The FASB has released a revised exposure draft of its proposed guidance on recognizing revenue from contracts with customers and reopened the subject for a new wave of comments. This release marks a significant milestone in the long journey toward a global accounting standard for revenue recognition. At this point, the US and international standard-setters (the FASB and IASB) have tentatively agreed on a contract-based approach that would apply across industries to a broad range of goods and services. Although the 2011 draft retains the basic approach proposed in 2010, numerous changes were made to simplify the steps and make the core principle easier to understand and apply. Now, the Boards are looking to management, auditors, and others to review the revised draft with any eye toward identifying any unintended consequences or undue costs and complexities prior to the issuance of the final standard, which is expected in late 2012 or early 2013.

Overview of the Revised Proposal

To help companies understand how the new proposal would affect them, this Messenger provides an overview of the revised proposal, starting with the proposed core principle and basic 5-step approach.

• The core principle. The overriding purpose of the core principle is to establish the timing and amount of revenue to be recognized. Under the proposed principle, a company should recognize revenue when goods or services are transferred to customers, and the amount recognized should reflect the consideration the company is entitled to receive in exchange for those goods or services. This principle would apply broadly to all types of contracts (whether written, oral or implied), but exceptions would apply to certain types of contracts that are subject to other accounting guidance. The exceptions include leases, insurance contracts, financial instruments, guarantees other than warranties, and certain nonmonetary exchanges.
• The basic 5-step approach.  Although companies may not need to consciously think through all the steps for a simple transaction, such as a T-shirt sale, the proposal suggests that the core principle can be consistently applied to a broad range of transactions by following five steps:

The five-step approach sounds simple, but some of the steps could involve new ways of thinking and require considerable judgment. For example, when the approach was initially proposed, many questions arose about specific types of transactions, including whether a particular transfer of goods or services should be considered a distinct performance obligation or if it would be combined with other performance obligations. The revised draft provides clarifications to help answer these questions.

In addition to the basic approach, companies would be required to make certain disclosures in financial statements for annual and interim reporting periods to help users of financial statements understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The annual disclosures would generally provide additional information about the company's contracts with customers, including any significant judgments and changes in judgments made in applying the proposed guidance.

Additional Analysis

Some of the changes from the 2010 draft reduce the level of judgment required and/or bring elements of the basic approach more in line with current practice. A number of these and other changes are highlighted in the 2011 draft as areas on which additional analysis and feedback are especially welcome. To help you put the changes in perspective, the following tables are provided as attachments.

• Attachment 1 - Changes highlighted for additional analysis and feedback.
• Attachment 2 - General Q&As without industry-specific insights.

The 2011 draft was issued as a proposed Accounting Standards Update, but it does not include the proposed amendments to the FASB Accounting Standards Codification. It is our understanding that the FASB will issue this section of the ASU shortly, along with a mapping tool to help readers understand the changes from current US accounting standards. Concurrently, MHM is developing supplemental Messengers with insights into the potential effects on companies in certain industries.  For example, a supplemental Messenger for the construction industry should be available soon.

For More Information

MHM's Professional Standards Group will continue to monitor progress on the many issues and possible future directions, and we are interested in your views on the basic approach and any or all of the possible changes described in this paper. If you have any specific questions, comments or concerns, please share them with James Comito of MHM's Professional Standards Group or your MHM service professional. James is located in our San Diego office and can be reached by email at jcomito@cbiz.com and telephone at 858-795-2029.