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Examining the New Principles-Based Five-Step Model
Revenue is a key performance metric used by investors and other stakeholders in assessing a company's performance and future prospects. Consequently, the accounting for revenue presents one of the most important challenges that companies face, and it continues to be a major area of auditing risk. Although the revenue recognition literature in the United States- except for industry-specific guidance-is codified under a single topic (Accounting Standards Codification [ASC] Topic 605, "Revenue Recognition"), it is based upon more than 100 different standards and is considered to be quite complex. In addition to broad revenue recognition concepts, much industry- or transaction-specific guidance can result in different accounting for economically similar transactions.
The revenue recognition guidance under IFRS is concentrated in two standards (International Accounting Standard [IAS] 18, Revenue, and IAS 11, Construction Contracts) and three related interpretations (IFRS Interpretations Committee [IFRIC] 13, Customer Loyalty Programmes', IFRIC 15, Agreements for the Construction of Real Estate', and IFRIC 18, Transfers of Assets from Customers)', however, this guidance has often been criticized as being difficult to understand and to apply to more complex revenue transactions. Finally, the disclosures required under both sets of standards have been criticized as inadequate and inconsistent with the disclosures of other items in the financial statements.
Background
For more than 10 years, FASB and the IASB have considered changes to revenue recognition guidance. As far back as 2002, the two boards agreed to work together on a joint project examining revenue recognition. Whereas initial efforts concentrated on measuring performance obligations resulting from revenue transactions at fair value, later efforts focused on using transaction prices. The boards' deliberations resulted in a 2010 exposure draft, Revenue from Contracts with Customers, which focused on improving revenue recognition and eliminating inconsistencies and weaknesses. After considerable outreach with constituents, the boards issued a second exposure draft in 2011.
It is now expected that a final Accounting Standards Update (ASU) will be issued in the fourth quarter of 2013. It will provide a comprehensive principles-based revenue recognition model, which would create a single revenue recognition stan- dard to be applied to all contracts with customers under both U.S. GAAP and IFRS. The objective is to have one standard that can be applied across all...