The comment letter deadline for the IASB/FASB discussion paper on revenue recognition was June 19, 2009. The staff recently presented a high-level summary of the 200+ comment letters received by the boards. Given my recent posts (July 30 and Aug. 11) on the AAA FASC’s comment letter, I thought it might be useful to consider the more general themes across all comment letters.

One of the common themes running through comment letters is whether a single recognition model is achievable. In other words, can one model that focuses on changes in a single asset or liability (in this case, the net contract position with the customer) provide decision useful information across all industries and transactions?  The fact that the boards have already noted the possibility of scoping out financial services, insurance, and leases suggests that a single model will not be achieved. If biological assets and construction contracts are scoped out also, how would things be all that different from what we have today? One of the primary objectives of the project was to simplify US GAAP and clarify IFRS guidance on revenue recognition. If five or six major areas are scoped out of the general standard to begin with, how much more time will it take before real estate gets its own interpretations of the new standard, and then perhaps the airline industry, an so forth?!

Maybe the feedback that the boards have received indicates something more sinister for the proposed model—that the boards got it wrong when they identified the net contract position with the customer as the single asset or liability that will drive revenue recognition. That model may handle 80% of the revenue transactions well, but it may represent a significant loss of decision useful information for transactions involving insurance, leases, financial services, real estate, construction, and biological assets. Are the boards pursuing a pipe dream by seeking a single model based on changes in a contract position with the customer?

Let me comment on one other theme (for now). Insurers that sell long-term policies are keen on deferring the acquisition costs of a contract (largely composed of the commission paid to agents) because recognizing acquisition costs as an expense at contract acquisition would result in a loss for most contracts. (The loss results because a commission often exceeds the premiums received for even the first two years of a policy.) The boards’ proposed model would preclude recognition of deferred acquisition costs as an asset, but it also precludes recognizing revenue for having obtained a valuable contract. My question—would the proposed model represent an improvement of decision useful information to users of insurance company financial statements?

The funny thing about existing insurance accounting is that companies essentially are already recognizing the newly acquired contract as an asset, but they’re just calling it a deferred acquisition cost. I suspect the value of that contract is pretty close to the acquisition cost in most markets because anyone who would buy that insurance contract would save the cost of paying an agent to sell it to a new customer (and other incidental costs such as a health examination). Because the proposed model explicitly precludes the recognition of a contract asset at contract inception, insurers will not get to recognize the valuable asset directly or implicitly through the recognition of deferred acquisition costs. Would this be an improvement to existing standards?