Peeling away financial reporting issues one layer at a time

My Safest Prediction for 2014: New Revenue Recognition Rules that Nobody Wants

We have thankfully come to the end of a year in which the gratuitous and repeated attempts by the FASB to converge U.S. GAAP with IFRS have finally devolved from “inevitable” to ignominy.     Yet, standards setting dysfunction will live on with a “final” and “converged”  revenue recognition standard to be issued by the end of this quarter.

Users didn’t clamor for a new standard, and despite a full 12 years of death by a thousand cuts (that must be some sort of record) to practically every original provision of the proposed standard to placate issuers’  “concerns,” there is no discernible support from issuers, either.  They had plenty of chances to voice their support at an FEI conference in November, but as reported by Bloomberg, nothing came of it besides politely-worded denunciations:

  • The existing revenue recognition rules are not broken; consequently, nothing has been “fixed,”  or even “improved.”
  • Transition costs are certain to be incurred, but future benefits to issuers or their investors are unlikely.
  • Even though U.S. GAAP and IFRS will have the same rules, the premise that this will result in consistent global application within or across jurisdictions is dubious.

I have written about the disconnect between the original project objectives and the kluges that eviscerated them here.  Moreover, much of the diversity in practice of applying the existing rules noted by the FASB as justification for new U.S. GAAP has diminished over time due to progress made on other fronts.  The advent of the Accounting Standards Codification (2009) has aided application by issuers.  And most prominently, the SEC staff issued, even before the FASB added revenue recognition to its agenda, extensive, no-nonsense interpretive guidance (SAB Topic 13) and numerous examples that should be credited for the reduction over the years in enforcement actions arising from manipulating reported revenue.  It’s depressingly remarkable that even after 12 years of ruminations, the boards say they are going to need two or three more years to figure out how their new rules are going to be interpreted for the myriad arrangements that exist in practice.

But, notwithstanding any demonstrated need or benefits of new rules, I’m as sure of my prediction that a plague of useless revenue recognition rules will be visited upon the FASB’s “constituencies”  as any I could make for 2014.  Very simply, and quite sadly, a failure to achieve some sort of closure on one of the most fundamental topics of financial reporting would clinch the FASB’s record of underachievement over the past 12 years, or even longer.  With a similarly-kluged leasing project on life support, and the continued dithering on loan accounting, abandonment of revenue recognition on top of all the other confirmed failures must resend a distress signal to the SEC that it can no longer afford to ignore: that the FASB members are primarily concerned with appeasement of the Accounting Establishment, and they care not nearly enough about responding to the needs of investors in a timely manner.

The SEC would love to stay above the fray that is accounting standard setting; but surely there must come a time when they will fulfill its duty to the public by reviewing its 2002 vote to reaffirm the FASB as the principle standard setter of U.S. GAAP.  In the spirit of the legislation that required it to do so, the SEC owes it to the public to investigate how the FASB has managed to accomplish so little; and to act accordingly on its findings.

If the FASB must be allowed to continue in its present form, then at a minimum, certain needed changes have already become self-evident.  First, when the FASB has identified needed improvements to GAAP, it should be incumbent on the Board to produce said improvement within a reasonable timeframe — say, five years, which also corresponds to a board member’s nominal term (the effective term is 10 years, since practically everyone seeks, and obtains renewal).  If the Board can’t bring itself to issue a final standard within the allotted time, then it should have to explain to the SEC why it could not, and table further discussion for at least three years.

Second, the current Conceptual Framework has become a joke — so much so, that the Board barely refers to it in the basis for conclusions sections of Accounting Standards Updates.  The SEC should compel the FASB to adopt and adhere to a rigorous set of principles.  As most vividly illustrated by the history of the revenue recognition and leasing projects, “due process” can easily devolve into a “dilution process.”  The board’s early “tentative” decisions for a new standard might have reflected reasonable objectives and straightforward solutions; yet, however one prefers to characterize the subsequent deliberations, the FASB lacks the discipline to stick to guiding principles, with the result that a proposed standard morphs over time into jello — sans the mold.  The original standard may have had both backers and detractors, but after a while, practically nobody, save the “experts” who will earn fees from assisting issuers in the transition to the new flavor of jello, derive any benefit from the new rules.

 * * * * * * *

The FASB and SEC were compelled to abandon its IFRS adoption efforts because the vast majority of issuers and users saw lots of cost and practically no benefit from accounting on the same basis as China and Europe.  The FASB is now  getting the same clear message about its revenue project, but it can’t possibly back away from it without a potentially fatal loss of face and credibility.

We’re stuck, and our only hope is that the SEC will help us out of the mess.

I wish it would, but I’m betting it won’t.

6 Comments

  1. Reply Joel Ungar January 3, 2014

    Great first post to the year Tom. I’m glad I made the switch from auditing to monthly accounting. Income tax basis is so much easier and makes more sense to our clients.

  2. Reply Scott January 3, 2014

    Still, the fact is that there is currently no revenue recognition standard under US GAAP—which should strike anyone as odd since US GAAP is considered the world’s premier set of accounting standards. US GAAP for revenue recognition, as ratified by the FASB and presented in the Accounting Standards Codification, is a hodge-podge of rules addressing specific, and generally more complex, topics. There is no guidance on fundamentals and the basic day-to-day revenue generating activities of most manufacturing and service businesses. The SEC tried to fill in the holes on more fundamental points with rules codified in SAB 13, but technically, these rules only apply to US public companies.

    • Reply Tom Selling January 3, 2014

      Hi, Scott:
      Your point about no actual revenue recognition standard in US GAAP is a good one, but I see it as more of a formality than a significant problem in practice at this point in the history of US GAAP. As to private companies, if the FASB is acting as an agent of the SEC, which in turn derives its authority from the securities laws, then the effect of a standard on private companies shouldn’t, IMHO, affect the FASB’s deliberations. Let the PCC handle private company issues further down the road, as necessary.
      Best,
      Tom

  3. Reply Matt January 6, 2014

    Tom – I agree, the FASB has been inefficient, at best, at getting anything significant accomplished and I would like to see the SEC hold them more accountable.

    When improvements to GAAP or the framework are needed, I think your proposal to set a deadline of 5 years would be a step in the right direction.

  4. Reply John January 18, 2014

    Tom, I completely agree with your first point. Someone needs to hold the FASB accountable for their lack of results / reform. The continued lack of progress and direction reflects poorly on the entire profession. It’s completely inexcusable in my opinion.

  5. Reply G Rogers January 21, 2014

    I really enjoyed reading your article and agree with you on all points! The FASB has simply failed in its mission to provide consistent, thorough guidance on accounting standards over the past few years. It has become distracted and almost weighed down by its own research projects, particularly the convergence of US GAAP and IFRS.

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