Peeling away financial reporting issues one layer at a time

Post the Convergence Mania: The New Revenue Recognition Standard Will Do Much More Harm than Good

A journey through recent accounting time…

It’s 2002

The Accounting Establishment declares that convergence of FASB and IASB rules is “inevitable.”  At the top of a very long convergence to-do list is revenue recognition.  It so happens that from decades of incremental adjustments on this topic, US GAAP is stable, conservative and comprehensive — albeit somewhat inconsistent. IFRS is like Swiss cheese. It’s holes are so numerous that when auditors of IFRS statements are confronted with a transaction not addressed by IFRS they reflexively look to US GAAP for the backfill.

The bottom line is that US GAAP works well enough.  But political reality dictates that it must be scrapped if accounting convergence has a hope of resulting in a single set of global accounting standards.  With the recent advent of a new and revitalized IASB, the days when international standard setters could simply adopt GAAP, after predictable expressions of misgivings and some minor tweaks, are over.

But the other political reality is that issuers do not take for granted that existing GAAP can be “managed” quite effectively, thank you very much.   As if they are oblivious to the uphill political battle they will face from issuers, the Boards put their most principled foot forward.  They naïvely propose an approach that should produce a much clearer reflection of economic reality:  changes to the current values of assets and liabilities (“asset/liability approach”) would be the basis for revenue recognition.

The stage is set for the most convoluted and protracted “due process” to a final standard in the history of accounting standard setting.

It’s 2014

The asset/liability approach quickly went over like a lead balloon. Issuers continually fought tooth and nail against any rule that would delay revenue recognition, or make it more volatile, or leave issuers with less wiggle room to manage earnings.  By 2014, the not-really-final standard, ASU 2014-09, is little more than old wine in new bottles.  The IASB’s companion document is similar, but there are significant differences.  Convergence of revenue recognition standards fails.

As an interesting (and depressing) historical note, the asset/liability approach has been put in an Orwellian memory hole. There is no record of it on the boards’ public websites, and the basis for conclusions sections of the not-really-final standard are written as if it had never existed.  After 12 years, the boards have done little or nothing to assure its stakeholders that the benefits of two new revenue recognition standards will be greater than the implementation costs. 

ASU 2014-09 is not effective until 2017 for public calendar-year companies.  As for “not-really-final,” the boards say that they need to work together for yet another 2 – 3 years to figure out how the new rules ought to be applied to actual transactions, and perhaps to make revisions.  For this, they establish the Joint Transition Resource Group (TRG) — at least 10 years later than they should have.

On the bright side, the long time to transition gives the Big Four and a few other larger accounting firms plenty of time to “earn” consulting fees for showing companies how to re-bottle their wines.

It’s 2015

The unenthusiastic response by issuers to the transition challenges can best be described as passive-aggressive — which is understandable since they see all near-term costs while the FASB has demonstrated no long-term benefits.  The FASB has little choice but to postpone mandatory adoption by one year, BUT to ensure that the peasants don’t get any ideas about staging a revolt, the FASB will now permit early adoption. For once the few US companies that might want to adopt in 2017 actually do so, there can be no turning back.

The Big Four gets another windfall: one year later means one more year of consulting revenue.

The FASB issues three proposal documents to amend the not-really-final rules issued in 2014.

It’s the Present

The FASB/IASB Transition Resource Group discussed 40 implementation issues in two years.  One result is that US GAAP and IFRS are now further apart.  Another is that issuers now have 40 new staff papers to read in addition to “authoritative” GAAP and the non-authoritative basis for conclusions published in ASU 2014-09.

The IASB has announced that they will not participate in future TRG meetings, but the TRG will meet at least three more times under the aegis of the FASB.

The FASB issues a fourth proposed Update to amend the not-really-final rules issued in 2014.

It’s the Future

Issuers will spend hundreds of millions, if not billions of dollars to implement ASU 2014-09.  As to costs beyond implementation, I attended two meetings of the PCAOB’s Standing Advisory Group* in which the auditability of of ASU 2014-09 was a topic of conversation.  Nobody praised the FASB member in attendance for producing a great standard that was sure to enhance the quality of US GAAP.  The general consensus was that ASU 2014-09 would present new challenges to auditors for the many new opportunities issuers will have to exercise “judgment.”

The probability is essentially zero that the FASB will do any sort of reasonably complete and rigorous cost benefit analysis.  Notwithstanding, a 2012 internal SEC memo clearly indicates that such an analysis would be necessary and appropriate:

“Recent court decisions … and Congressional inquiries have raised questions about and/or recommended improvements to various components of the Commission’s economic analysis in its rulemaking, including: (1) identifying the need for the rulemaking and explaining how the proposed rule will meet that need; (2) articulating the appropriate economic baseline against which to measure the proposed rule’s likely economic impact (in terms of potential benefits and costs, including effects on efficiency, competition, and capital formation in the market(s) the rule would affect); (3) identifying and evaluating reasonable alternatives to the proposed regulatory approach; and (4) assessing the potential economic impact of the proposed rule and reasonable alternatives by seeking and considering the best available evidence of the likely quantitative and qualitative costs and benefits of each.”  [footnotes omitted]

It can be argued that FASB standard setting is technically not SEC rule making even though formal SEC policy considers compliance with FASB standards to be a legal requirement.  But, if I were a commissioner, that is an argument I would not want to have to make.  (And, who knows how a court would rule on the question should there be a legal challenge?)

Let’s put it another way.  How would you like to be an SEC commissioner and have to answer a question from a reporter about the costs and benefits of the new revenue recognition rules?  If I were Chair White, I would feel behooved to provide the public with an answer — or to explain why I, and my predecessors, stood idly by while the FASB dithered its way to rules that provide no discernible service to investors.

I promise that if I should ever have a chance to ask, I will.

* * * * * *

“To Everything (Turn, Turn, Turn)
There is a season (Turn, Turn, Turn)
And a time to every purpose, under Heaven

A time to be born, a time to die
A time to plant, a time to reap
A time to kill, a time to heal
A time to laugh, a time to weep”

A time to establish, and a time to abrogate

“I swear it’s not too late!”

(With apologies for my interpolation to Pete Seeger)


*I am a member of the Standing Advisory Group of the PCAOB.  All of the views expressed in this post are my own.

 * * * * * *

Here are the latest additions to The Accounting Onion Bookstore:
SynergyTrapAlthough slightly dated, the financial lessons are timeless. It explains practically everything you would want to know about the reasons why companies pay too much for an acquisition target (including unrealistic expectations of synergies that don’t materialize); and the consequential value destruction that occurs.  (By the way, I assign chapters from this book when teaching business combinations in my Advanced Accounting classes.)
41VfnQvDU6LI use this textbook for teaching business combinations and related topics at SMU. Mainly, the consolidation worksheet format used comes closest to the way I prefer to set things up and explain them to students. I have augmented this book in class with The Synergy Trap  to give students a strong sense for the financial and management aspects of M&A.  (Note, the 3rd edition of Advanced Accounting should be available soon.)



  1. Reply Doug Barnert April 22, 2016

    Ecclesiastes for your quote.

    • Reply Tom Selling April 24, 2016

      Actually, I wouldn’t say Ecclesiastes is technically correct. Pete Seeger clearly based his lyrics on Ecclesiastes, but a comparison shows that they are different in important ways.

  2. Reply Brad April 28, 2016

    and guess what….give this 30 years, and we will be back to a rules based approach to revenue recognition. Enough “uncertainty” as to judgment and need for clarification on specifics and we will be back where we started. The reason you can honestly never truly have convergence is that the ultimate reason for each country’s accounting standards is driven by that country’s legal environment and ability for investors to seek damages where they feel wronged.

    In the US especially, where we have effectively outsourced industry regulation to class-action law suits, the ambiguous nature of the new standard is only going to lead to more and more clarification.

    Finally, we are close to two years post-standard and they are issuing “rules” to the “principles”. Did anyone at the FASB step-back and look at the FASB Concepts and realize…hmmmmm those are principles…yet we needed 160 FASB Statements to clarify these statements?”

    And quite frankly, this is going to cost more than just implementation costs. It is going to cost investors a ton of money as I am sure, management, in good faith, is going to apply this new Standard incorrectly, and there will be plenty of restatements over the next decade.

    And I cannot wait for auditors and regulators to look to previous GAAP (i.e. – rules based approach) to identify lapses in judgment. It is only natural. The worst will be software revenue recognition…where rules were created specifically due to the nature of the work. Look for many auditors and regulators to question timing and amount of revenue recognized, and look to the fact that their judgment should have been consistent with the concepts of software rev. rec (SOP 97-2) and amendments thereafter.

    Cannot wait!

    • Reply Brad April 28, 2016

      The only people that benefit….Senior Executives shielded from liability by professing a good-faith argument under these new Principles. Lovely.

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