FEI Committees Comment To FASB, IASB On Revenue Recognition ED

FEI Committees Comment To FASB, IASB On Revenue Recognition ED
October 26, 2010
FEI Summary

In October, 20110, two of FEI's Committees filed comment letters in response to the Financial Accounting Standards Board Exposure Draft: Revenue from Contracts with Customers. The project, also referred to as the 'revenue recognition' project, is a joint project of FASB and the International Accounting Standards Board.

FEI's Committee on Corporate Reporting (CCR) filed a comment letter on the revenue recognition ED on October 21, and FEI's Commitee on Private Company Standards (CPC-S) filed its comment letter on October 22. The CCR letter was addressed to the FASB as well as the IASB.

Highlights of CCR letter:

The Committee on Corporate Reporting (CCR) letter is supportive of the project’s overall goals of convergence, simplification and comparability of revenue across companies and continued to support the convergence of United States generally accepted accounting principles with International Financial Reporting Standards. The letter also is supportive of one revenue recognition model to be applied by all entities and industries.

However, the letter expressed concern about application of a number of the proposed requirements to business operations. The comment letter:

• Recommends the use of management’s best estimate as the underlying principle for measuring transaction prices (the ED calls for probability-weighting of consideration an entity receives from customers in exchange for transferring goods or services).
• Recommends that the boards retain the existing guidance on how to account for warranty obligations that are incurred in connection with the sale of goods and services and those that are sold separately. (The ED is asking companies to differentiate between two types of warranties.)
• Believes that certain new disclosures will not provide useful information to financial statement users. For example, the letter recommends removal of the requirement to disclose the reconciliation of contract balances, reconciliation of onerous performance obligations and the total amount of performance obligations along with the expected timing of their satisfaction.
• Notes that the proposed retrospective application will require a significant investment by preparers.

Click here to access CCR's letter.

Highlights of CPC-S Letter

In general, CPC-S disagrees most of the proposed standards from ED and suggests that those proposed standards should not be applied to private company financial statements.

The key points from the Comment Letter are listed as following:

1.     The Exposure Draft defines core principle of Revenue Recognition, but the content of the proposed standard does not follow this core principle, even contradict it.

2.     Revenue is a flow of an entity’s product to a customer; revenue is measured at an exit price; a new asset (promised compensation) is received at an input cost.

3.     The users of private company financial statements and the users of public entity financial reports have different requirement. Private company users do not desire revenue recognition to be redefined as the change in periodic valuation of contract assets and obligations and not desire the measurement, recognition and disclosure of mutually unfulfilled contracts.

4.     Implementing and applying the ED’s proposed standard will impose huge costs on private companies, with no benefit to private company financial statement users.

5.     The starting point for recognizing revenue is not to first recognize and measure contracts.

6.     CPC-S recommends that the FASB defer for a minimum of three years the effective date of this ED for nonpublic entities.

 Click here to access CPCS's letter.