Question

In a few paragraphs, summarize the revenue recognition convergence process on this subject. How long did it take? Was it contentious and, if so, why? What were the areas of disagreement as the convergence process developed?

Answer 1

HISTORICAL TIMELINE OF THE CONVERGENCE PROCESS: FASB and IASB made significant strides in developing a single revenue standard for financial reporting. Dated back to 1999, FASB already outlined its support for the dual goals of converging global accounting standards while continuing to improve U.S. GAAP. The two Boards defined convergence and tactics in two different documents-the Norwalk Agreement issued in 2002 and the Memorandum of Understanding (MoU), originally issued in 2006 and updated in 2008 and 2010. The timeline of the convergence that the two Boards accomplished is listed below,

January 2002: FASB discussed the objective and scope of a potential major project on the recognition of revenues and liabilities in financial statements. The Board issued a project proposal with a 60-day public comment period.

May 2002: After considering 32 comment letters on the project proposal, FASB started the technical agenda project to develop a comprehensive revenue recognition standard and to amend the related guidance on revenues and liabilities in some FASB Concepts Statements. Both "top-down" approach and the" bottom-up" approach were used. In the top-down approach, the staff developed conceptual guidance for the recognition and measurement of revenues that would form the basis of a new standard. In bottom-up approach, the staff analyzed existing authoritative guidance and the revenue recognition principles and practices related to that guidance.

June 2002: IAS added the revenue recognition project to its technical agenda.

September 2002: FASB and IASB formally agreed to work jointly on revenue recognition project. September 2002-May 2005 The Boards were developing a revenue recognition model that measures assets and liabilities at fair value. The Boards tentatively agreed performance obligations should be measured at fair value-the price that the reporting entity would have to pay an unrelated party to assume legal responsibility for performing all of its remaining obligations. After concerns of reasonably estimating the prices when they are not observable, board members developed an alternative model, the customer consideration model in which performance would be measured at an allocated customer consideration (transaction price) amount.

October 2006- October 2007: The Boards decided to further develop both the fair value model and the customer consideration model. The initiative was undertaken by the staff using two small groups of Board advisors drawn from both Boards and was completed in July 2007.

October 2007- May 2008: The Boards discussed the two models from October 2007 to May 2008. The Boards coalesced around a single contract-based revenue recognition model. The Boards reached a preliminary view in favor of the allocated customer consideration approach of measuring performance obligations.

December 2008: The Discussion Paper "Revenue Recognition in Contracts with Customers" was issued and it contained the Boards' preliminary views on allocated customer consideration approach.

June 2010: More fully-developed proposals were issued for public comment in the Exposure Draft "Revenue from Contracts with Customers" (FASB 2013)

November 2011: Revised exposure draft issued and opened for discussion until March, 13, 2012

January 4, 2012: The Board published, for public comment, exposure draft "Revenue from Contracts with Customers-Proposed Amendments to the FASB Accounting Standards Codification".

October 2013: Topics on constraint on estimates of variable consideration, implementation guidance, and collectability were further discussed.

May 28, 2014: The converged standard on revenue recognition from contracts with customers, Accounting Standards Update (ASU) 2014-09 (Topic 606) and IFRS 15 was issued.

WAS IT CONTENTIOUS AND, IF SO, WHY? WHAT WERE THE AREAS OF DISAGREEMENT AS THE CONVERGENCE PROCESS DEVELOPED?

Accrual basis-point of sale or service is performed: Under the accrual basis of accounting, revenue is generally recognized at the point of sale or as the service is performed. The point of sale occurs when a title passes, generally when a seller ships (FOB shipping point) or when a buyer receives (FOB destination). Three exceptions exist to the general revenue recognition rule: during production, at the point where production is complete, and at the point of cash collection.

Recognize during production Exception 1: One example for revenue recognized during production includes the percentage of-completion method. The criterion to utilize this approach is the dependable estimates of extent of progress cost to complete and reasonable assurance of collectability of contract price. It departs from the general sales basis because it can better measure periodic income, and better avoid fluctuations in revenues, expenses and income, and availability of evidence of ultimate proceeds.

Recognize when production is complete Exception 2: When revenue is recognized at the basis of completion, as an example the net realizable value can be used. A reason for departure from the general sales basis is that known or determinable revenues and inability to determine costs defer expense recognition until sale.

Recognize at the point of cash collection Exception 3: An example of a method used for revenue recognized at cash collection basis is the installment and recovery method. This basis departs from the general sales basis because of the level of uncertainty with respect to collection of the receivables precludes recognition of gross profit before cash is received.