On April 29th, the FASB issued proposed ASU 2015-240, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. It is widely expected that the Board will adopt a one year delay in the effective date of its new revenue recognition rules set forth in ASC 606. That will make 2018 for public companies, and 2019 for nonpublic companies.
Sixteen years from start to effectiveness of a proposal is remarkable. It must be some sort of record. Let’s begin by recalling the original objectives, all of which have gone by the wayside: convergence of U.S. GAAP with IFRS; re-organizing US GAAP to make it more accessible and understandable; and improving comparability. Comparability would be improved by consistently applying the asset/liability view to revenue recognition in the same manner that it has been pervasively applied to expenses. Also, by eliminating idiosyncratic special industry rules, application will be more consistent.
The first grim reality is that absolutely none of the above are going to be achieved with the effectiveness of ASC 606:
- Revenue recognition was a joint project of the IASB and the FASB. There are huge gaps in the extant revenue recognition standards of the IASB, and the effectiveness of IFRS 15 will narrow some of them. But, nothing like that will happen over here. Revenue recognition under U.S. GAAP has been stable and effectively enforced by the SEC for years (setting aside the cases of plan vanilla making up the numbers, like creating fictitious sales). Every issuer understands the rules that apply to their industry well enough, and any net benefits from having a single global revenue recognition standard, if they ever existed, have evaporated. SEC commissioner, Kara Stein, recently said it’s time to move on from the disaster (my term for it) that has become convergence. And, quite predictably (I did), the new head of the European Financial Reporting Advisory Group (EFRAG) recently stated that it’s high time for Europe to make the IASB to toe the party line — or else to lose its funding from the EU. Finally, the meetings of the Transition Resource Group has seen the IASB break away from a uniform standard with U.S. GAAP.
- Although it is still somewhat difficult to use, perhaps the greatest accomplishment of the FASB during the last 20 years has been the introduction of its codification. Now, researching the authoritative GAAP governing revenue recognition is one-stop shopping — whether or not ASC 606 ultimately becomes effective.
- The promise of increased comparability has never been anything more than a red herring. First, the final rules scope out a lot of industries: leasing, insurance and financial services, just to name the big ones. (It’s easy to eliminate industry revenue recognition rules by eliminating industries.) Second, there will be plenty of room for issuers to exercise their “judgment” when applying the rules to their contracts, and to massage those contracts to get the accounting result they want. In my post from last September, I provided a quick and dirty list of the areas where massaging the numbers will be normal, and comparability will just be something for issuers to sniggle about (urban dictionary definition of “sniggle” — “to giggle and snort through the nose simultaneously”). Third, the asset/liability view was abandoned after the first five years of deliberation by the boards. Around the time I wrote that September post, one FASB member told me that while the standard would have been easier to write, application would have been difficult. But, given all the questions and hemming and hawing about what the boards have come up with over the last 7 – 8 years, it doesn’t look like the patchwork replacement for the asset/liability view has solved that problem.
So, if all of the benefits have dissolved while the costs of implementation remain, why is the standard still on the docket?
The second grim reality is that if the FASB doesn’t carry ASC 606 through to effectiveness, it will — to put it mildly — lose face.
It has become self-evident that the FASB needs ASC 606 to be able to state sniggle-free that the years since the 2002 Norwalk Agreement have not been a complete waste of time. But, of course, they were. Accounting convergence has not even been a mixed bag; it has been a bag of fertilizer.
And looking ahead, the loan impairment and leasing standards will do little to burnish the FASB’s reputation. Considering the real need for standard setters to help investors get better information about leases and impaired loans, and the unpardonable delays and the beat downs the FASB has absorbed from special interests, why do we hear nothing but platitudes for them from the SEC capons?
The third grimly reality is that, when it comes to FASB oversight, the SEC has submitted itself to voluntary sterilization.
To the best of my knowledge and belief, the last time Chair White made a public utterance regarding the status of IFRS in the U.S. occurred in May 2014:
I have made it a priority for the Commission to position itself to make a further statement on this very important subject …and I hope to be able to say more in the relatively near future.” [emphasis added]
So, here we as we approach the first anniversary of that speech, and the Chair of the most important capital markets regulator in the world has converted hope for something in the near future to bupkis. That’s because, I think, there is only one thing that can be said without risking a sniggle fit: that IFRS for the U.S. is dead. But, for the SEC chair to make it official before the FASB is allowed to push through revenue recognition, leasing and loan impairment would be highly impolitic. Better for Chair White to go back to private practice before the chips fall where they may, but surely hit the fan on their way down.
I was just kidding about the SEC being sterilized. Actually, I hope that whatever afflicts them is not irreversible. I’m not a politician, so I am unable to prescribe a treatment for curing whatever it is that afflicts them when it comes to the FASB. But, a cure is needed, urgently. ASU 2015-240 doesn’t propose to stop the clock on the initial application of ASC 606. The FASB is proposing a one-year delay to mandatory adoption, but they are now getting set to permit voluntary adoption on the same schedule as originally set forth in ASU 2014-09.
So much for comparability. And just who does the FASB think will adopt early? The companies whose reported earnings will benefit, silly. And, by the way, that’s not just my speculation. I asked that question of a national office staff member in a Big Four firm, and that’s the answer I received (with a sniggle, but without the “silly” part). The early adoption option exists for two reasons only, and neither of them have anything to do with the quality of financial reporting: (1) the Big Four are champing at the bit to get their new source of fees flowing (and a two-stage adoption will allow them to rake in even bigger bucks); and (2) for reasons already stated, the FASB absolutely refuses to delay when the genie should pop out of the bottle — and can’t be put back.
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Either the FASB is indifferent to the gratuitous value destruction that will ensue as companies apply ASC 606, or they are completely ignorant of the needs of investors. The most generous I can be is to suppose the former.
The only hope is for the SEC to actually take its role as the investor’s advocate seriously, and to instruct the FASB to take down ASC 606.
The fourth grim reality is that the SEC won’t do that.
But, one can hope.