How Standard Setters Seek to Minimize Implementation Issues

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By Denise Lugo

Oct. 25 — The Financial Accounting Standards Board’s main intention of setting up a transition resource group—TRG—for revenue recognition was to aid in the implementation of the rules, and not necessarily to set a procedure for how new accounting rules should be handled.

But after the revenue TRG was created, FASB has formed TRGs to aid in implementation of other sweeping accounting rule changes.

Revenue TRG

FASB formed the revenue TRG six months before the adoption of the revenue rules. The group was set up to monitor proactively the rules’ implementation and to aid in addressing anticipated problems, FASB Chairman Russell Golden said Oct. 20.

“We recognized that a system that was going from predominately industry-specific revenue recognition guidance to one principle-based model would have a lot of questions and would need others in the profession to stand ready to help and so we created a transition resource group,” Golden told attendees at the National Conference of the Securities Industry, hosted by the Securities Industry and Financial Markets Association and the American Institute of CPAs, at New York Law School.

Revenue Recognition Rules

The some 750 pages new accounting standard, Revenue from Contracts with Customers (ASC 606), would globally impact every company’s accounting for revenue--the most important item on the financial statement.

More significantly, in the U.S., companies would have to shift from industry-specific rules to one principle-based model: a huge effort nationwide with consequences that still aren’t fully apparent.

Issued in May 2014, the rules are effective in 2018, but can be applied next year.

Preventing an Implementation Crisis

The revenue TRG, chaired by FASB Vice Chairman James Kroeker, was initially established jointly by FASB and the International Accounting Standards Board June 2014.

The standard setters sought for the group to educate accounting professionals about the types of questions that would arise in applying the new revenue standard. The goal of the transition group was to potentially narrow differences that might arise, because accounting firms disagreed among themselves.

The TRG also sought to keep U.S. generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) converged. In the U.S., interpretation differences stem from the level of judgment involved in applying principles-based rules as opposed to the industry-specific ones companies are accustomed to.

Since its inception, the revenue TRG has met a number of times, dealt with about 90 different issues. Ten of those issues have become new standards.

Having a Debate on a Question is Good

FASB understood there may be times when the board just didn’t get the words right, or what it thought it had done to meet the cost benefit test—didn’t, said Golden.

“I think we’ve narrowed diversity, or we’ve also observed not every question needs to be answered in accounting, and so sometimes merely having a debate that says ‘either or is fine’ is a way to move forward,” he said.

Other times, an issue results in FASB making changes to resolve confusion and provide clarity so that the accounting neutrally depicts the economics of a transaction.

The revenue TRG will continue to meet as long as it needs, said Golden, because what the most important is that all industries consistently apply the standard.

The next meeting will take place Nov. 7.

Why No TRG for Leasing?

FASB’s decision on whether to have a TRG is based on the level and significance of the accounting changes for companies. Though the new rules on leases is a sizable change, FASB felt it wasn’t a big accounting shift in how one thinks about leases. Therefore a TRG wasn’t warranted for those rules.

The Leases standard (Topic ASC 842), issued February 2016, is effective 2019 for public companies.

For the first time companies will be required to record long-term operating lease obligations on their balance sheets. Currently those lease obligations are kept off balance sheet, so the significance of that change relates to the likely impact of reporting those items, as opposed to major changes in the accounting, Golden’s comments indicated.

FASB has assigned resources to pro-actively go out to companies and auditors to educate them and help companies accept “what they need to do.”

Credit Losses TRG

Not like the leasing change, FASB said the rules for credit losses would be a significant change for financial institutions.

Therefore, it was important to have preparers, financial institutions, auditors, and regulators come together every four or five months and talk about the pressures they are seeing in the system so that there can be a consistent understanding about the board’s intent, Golden said.

The accounting standard, Financial Instruments—Credit Losses (ASC 326) was issued in June, but won’t take effect until Jan. 1, 2020 for public companies.

It is significant to banks and other financial institutions, and spurred by the 2008-2009 financial crisis. The standard requires a more timely recognition of credit losses on loans and other financial assets than under current accounting.

The credit losses TRG, chaired by FASB member Lawrence Smith, was established before that standard was issued in an effort to prevent the level of questions and issues the board had to deal with compared to the revenue standard.

“We’ve had a couple of TRG meetings, prior to the issuance of the standard—we didn’t do that in revenue,” said Golden.

“What we learned was that some of the things we had to change in setting the revenue standard, if we had known that before we would have thought ‘let’s have a TRG in advance to reduce number of standard setting activities,’” he said.

Sensitive to Change

FASB is “sensitive and cognizant of the changes” and consistently continues to monitor potential issues stemming from the new rules on revenue, leases, and credit losses, said Golden. “And that’s why the effective dates of these standards are not all at once,” he said.

A company, for example, can adopt the leases standard and the revenue standard at the same time, but isn’t required to. “We met and thought about all of these effective dates at once recognizing that there is fairly substantial amount of change occurring for the profession that we wanted to do it in a methodical systematic way,” Golden said.

To contact the reporter on this story: Denise Lugo at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

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