Convergence on revenue recognition hailed

In what has been hailed as a major step towards creating a converged set of international accounting rules, regulators have agreed on a standard global revenue recognition standard.

The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have issued a joint statement that will make it easier to compare how much companies from around the world earn.

IFRS 15 Revenue from Contracts with Customers will be effective from January 1st 2017 and is the product of more than a decade’s work.

Regulators hope that the new standard will end inconsistencies that saw companies accounting for similar transactions differently.

It should radically simplify this area of financial reporting as disparity in reporting requirements. Revenue recognition requirements of IFRS “lacked sufficient detail”, while the accounting requirements of U.S. GAAP were seen as “overly prescriptive and conflicting in certain areas” the bodies said.

The standard establishes a framework for determining when to recognise revenue and how much revenue to recognise, the statement from the two regulators explains. They add that the primary principle “is that a company should recognise revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services”.

Regulators say IFRS 15 will produce enhanced disclosures about revenue, provide guidance for transactions that were not previously in enough depth and improve guidance for multiple-element arrangements.

FASB chairman Russell Golden said the revenue recognition standard represents a “milestone” for the two regulatory bodies.

“It will eliminate a major source of inconsistency in GAAP, which currently consists of numerous disparate, industry-specific pieces of revenue recognition guidance,” he explained.

“The issuance of this standard is a major first step, but it is not the end of the process. Through the transition resource group and a robust implementation period, the FASB and the IASB will work to ensure that reporting organisations are able to make a smooth transition to the new requirements by 2017.”