FASB Proposes One-Year Deferral Of New Revenue Rule Effective Date

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By Denise Lugo

April 1 — The Financial Accounting Standards Board voted 4-3 to propose deferring the effective date of the new revenue accounting standards one year for public and private companies.

FASB also voted to allow companies that want to adopt the guidance at the initial Jan. 1, 2017, effective date to do so.

The one-year deferral means that public companies would apply the guidance to annual periods beginning after Dec. 15, 2017, and nonpublic companies would apply it to annual periods beginning after Dec. 15, 2018.

“Early adoption is very important to me for those who have already incurred significant costs to meet the original effective date,” said FASB Vice Chairman James Kroeker. “Those where the financial reporting might be a much better reflection of their economics, I think tend to be those who are thinking more seriously about early adoption as well, so that would be important to me.”

The board said it will issue an exposure document for public comment on its decision to defer the guidance. Companies will have one month to comment on the proposal.

The new revenue rules, Revenue from Contracts with Customers, were jointly issued by the FASB and the International Accounting Standards Board in May 2014. The guidance provides a converged standard for recognizing revenue worldwide.

Applies to U.S. GAAP; IASB to Consider Deferral

The board's decision to defer the rules for companies using U.S. generally accepted accounting principles responds to requests by some companies for more implementation time.

An IASB public relations person in an e-mail told Bloomberg BNA April 1 that IASB expects to discuss at its board meeting towards the end of April whether any change should be made to the effective date under IFRS.

Some companies, including telecoms companies' Verizon Communications Inc., and AT&T Inc.; software companies' Adobe Systems Inc., Advent Software, among others; made requests for a deferral. They said that the 2017 date wouldn't give them sufficient time to implement the changes, which eliminate industry-specific GAAP. Entities wishing to adopt the standard retrospectively said they were facing especially difficult implementation challenges.

Some Stay With Original Date

The provision to allow companies to stick with the initial 2017 date also responds to other companies' requests that they be allowed to continue with meeting that adoption date. Aerospace and defense company, General Dynamics, for example, asked the board to allow them to continue along the initial adoption path, stating that a deferral would heighten internal and consulting costs.

All FASB members favored issuing some type of deferral, pointing to systems challenges among companies. However, they held mixed views regarding how much of a deferral would be appropriate.

Given 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.

Some Wanted 2-Year Deferral

Those board members who opposed a one-year deferral generally favored granting a two year deferral for public companies, which agreed with staff accountants' views. This would allow public companies to apply the standard to annual reporting periods beginning after Dec. 15, 2018.

“It very quickly became apparent to me that companies in some industries, being in a ready state to implement the standard as of the effective date that currently exists will be very difficult for them,” said FASB member Daryl Buck.

One obvious reason, said Buck, is the board's decisions during the same meeting to issue a new exposure draft to give clarifications with regard to licensing revenue.

“For those companies that is a huge percentage of their revenue, and the guidance is still in somewhat of a state of flux, and therefore it's very difficult to expect them to be able to comply with the existing effective date,” Buck said.

Varied Preparedness

Among issues the board weighed was the variety of preparedness among companies, with some more advanced in their planning and others lagging.

Moreover, concerns about the potential for noncomparability across companies were raised. The board agreed to explain its decisions about choosing a one-year deferral over a two-year deferral in the “basis for conclusions” section of the forthcoming exposure document.

The board will also point to a third, hybrid-type deferral that was floated by a board member, discussion indicated. This hybrid-deferral would allow a one-year delay for cumulative effective adoption and two-year deferral for full retrospective application.

To contact the reporter on this story: Denise Lugo in Norwalk, Conn., dlugo@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com

For a copy of the board's handout go to http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176165902795

For a discussion of fundamental principles of revenue recognition, see 5100-2nd, Revenue Recognition: Fundamental Principles, at 5100.