, in its current form - and how it could affect current revenue recognition practices in various industries.