Proposal on Changes to Revenue Recognition for Long Term Contracts to be Reworked

Both US and International Standards Boards are going back to the drawing board to rework their proposal to change the way many companies recognize revenue. As with other controversial proposals, the standard setters did not think clearly about the ramifications of complying with the standard on those required to comply and users of financial statements. Out cry from industry as well as the public sectors were significant and diverse based upon the sheer volume of comments received.

The proposal would have primarily required Companies involved in long term contracts to only recognize revenue when the contract was complete ( or C.O. obtained for commercial contractors) instead of as earned over the term of the contract ( i.e. percentage of completion based on actual costs incurred to date to total contract costs). The intention was to streamline revenue recognition across industries and avoid inconsistencies. Companies defined contract terms, determined cost estimates and other factors differently, which could cause disparity between similar companies’ revenues and possibly confuse users of the financial statements.

Comments suggested the proposed method was neither practical nor operational. Also sited by commentators was the cost to employ. The AICPA’s Financial Reporting Committee agreed with many of the comments. The Boards agreed to rework the standards, taking into consideration the many comments and suggestions received and introduce a “new and improved” proposed standard and take all possible steps to avoid unintended consequences. Expect the “new and improved” version to be released toward the end of 2011.