By Theresa Hickman on Aug 21, 2012
I met up with Seamus Moran, our resident accounting expert, to get an update on the things we can expect to come down the pike in the ever changing world of standard settings. Several things have derailed recently; the SEC has been dithering; their staff is negative on the adoption of IFRS, and FASB made a decision to proceed with asset impairment differently than IASB.
However, we’ve still got two of the biggest accounting changes coming full steam for arrival next year: Revenue Recognition and Lease Accounting.
- Revenue Recognition replaces the notion of deferred revenue liability – sales invoices you can’t book to the P&L until contingencies are lifted – with performance obligation liabilities – the items you owe to customers valued at estimated selling prices. It also replaces the notion of revenue as items billed without any contingencies with the notion of revenue as items for which you have satisfied your customers valued at what you are entitled to receive. It’s difficult to fathom the implications of these definition changes in terms of bookkeeping, process, and substantiation. For some, it may not be a major difference, for most, it will be difficult.
Revenue will be finalized in the spring of 2013. The changes will hopefully simplify the most recent Exposure Drafts in the area of transition reporting, disclosure, and the cell phone example. But the new standard will impact all US registrants under US GAAP. And it impacts all non-US registrants under IFRS.
- Lease Accounting abolishes operating leases and adjusts the math and the way in which leases are expensed. Real Estate professionals are already anxious about the change, anticipating the complexity it brings to landlords, developers and tenants. Equipment renters, although not nearly as tuned-in, will also be highly impacted. It will affect equipment rentals from jet aircraft through photocopiers, panel vans, etc. that are currently treated as operational leases but will soon be accounted as capital leases--complete with the right of use assets and complex liabilities, hitting the P&L in a new way with amortization expense above the line and interest expense below.
Lease Accounting is slated to be finalized in the fall of 2013. A new exposure draft (ED) will be published this winter with a 120 day review and comment period. This ED is expected to meet the General Acceptance criteria with changes impacting all US registrants under US GAAP and non-US registrants under IFRS.
When will the Revenue Recognition and Lease Accounting Changes be Effective?
It is difficult to say. Originally, the Boards had announced that the standards would not be effective before June 2015. Although they have not publicly revised the date, practically speaking, that date can no longer be achieved.
It is important that the SEC, FASB, IASB, and registrants and users have time to gather, aggregate and report the necessary data. Software vendors, such as Oracle, need appropriate time to discuss the changes with their customers across various industries, along with the Big 4. And then software vendors need time to design and revise their software, and customers need to implement the changes to their accounting software. The SEC, FASB and IASB are aware of this, and they have discussed it with vendors in the software industry; they intend to reflect the industry’s input in their scheduling. Currently, it is anticipated that the standards will be effective for new transactions in 2016 and/or 2017. As usual, both standards will require reporting of the several years prior to the effective date under the new standard, although companies will have already reported it under the old standard. Details of this requirement are among the issues being re-deliberated and are not finalized.
Financial Reporting of the Banking Industry
The Boards are also working on how best to report the activities and status of banks. These issues are complicated by the fact that the FASB & IASB are concerned with how Banks report to their owners (the stock holders) while bank regulators are concerned with evaluating safety in terms of both the economy and the individual depositor. With the many recent crisis’, apparently safe bankers’ assets (financial instruments), such as national debt (government bonds) or secured real estate loans (mortgages) have in fact turned out to be not so safe. The standard bankers’ interest margin is measured in part-percentage points, and defining a financial report that accurately defines a bank’s equity is proving difficult. This difficulty is compounded by the fact that the banking regulators in different countries have very different philosophies about what is safe and for whom that matters, and the philosophy within a country varies depending on the elected government.
Our Plates Are Full
So I think our hands are full with US GAAP and IFRS at the system level, the accounting level, and at the regulators level. We don’t need to be dealing with asset componentization this year, next year or the year after: changes to Lease Accounting and Revenue Recognition will be plenty, thank you.
After all of us around the world adopt the changes to Lease Accounting and Revenue Recognition, we’ll be in a better position to work with whatever the SEC decides is an appropriate time and way for the US to join the rest of the world in adopting IFRS. This means establishing what is truly “Generally Accepted” in both the US and non-US countries. The SEC staff has proposed a process of “condorsement,” where the FASB would publish IFRS standards as Exposure Drafts of Accounting Standard Updates to the FASB codification. Other countries have already adopted IFRS using this path, although none had as dense a statement of their existing GAAP as the US does. Such a process will also expose the IASB to addressing issues addressed under existing US GAAP that are not addressed under IFRS. The SEC have not endorsed nor adopted this proposal; we must wait to see what their considerations might reveal.
In a nut shell, we have our hands full dealing with changes to Lease Accounting, Revenue Recognition, as well as the issues with the financial houses. We have an unequal system of enforcing compliance, and we don’t have a way to ensure uniform interpretation. For the time being, our plates are full, so not having a definitive date as to when the US will adopt IFRS or how asset impairment will be dealt with is not a big deal. We can wait and not try to bite off more than we can chew.