Rev Rec Could Return to Standard-Setting

by Edith Orenstein

U.S. Securities and Exchange Commission Chief Accountant Jim Schnurr said during a conference last week that he believes the "game plan" for addressing hundreds of implementation issues raised as a result of a new revenue recognition standard could include revisiting some of the standards set by the two largest accounting oversight boards.

Schurr's remarks were at the U.S. Chamber’s Future of Financial Reporting conference last Wednesday, and he made similar remarks at the AICPA's National Conference on SEC and PCAOB Developments earlier today. The revenue recognition (‘rev rec’)  standard, issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in May of this year, is currently slated to take effect in 2017 for calendar year public companies (with a year delay for private companies) in the U.S.

Given his level of concern with the implementation-readiness of the standard,  Schnurr told the Chamber of Conference audience, “I am working with the two boards as well as some other constituents, principally the accounting firms … and we’re trying to come up with a game plan in terms of how to move forward.”

In remarks earlier today at the AICPA's National Conference on Current SEC and PCAOB Developments, although not saying he has "asked the FASB" to return to standard-setting, or that FASB has reached their conclusion on this matter yet, Schnurr outlined concerns that have been brought to his attention.

Here is are three key points from Schnurr's remarks at today's AICPA-SEC conference  (reformatted to bullets; emphasis added):

  • "We understand from speaking to various parties that there are a variety of accounting questions that range from questions that may require additional action by the standard setters to questions that appear to be more educational and simply need clarification as to what the intentions of the boards were when drafting the standard."
  • "It is our understanding that a number of the concepts that exist in current revenue guidance were carried over into the new standard, although the wording in the new standard removes some of the specificity that currently exists in the Codification. In these cases, some preparers may be asking if the accounting has changed even though the boards did not intend, or expect, to change current practice."
  • "If there is significant diversity in practice for similar transactions, then it raises the question as to whether the principles in the standard are adequately articulated; and disclosure is not a substitute for comparability."
The Chairman of the FASB, as mentioned by Schnurr during the Q&A following his remarks, is slated to address the AICPA conference tomorrow.

Possible FASB would Return to Standard-Setting, and IASB Reach a Different Conclusion

Returning to the Chief Accountant's remarks at the U.S. Chamber of Commerce conference last week, Schnurr further described the potential game plan for rev rec as including, “whether or not there  are 1, 2 or 3 issues that need  to go back to standard – setting,” adding that, “it’s possible that in that process, FASB could conclude that  they need to go back because they need to clarify [the standard], and the IASB says they’re not [going back] ... but again, I think the importance being, we need to do what we think is in the best interests of U.S.  investors.”

He added, “My interest and I believe the FASB’s mission - and obviously as the designated standard- setter for the SEC - have to be first for the U.S. investor. And that’s where we are focused.”

Notably, although the rev rec standard’s effective date is still two years away  the real impact is being felt now because companies are either considering the "retrospective adoption" option, or are preparing to provide comparable information for past years as of the effective date. Additionally, many companies are going through an extensive exercise to identify what the separate "performance obligations" are within contracts.

Hundreds of Implementation Issues; ‘Significant Concerns’

Responding to a question posed by the U.S. Chamber’s Tom Quaadman, Schnurr replied that there appear to be a "significant number" of implementation questions that have been identified by preparers of financial statements and their auditors, with some of those issues "bubbling up" to the FASB-IASB’s joint Transition Resource Group.

“I’ve asked my staff to try and inventory  to the best we can what those questions are,” said Schnurr, adding, “ My sense is that when we get those questions the number of questions range from ten’s to maybe a couple hundred.”

Reflecting on the implementation issues raised and process of handling them to date, Schnurr observed,  “Looking with a U.S. investor perspective, I have expressed some very significant concerns to FASB and the IASB about the number of questions getting to the Transition Resource Group (TRG), as well as the pace of dealing with them.”

Having gathered a large inventory’ of implementation issues,  Schnurr continued, “ We take those and try to distill them down.” He noted, “I think there are probably 3 buckets that I would put the questions in.”

Implementation Issues in Three Buckets

In my view the three buckets of implementation issues, and how they may be handled, based on listening to Schnurr’s remarks, can bedistilled as follows (please note Schnurr did not use these single-word categories; but that’s how I would further distill his comments, detailed further below).

  1. Standard-setting
  2. Interpretation
  3. Implementation

“There may be one or more issues that actually are going to require the standard-setters  to go back and take another shot at the clarity of what they are trying to achieve,” said Schnurr, describing the first of the three "buckets" of implementation issues.

“Particularly in the licensing area,” said Schnurr, “ there seem to be fairly divergent views about whether you should recognize revenue up front, at the point in time that the Intellectual Property (IP) passes, vs. over time.”

Emphasizing that one of the "cornerstones’" of financial reporting is that diversity in practice is eliminated, he added, "consistency and comparability has been very important to strength of the markets."

" Let’s say, we had two companies looking at essentially identical transactions in the licensing area," Schnurr explained. "One company concludes they are going to recognize it up front and another one over time. Because they weight the different factors in a different way, I believe that ultimately, the SEC and the FASB would want to eliminate  that diversity. To me, it also would indicate that the principle or the concepts in the standard were not sufficiently  articulated in a way that you should get the same answer for the same transaction.”


Issues in the second bucket identified by Schnurr, would arise from, “[P]eople being very theoretical about reading the standard,” and that, “while the two boards had really never  intended to change practice for what I’ll call some fairly straight-forward transactions, there are people suggesting that there would be, kind of, a different model.”

Schnurr utilized his host, Tom Quaadman, for illustrative purposes on this point. “Let’s say , Tom goes and he orders something from Amazon. Right now, Amazon treats that as one performance obligation:  they’ve got to ship whatever it is he ordered.”

However, under the new standard, continued Schnurr, “There are people now looking at that and  saying Amazon has three performance obligations: they’ve got the good, they’ve got the shipping obligation, and they have an insurance obligation on the product till it gets there.”

If that were the answer, said Schnurr, companies would have to change their current processes and controls.


The third bucket of implementation issues , according to Schnurr, were things that, “I think can be dealt with, with some sort of implementation guidance; exactly what the mechanism is for that, I’m not sure.”

Principles vs. Rules?

Audience member Liesl Nebel, Accounting Policy Controller of Intel Corporation asked Schnurr whether  if he believed the differing nature of the U.S. regulatory environment “calls into question whether we are ready for principles-based standards” in the U.S.

“I think discussion about international standards being principles- based and U.S. rules-based is overblown,” Schnurr replied, adding, “ I think a lot of standards FASB has issued over the last several years have been more principles based.”

Further, he continued, “if you look at financial statements, preparers have to make many, many judgments about various transactions,” with management estimates embedded in that process,” emphasizing, “the importance is the robustness of the process used to make that estimate, and the consistency and controls around that,” he emphasized.

Reiterating, “If the standard is properly articulated, you should not get different answers from the same transactions,” and adding, “It is in the best interests of investors to narrow that diversity in practice from a comparability standpoint,” he noted, however, “We are not looking for a rule, we are looking for consistency.”