FASB reviews impact of revenue recognition standard

The Financial Accounting Standards Board released a post-implementation review Monday of its revenue recognition standard, reflecting on the benefits and costs of the wide-ranging standard a decade after its release.

FASB and the International Accounting Standards Board spent years working on converging their different approaches to revenue recognition under both U.S. GAAP and International Financial Reporting Standards. Unlike some of their other convergence projects, they mostly achieved alignment, and they released the rev rec standard in May 2014. Under FASB’s Accounting Standards Codification, it’s known as ASC 606 or Topic 606.

FASB generally conducts a post-implementation of its standards about a decade after they’re issued to assess whether they achieved their intended objectives. For this review, FASB’s staff did outreach to over 2,200 stakeholders from various backgrounds to get their views. The investors generally agreed that Topic 606 provides more useful, transparent information, especially through improved disclosures. Investors also agreed that Topic 606 improves the consistency and comparability of revenue across industries and achieves its expected benefits in a majority of industries. 

Other stakeholders, including practitioners and preparers, said the principles-based guidance with the application of judgment allows for better alignment of revenue recognition with the economics of the underlying transactions and is more adaptable to an evolving business environment. Some of the stakeholders said the new standard helps entities better understand their contracts and improve their internal processes around revenue recognition. Most of the stakeholders surveyed for the post-implemenation review viewed convergence with IFRS accounting standards as a significant accomplishment. 

“During the Revenue PIR process, we obtained an even greater appreciation for our stakeholders’ commitment to the high-quality implementation of a standard,” stated FASB chair Richard Jones and technical director Jackson Day in a joint statement Monday. “We were also pleased to learn that most stakeholders agree that, while there are lessons to be learned, overall, the revenue standard’s long-term benefits outweigh the costs of applying it.”

However, there were a few downsides. While the nature of costs were consistent with FASB’s expectations, stakeholders indicated the implementation costs were significant, especially in industries for which prior industry-specific revenue guidance was removed. While investors had to expend some effort to learn Topic 606 and understand revenue trends during the transition period, for most industries the costs incurred by investors were generally one-time costs. 

Most preparers noted their reported revenue was not materially affected, though they still needed to comprehensively review their existing contracts and practices and make changes to their processes and controls. Stakeholders found certain costs lasted beyond the implementation period. They also found that, in some cases, certain ongoing costs, such as the costs of analyzing emerging and complex arrangements and establishing related controls, aren’t solely attributable to the revenue recognition standard but also arise from business growth and innovation and would have been incurred in many cases under the previous guidance.

Income statement expense disaggregation effective date

Separately on Monday, FASB published a proposed accounting standards update to clarify the interim effective date of its disaggregation standard for public business entities that don’t have an annual reporting period that ends on Dec. 31. The proposed update clarifies the interim effective date of Accounting Standards Update No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The proposed ASU is open to public comment for 15 days. FASB issued the disaggregation standard earlier this month.