Landmark Revenue Rules Vex Companies but No Major Changes Sought

Landmark accounting rules overhauling how companies record the top line in their income statements have many strengths but a few pitfalls, companies, auditors, and investors told US accounting standard-setters on Friday.

The pro-and-con discussion was part of the Financial Accounting Standards Board’s ongoing post-mortem of its sweeping revenue recognition accounting standard to see if, almost a decade after its publication, the rules need any tweaks or clarifications. Publicly traded companies started following the new rules in 2018 and private companies complied in 2021.

Participants in FASB’s five-hour discussion Friday said there’s room for improvement in the standard, but not necessarily appetite for major changes.

“At this point everyone has adopted and many incurred significant costs to adopt, so I would rather not disrupt practice and see wholesale changes,” said Sandie Kim, senior consultation partner at Deloitte & Touche LLP.

Judgment Calls

Published in 2014 after years of debate, FASB’s ASC 606 replaced scores of industry-specific rules to come up with a single way for most companies worldwide to tally their revenues. The US standard was published in tandem with the International Accounting Standards Board’s IFRS 15 and the rules largely match—another check in the “pro” column, especially for multinational businesses.

The near-universal set of rules also reduced headaches for accountants who no longer have to sort through individual rules to calculate revenue, said Stacy Harrington, general manager of corporate accounting at Microsoft Corp.

“We were constantly going to have to go to different standards and explain to our executives why, if you sold a phone, it was different than if you sold software on the phone,” Harrington said. “So that was super helpful.”

But the one-size-fits-all standard requires judgment calls that can lead to questions.

On some of the thornier issues, public companies often escalate their queries to the Securities and Exchange Commission before they commit their answers to paper, said Ernst & Young LLP partner Alison Spivey.

“The reason being is the nature of judgments are so significant that registrants are looking for more certainty in their accounting conclusions,” Spivey said.

Companies especially want answers on determining whether they are what the standard calls the principal—primary suppliers of goods or services in a transaction—versus the agent, the party that arranges sales, Spivey said. The judgment hinges on who controls the good or service before it goes to the end customer.

The decision sounds straightforward enough but it gets complicated in multi-party transactions and in emerging, app-based industries, FASB research shows.

The complexity doesn’t stop there. All four Big Four accounting firms produce technical guides running hundreds of pages long addressing frequently asked questions and walking companies through some of the more complicated revenue accounting decisions.

Only FASB has the authority to set accounting standards, but these guides can become de-facto rules, and that’s a problem, said Eric West, director of accounting policy at Amazon.com Inc.

“They are very dangerous,” West said. “I think they take bright lines in certain positions and they effectively become GAAP. It becomes very challenging to argue with a firm when they say, ‘But it’s in our monograph.’”

Investor Needs

The areas of the accounting standard that are subject to interpretation put the onus on companies to explain their decisions to investors and other readers of their financial statements. The revenue standard introduced a bevy of new disclosure requirements, including requiring companies to break out revenue by type and amount, and revealing details such as costs to fulfill a customer contract, such as sales commissions.

“The incremental disclosure from 606 is good, but I wish there was more of it,” said Mark Hamel, principal at Assay Research LLC, who covers the software sector. “It seems like disclosures are all over the map right now.”

More robust disclosures about key decisions and major judgments could also give investors and analysts more insight about some of the thorny revenue accounting questions, such as principal versus agent or whether a company records revenue all up front or in increments, said David Gonzales, senior accounting analyst at Moody’s Investors Service.

“That’s what we’re struggling with right now,” Gonzales said.

FASB plans to formally discuss the feedback in 2024 and plot any next steps. Ideas presented during the roundtable ranged from adding illustrative examples to the accounting standard to requiring companies to provide new disclosures.

“We heard today there are challenges,” FASB Chair Rich Jones said in a brief interview. “Part of that is due to the complexity of the transactions and part of that may be our standard.”