what will a new revenue recognition standard accomplish to improve financial reporting? And at what cost?
Those are Tom Selling’s questions in his post, Revenue Recognition Sure Isn’t Perfect – But Convergence will be much Worse.
As to the cost question, I expect it would be very high. The disruption to preparers, confusion for report users, and increased time for auditors would be big.
I doubt it would just be learning curve costs either.
Dr. Selling’s estimate of the cost?
..it’s quite possible that accounting mayhem would ensue
If there were to be massive benefits, then massive costs would be worthwhile. However….
Dr. Selling doesn’t see any benefits. I think he perceives it taking GAAP backward. He provides a list of the places he sees open questions:
Here’s a quick list of off the top of my head of the questions that are still up in the air after ten years of “due process”:
· Criteria for recognition of revenue;
· Constructive obligations;
· Measuring the transaction price;
· Allocating the transaction price to performance obligations under multiple element arrangements;
· Estimating and presenting bad debts;
· Warranty liabilities;
· “Onerous” performance obligations;
· Costs eligible for deferral; and last but not least,
· Whether the final standard should provide detailed examples, or just wait and see how practice ‘interprets’ general guidance.
A large portion of the post deals with undefined components of determining an allowance for bad debts and the problems that creates. He sees the introduction of wiggle room in the exposure draft that opens the door to more creativity on the topline number.
If you are interested enough in the topic to have gotten this far in my summary, you really need to check out his post.
My previous posts discussing this project:
- Pushback on revenue recognition draft – topic 605
- Revenue recognition exposure draft – topic 605
- AICPA interview with FASB chair on revenue recognition – how that illustrates the issue with IFRS too – post discusses the substantial tensions between the US and international environment in terms of foundational perspectives regarding how accounting rules are written. Dr. Selling suggests the serious divergence of perspective has not been addressed on the revenue recognition project.
One enlightening realization from rereading my posts is that two of them are almost 2 years old. The final document was expected in the second quarter of 2011. Here we are in fall 2012 and there will be another exposure draft.
The professor’s conclusion:
No matter what a final standard will look like at this point, all I see coming out of new revenue recognition rules are mountains of wasted resources on compliance by issuers and lots of new “interpretive guidance” from regulators.
If the FASB can’t satisfactorily explain how the revenue recognition project will benefit users, it should abandon the project and leave the IASB to take it where the EU wants it to go.