Proposed Change to Revenue Recognition Standards

| Audit and Accounting

By  Mike Alerding     Recently, we heard about the proposed changes to accounting for leases. These changes would have widespread effects on many company’s financial statements and how those financial statements are interpreted by banks.

Another potential change could have similar effects. The International Accounting Standards Board (IASB) and the Financial Accounting Standard Board (FASB) have released a joint exposure draft on revenue recognition, particularly revenues relating to contracts with customers. The proposed standard would apply to all entities, including public, private and nonprofit.

Under the proposed standard, companies would have to identify certain performance obligations in their contracts with customers. The contract price would then be allocated to these performance obligations, and revenue would be recognized as each obligation is met.

While this process may sound straightforward, consider a construction contractor with anywhere from 50 to 100 contracts containing different trades going on at any given time. The task of monitoring the performance obligations and recognizing revenue would be much greater than what is required by the percentage of completion method, which is used to account for most long-term contracts. All this while companies are trying to watch their bottom line and keep accounting departments as lean as possible.

In addition, the proposed standard, or some version of it, will likely be implemented because the IASB and FASB both want to beef up their revenue recognition guidelines and create consistencies across different industries. However, asking companies to define performance obligations and allocate the contract price accordingly is very subjective. The exposure draft provides guidelines on how to accomplish each step, but as with any standard, it is subject to interpretation.

It will be critical for businesses to work with their outside accounting firm to become familiar with the proposed changes and the internal changes that will be necessary to implement them. Implementation is expected to take effect in June 2011.

Mike Alerding is a co-founder and Senior Director of Alerding CPA Group, an Indianapolis-based public accounting firm.  Visit our website: www.alerdingcpagroup.com.

This post was written by:

Michael Alerding, CPA
Senior Director

Mike has over 40 years of experience in public accounting. He is a prior columnist for The Indianapolis Business Journal and serves on multiple boards throughout Indianapolis. He currently focuses his time on litigation support, business valuations, succession planning consulting and audit and accounting engagements.
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