Revenue and Leasing Standards Heating up with the SummerPosted: June 11, 2012
After a period of relative quiet, work on the revenue recognition and leasing convergence standards is heating up just like the temperatures in the Summer. The Boards’ staff recently released their proposal for re-deliberations of the revenue recognition standard based on feedback from comment letters and various roundtable and other outreach activities over the past several months. The staff laid out a timeline that will cover the remainder of 2012 as follows:
June – Identification of separate performance obligations
July – Satisfaction of performance obligations
September – Constraining revenue recognized, collectability & time value of money
October – Allocating the transaction price to separate performance obligations
November – Disclosures, transition and effective dates
December – Cost-benefit analysis
The Boards have previously stated a final standard will not be issued until early 2013, but they have yet to delay the earliest projected effective date of 1/1/2015. Their stated reason is that the effective date is dependent on how much change required as well as what the transition requirements are in the final standard. The implication is that if the standard requires retrospective application then they will likely delay the effective date, but if it does not, they may still go with the 1/1/2015 date.
The number of comment letters was down from the first exposure draft, but that seemed mainly due to the lack of letters from the construction industry this time around. The main concerns of the construction industry appear to have been addressed – or at least addressed to the point that they felt that a few letters from industry groups could better address what else was needed rather than an orchestrated writing campaign from a multitude of businesses. On the other hand, the financial services, software and telecommunications industry appear to have several continuing concerns with the exposure draft and let the Boards know through letters and multiple round table appearances.
On the Leasing front it looks like we will be waiting a while longer for the promised second exposure draft. An exposure draft is now expected to be released in the fourth quarter, but it increasingly appears it may be a Christmas present (or will it be coal in the stocking of financial statement preparers), rather than a Halloween trick or treat.
The biggest news on the leasing front is the Board decision to look at additional models for expense recognition. In solving the issue of leases not being on the balance sheet, the Boards essentially treated all leases as financing arrangements which resulted in higher expenses earlier in a lease rather than the straight line expensing as required by current accounting for operating leases which make up the vast majority of leasing activity. The Boards have heard loud and clear that while many constituents thought the leasing rules were broken because they resulted in no recognized liability on the balance sheet, those same constituents were relatively happy with the current rules impact on the income statement. The Boards are now looking at three possible models including the model from the original exposure draft. The model initially favored by the FASB would essentially keep the current operating/financing lease type split for the income statement, but require all leases to be put on the balance sheet. Effectively, an entry would need to be made each reporting period to record a liability and asset equal to the present value of the required cash flows under the lease, while leaving the current income statement treatment for operating leases intact.
It’s important to note that no decisions have been made by the Boards and they have currently only asked the staff to conduct further research on the additional proposed models and report back to the Boards. It will certainly be interesting to watch the developments over the coming months as leasing and revenue recognition once again take the center spotlight on the Boards agendas.