In May 2014, the Financial Accounting Standards Board (FASB) issued a new standard on revenue recognition, which is set to take effect for public organizations on Dec. 15, 2017, and for nonpublic organizations on Dec. 15, 2018.  These dates reflect a deferral by a year from the original effective dates; the FASB issued the deferral in August 2015.  The revenue recognition standard is one of the major features of the joint FASB/International Accounting Standards Board (IASB) convergence project, which was intended to produce a set of high-quality international accounting standards that can be used within either framework.  The product of six years of discussion, outreach, exposure and re-exposure, the standard replaces the myriad industry- and transaction-specific guidance within generally accepted accounting principles (GAAP), with a singular approach based on identifying, fulfilling and recognizing performance obligations within contracts.

In February 2016, the FASB also issued a new standard to address  financial reporting for leasing transactions.  That standard’s effective date for public companies is Dec. 15, 2018. Mary Mazzella, supervising project manager at the FASB, and Cullen Walsh, an assistant director at the FASB, are members of the FASB/IASB Joint Transition Resource Group for Revenue Recognition (TRG).  The group’s purpose is to address stakeholder issues arising from implementation of the new guidance, inform both the FASB and the IASB about implementation issues, and “provide a forum for stakeholders to learn about the new guidance from others involved with implementation.” Mazzella and Walsh took the time to respond to questions from  The Trusted Professional about how the implementation process is progressing.

A KPMG survey, taken at the beginning of 2016, showed that just 29 percent of  firms had a clear plan to actually implement this standard, with 27 percent having taken no action at all to prepare. It’s now early in 2017, and there’s less than a year left before the standard becomes effective. What do you think is at the root of the difficulties that companies are having with preparation?

Cullen Walsh: Public companies have [slightly less than a] year until the mandatory effective date; however, it’s important to keep in mind that a majority of organizations— private companies and not-for-profits—have [nearly] two more years. 

The FASB understands that our work is not done the day we issue a new standard.  The FASB monitors implementation activities, and we stand ready to address implementation questions as they arise. Our efforts primarily involve educating stakeholders about the new standard. We have done this through meetings of the TRG, technical inquiries raised by stakeholders, webcasts and presentations at conferences.

Of the  firms that are well on track to being ready for implementation, do you  find that they have anything in common? Are they clustered in a specific industry, do they have a certain type of governance structure, is there some kind of cultural commonality? Or is it across the board?

Mary Mazzella: One key to success for those organizations seems to be that they do not go it alone. They are actively engaged with others in their industry to discuss implementation questions.  They collaborate on identifying industry-specific issues and the resolution of those issues under the new standard, for example, through the AICPA Expert Panel on Revenue Recognition. From my perspective,  financial statement users will benefit from this collaboration because it will lead to more consistent application of the new standard.

Since the  final standard was released, it has been delayed by a year and slightly tweaked to account for licensing agreements on intellectual properties. Now there’s another proposal to make technical corrections and improvements. Why did the standard need these modifications even before the implementation date?

Mazzella:  The process we have employed on the new revenue standard is not new; FASB went through a similar process when we ... issued other major standards. Our process doesn’t end when the standard is issued because we want to ensure that our stakeholders have the ability to ask questions during implementation and understand the board’s objective in issuing the guidance. We stay engaged after issuing a standard because we know that quality implementation is critical to the overall success of a project.

We want stakeholder feedback on our standards—whether it’s a new standard or a decades-old standard. When stakeholders provide new information, the FASB evaluates whether there is an improvement to be made to a standard. For example, after the revenue standard was issued, a few stakeholders identified ideas for practical expedients, which simplify the application of the guidance without significantly changing the quality of information reported to investors. Some of the tweaks to the standard were those practical expedients. Stakeholders also identified a couple of areas where they thought the board could clarify its intentions in order to reduce the risk of diversity in practice.  The board thought the suggestions were good and that they represented an improvement.

If, in the next few months, we still see many companies unprepared to implement this standard, do you anticipate another delay in the effective date?

Walsh: We do not anticipate another deferral of the effective date. Some companies in the United States are planning to adopt the new revenue standard early [this year], and you might be surprised to know that some companies that prepare  financial statements under IFRS [International Financial Reporting Standards] already have adopted the standard. We strongly suggest that all organizations make progress on their implementation activities in the coming months.

To what degree do you think needing to get ready for the leases standard, as well, is impacting people who are getting ready for the revenue recognition standard?

Walsh: I do not think it is having a significant impact. The revenue standard was issued almost two years before the leases standard.  The mandatory effective date for the leases standard is one year after the revenue standard, so most private companies and not-for-profits have three years before the mandatory effective date. Some stakeholders informed the FASB that they actually prefer to adopt the revenue and leases standards in the same year, so the board decided to permit early application of the leases standard.

What aspects of the revenue standard do you  find people having the most trouble with today?

Mazzella:  The most difficult questions we have received involve areas in which there exist challenges under current revenue guidance. Contracts with customers can be complex— they can involve many different promises that extend over many years, and payment for those promises can come in many different forms.  The new revenue standard provides guidance in several areas where, currently, there is little or no guidance, but where there still is a need for judgment and estimates. Good professional judgment is critical today, and it will continue to be tomorrow under the new revenue standard.

What is a common misconception about the standard that you’ve had to clear up numerous times?

Walsh: I do not think there have been broad misconceptions. It is natural that stakeholders will have many questions about a new standard, particularly one as broad as the revenue standard. Most of the questions raised to the FASB staff  have been good ones.  The United States is fortunate to have a lot of dedicated accountants who are taking the revenue standard seriously and are being thoughtful about implementation.

What tends to surprise people the most about the new standard? Is there anything different that few have thought about?

Mazzella: Disclosures are an important part of the revenue standard. One of the objectives of the FASB and the IASB was to improve revenue disclosures. Financial statement users informed the boards that more transparent disclosures about revenue recognition under both GAAP and IFRS were in need of improvement.

The new disclosure requirements are intended to help users understand the nature, amount, timing and uncertainty of revenue and cash  flows arising from contracts with customers. I see the disclosures as an opportunity for an organization to communicate useful information to its investors, lenders and other  financial statement users. For some organizations, the main change resulting from the standard will be disclosures. I encourage organizations to make disclosures an important part of their implementation activities.

For a CPA, what is the most important thing to remember about the new standard?

Walsh: If you are struggling with an implementation question, the FASB has resources that may help you. For example, our website includes a variety of resources, including [the] TRG and other educational materials, to help you understand what is required by the standard.  Thee FASB staff  also helps stakeholders with questions on specific areas of the new standard through our technical inquiry line, accessible through our website.  There are many other resources for companies and auditors to use, including informal industry groups and the AICPA’s industry working groups.  The FASB’s revenue recognition website is a great resource for educational material. It also has contact information of FASB staff  who are available to help.