Revenue and Lessee Reporting Changes Loom

Significant FASB changes will affect the way companies do business — and put even greater emphasis on strategic tax planning

Legislation  |  December 2011

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As part of its ongoing effort to increase transparency for investors, lenders and other financial statement users, the FASB and IASB have moved forward on major issues that will affect the way companies conduct business and pay taxes. The big changes include:

A new global accounting standard for revenue recognition. This will affect nearly every company that writes sales contracts with customers. A joint effort by FASB and IASB to develop a new global accounting standard for revenue recognition will replace the existing guidance with a single set of standards that apply across almost all industries. After extensive comment on this, FASB recently re-exposed a draft of its new approach for additional comment.

“Companies often think of this as just an accounting exercise, but revenue is an important metric that goes beyond contracts to pose legal and tax issues as well,” says Brett Cohen, CPA, a national office partner who serves as one of PwC’s experts on the subject.

Cohen says that in many tax jurisdictions, including the United States, income tax methods are driven off financial reporting, and you have to think about whether you will have to pay more taxes sooner, or if divergent methods may be used for tax-versus-financial reporting. “It’s an important aspect that often gets overlooked,” he says.

“For example, if you license a piece of intellectual property over 10 years for $1,000 per year, under the new recognition model, the entire amount would be recorded as income on day one,” Cohen says. “Companies need to think about the tax impact of that sooner rather than later.”

A new approach to lease accounting. This major change will affect nearly every company that leases equipment, ranging from automobiles to copiers. It will have the greatest impact on lessees of big-ticket items like real estate or manufacturing equipment.

Simply put, FASB and IASB want to eliminate off-balance sheet treatment of operating leases and report them as assets and liabilities on the books.

Final rules are not expected until late in 2012, at the earliest, with implementation delayed until 2015.

“This gives you the luxury of thinking about what it all means now, rather than waiting,” says Peter Hogarth, FCA, a partner in PwC’s UK firm who tracks the leasing measure. “You need to understand the financial reporting and business implications affecting your processes and systems,” he says.

“Most large companies do not track leases the way they do fixed assets, because the accounting has been straightforward,” Hogarth says. “But this is a whole new ballgame.  Companies need to develop an inventory, organize the data and understand the terms. That can be particularly challenging for global enterprises with leases in multiple languages.”