FASB and IASB Reach Tentative Decisions on Revenue Recognition Proposal
Revenue is a key number for users of financial statements in assessing an entity’s financial performance. As part of the ongoing Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s (IASB) (the Boards) joint projects, they continue to discuss revenue recognition. This has been one of their key projects, and one that has been ongoing for a number of years. The first Discussion Paper on this topic was released in December 2008. The Boards’ main objectives were to develop more consistent requirements, improve comparability, and provide more useful information to users of financial statements.
The Boards have recently reached tentative decisions on the revenue recognition disclosure issues related to the following:
- Disaggregation of revenue
- Reconciliation of contract balances
- Remaining performance obligations
- Assets recognized from the costs to obtain or fulfill a contract with a customer
- Onerous performance obligations
- Qualitative information about performance obligations and significant judgments
The Boards also reached tentative decisions on transition, effective date and early application. The tentative transition guidance would allow an entity to apply the new revenue standard retrospectively with optional enhanced practical expedients. An entity would also be allowed to elect an alternative transition method that would require:
- Applying the new revenue standard only to contracts that have not been completed under old standards;
- Recognizing the cumulative effect of initially applying the new standard to the opening balance of retained earnings; and
- Providing additional disclosures related to the amount by which each financial statement line item is impacted and explanation of the significant changes in reported results under the new standard.
The revenue recognition guidance would be effective for annual periods beginning on or after Jan. 1, 2017. Early application would not be permitted.
The Boards noted that the period of time from the expected issuance of the standard until its effective date is longer than usual due to the unique attributes of the revenue recognition project, including the scope of entities that will be affected and the potentially significant effect that a change in revenue recognition has on other financial statement line items.
The Boards have completed their substantive redeliberations of the 2011 exposure draft. The FASB staff has begun drafting the final revenue recognition standard, with final release expected in the second quarter of 2013. See the FASB website for a complete update on the revenue recognition project.
FASB Issues Proposed Guidance on Financial Assets and Liabilities
The FASB has issued a proposed Accounting Standards Update (ASU), Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The proposed ASU is part of the joint projects with the IASB to converge the accounting for financial instruments, and to provide a comprehensive measurement framework for classifying and measuring financial instruments.
As described below, the proposed accounting standard would measure financial assets based on how a reporting entity would realize value from them as part of distinct business activities, while the measurement of financial liabilities would be consistent with how the entity expects to settle those liabilities.
Financial assets would be classified into one of three categories:
- Amortized cost;
- Fair value through other comprehensive income (OCI); or
- Fair value through net income.
Equity investments (except those accounted for under the equity method of accounting) would be measured at fair value with changes in fair value recognized in net income. A “practicability exception” to measurement at fair value would be provided for equity investments without fair values that can be readily determined.
Financial liabilities would generally be required to be carried at cost unless: 1) the reporting organization’s business strategy is to transact at fair value, or 2) the obligation results from a short sale.
Public companies would be required to disclose fair values parenthetically on the face of the balance sheet for financial assets and financial liabilities measured at amortized cost, with exceptions for demand deposit liabilities and receivables and payables due in less than a year. Nonpublic entities would not be required to disclose this fair value information parenthetically or in the notes. Comments on the proposal are due by May 15, 2013.
FASB Issues ASU 2013-05
The FASB has issued Accounting Standards Update (ASU) No. 2013-05, Foreign Currency Matters (Topic 830) Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.
When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. The cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided.
For an equity method investment that is a foreign entity, the partial sale guidance in Section 830-30-40 still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. This treatment does not apply to an equity method investment that is not a foreign entity. In those instances, the cumulative translation adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment.
The ASU also provides clarification as to what events comprise a sale of an investment in a foreign entity.
For public entities, the amendments in this ASU are effective prospectively for fiscal years beginning after Dec. 15, 2013. For nonpublic entities the amendments in this ASU are effective prospectively for the first annual period beginning after Dec. 15, 2014, and interim and annual periods thereafter. The amendments should be applied prospectively to derecognition events occurring after the effective date. Prior periods should not be adjusted. Early adoption is permitted.