Tuesday, March 13, 2012

Changes in the Way We Recognize Revenue

This week's article is about changes to how accountants will recognize revenue for contracts come 2015.  Matthew G. Lamoreaux's article in the January 2012 issue of the Journal of Accountancy, discusses what these changes mean for accountants.

The Federal Accounting Standards Board (FASB) as well as the International Accounting Standards Board (IASB) have decided to create a single standard for recognizing revenue.  Lamoreaux says under a the new standard a company will recognize revenue from contracts as soon as it transfers goods and services.  This is not much of a change from how accountants already handle revenue under GAAP.

According to Lamoreaux the boards also included guidance on how to know a good or service is tranferred over time.  They also simplified proposals on warranties, how to determine transaction price, and modified the test to apply to long term service as well as provided some expemptions from some disclosures for private companies.

The accounting model they have proposed would be:

1.  Indentify the contract with a customer.

2.  Identify the seperate performance obligations in the contract.

3.  Determine the transation price.

4.  Allocate the transaction price to the separate performance obligations in the contract.

5.  Recognize revenue when the business satisfies a performance obligation.

This model is scheduled to go into effect on January 1, 2015 except for private companies, who have an extra year to implement as well as being exempt from some mandatory disclosures.

I personally can't tell the difference between this new standard from what I have already practiced in the professional sphere.  I did however find it interesting that despite the FASB's refusal to adopt or even converge with IFRS, it felt the necessity to write a new standard with the IASB on the recognition of revenue.

They are also handling implimentaion differently as well.  FASB is not allowing early implimentation which means that people will have to collect data for two years and then retroactively apply the new standard to it.  Whereas the IASB is allowing companies to implent the new standard as soon as they are ready.

I can understand why the IFRS vs GAAP debate has gone on for so long, FASB continues to send mixed signals whether it wants to be part of the international community or not.

Tuesday, March 6, 2012

Standards for Private Companies

I managed, almost, to get away from IFRS.  I instead chose to look at the push to change the U.S.'s standards (GAAP) to recognize the differences between public and private companies.  In the middle of the article I realized it had included how the international community was dealing with issue and so found myself reading about IFRS once again.

In the article One Size Does Not Fit All, Judith Kamnikar and Ashley Burrowes assess why the Financial Accounting Standards Board (FASB) should create a seperate set of standards for private companies.  It boils down to the end users of private companies being quite different from public companies, thus their needs are different.  Why should a private company have to figure its Earnings Per Share if they don't publicly sell their stock?

The FASB was created in 1971.  It took quite some time, however, for the FASB to decide to do something about the disparate reporting needs of private companies.  Finally in 2004 they created the Small Business Advisory Committee (SBAC) to begin the process of developing reporting and financial standards for small businesses.  The SBAC is still providing input private company reporting issues.

A seperate task force created by the AICPA (American Institute of Certified Public Accountants) in 2005 produced a report that concluded, "the users of private company financial statements have different needs than users of public company fiancial statements (and) that GAAP exceptions and OCBOA should not be the resolution to the private company financial reporting problems."  This report thus generated yet another committe, the Private Company Financial Reporting Committee (PCFRC) for the purpose of providing recommendations to the FASB about how prospective and existing GAAP rules would affect small businesses.  Unfortunatley, the PCFRC has not enjoyed much attention from FASB.

In response to this the AICPA again created another committee who issued another report in 2011 claiming that GAAP for private companies is "urgent and growing".

Internationally, the IASB has been a bit more receptive to the needs of small businesses and has implimented IFRS for SME's (International Financial Reporting Standards for Small and Medium-sized Entities).

Some of the changes in IFRS for SME's include:
  • Some topics are omitted from small business reporting
  • A more simplified accounting method
  • Substantially fewer disclosures
  • Omitted Earnings per share
In the end it appears that the IASB has made leaps and bounds on this issue within the international community while the FASB has sat on its thumbs.  In their defense, they have been overshadowed by the needs of public industry and it looks as if they are finally applying the attention that is required to fix this deficit of standards for private companies.


Kamnikar, J., Kamnikar, E., & Burrowes, A. (2012). One Size Does Not Fil All. Journal of Accountancy, 213(1), 46-49.

Monday, March 5, 2012

IFRS: A Contradictory View

I had thought that for this week's blog I would shift away from IFRS, but during my search for a new and interesting international topic, I found a dissenting view of IFRS to those I have previously found.  And so, despite my thoughts of new topics, this week I will instead present the argument for IFRS.

In the article, International Adoption Issues:  A View From the IASB, Patricia McConnell lays out the different types of acceptance of IFRS as well as explains why it should be adopted.  Her differing ideas stem from her work with the International Accounting Standards Committee (IASC) since the 1980's and as a financial analyst for Bear Stearns.  She has spent a great deal of her 40 year career as a Certified Public Accountant (CPA) viewing the accounting world through investor-tinted glasses.

McConnell lays out a lot of information we have already heard or discussed.  She believes that a "high-quality global financial reporting standards are essential for the transparency an comparability that is critically important to the effective functioning of today's global capital markets."  Which is, as stated in previous articles, the reason that IFRS should not be a pipe dream.
She also goes on to state that despite the stereotype, the International Accounting Standards Board (IASB) is not a British organization.  Instead it consists of 15 members from 12 countries, and 1/4 of the members, trustees and technical staff are American.  Unfortunately, whether or not IASB is a multi-cultural organization was never in question by its opponents.

She believes that IFRS will result in a common financial reporting language that will improve transparency and enable investors to make comparisons among similar entities across jurisdictions.  Several more times throughout her commentary she describes how IFRS will help investors.  Miller and Bahnson in their article however pointed out that for many countries investors aren't the point of financial accounting.  Never once does McConnell address the cultural diversity issues that IFRS must overcome for the implementation she so strongly desires.

She also does not mention that recently the IASB has begun to appoint politicians, not accountants, to its regulatory board.  In the end her article discusses how the world should be with a global policy for investors without ever once discussing who is going to make sure that each country is giving IFRS its due diligence and ensuring it is implemented the same throughout various nations with various cultural perceptions of the purpose of financial reporting.
These are the issues with IFRS, not its base premise, a global financial standard.  In the end she simply reiterates the hope and promise of what IFRS could be and disappointingly never addresses how, other than people adopting it, IFRS is to be maintained or regulated, or any other opposing arguments.

McConnell, Patricia. "International adoption issues: a view from the IASB." The CPA Journal 81.12 (2011): 6+.  General OneFile.  Web. 27 Feb. 2012