Revenue accounting policies – where (or where not) to look…

The IFRS Discussion Group recently considered the relevance to Canadian preparers of the Transition Resource Group (TRG) for Revenue Recognition…

The TRG was initially established as a joint initiative between the IASB and the Financial Accounting Standards Board (FASB). The relevance question arises in particular because the IASB announced in early 2016 that it doesn’t plan to schedule further meetings of the IFRS constituents of the TRG; since then the group has continued as a “FASB TRG.” The IASB is monitoring the group, but has indicated: “companies reporting using IFRS Standards are not required to consider the pronouncements or public discussions of the FASB in applying IFRS Standards.”

Even so, it seems inescapable, as the IDG put it, that “Canadian SEC registrants need to follow the (FASB TRG) discussions because the SEC determines the accounting framework to be used to file continuous disclosure documents in the U.S.” But what about Canadian IFRS preparers with no US filing obligations – how much weight should they feel compelled to put on a US-only conversation? The primary reference point for this question is IAS 8.12:

  • “In making the judgement described in paragraph 10 (that is, in developing and applying an accounting policy for a transaction, in the absence of an IFRS that specifically applies to it), management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11.”

The notion that management “may…consider…other accounting literature” is subject of course to several degrees of inherent vagueness. As written, it allows management plenty of latitude to choose not to consider such literature (even if it might be right on point), or to consider it only lightly before rejecting it, or to decide that a particular source doesn’t constitute relevant “other accounting literature” anyway. IFRIC had an opportunity to comment on this in 2011, but declined, saying: “The Committee concluded that the process for developing accounting policies by analogy does not need to be clarified in paragraphs 10–12 of IAS 8 because the current guidance is sufficient.” (It noted with regard to another aspect of IAS 8 that “when management develops an accounting policy through analogy to an IFRS dealing with similar and related matters, it needs to use its judgement in applying all aspects of the IFRS that are applicable to the particular issue.”)

The IDG’s discussion suggested though that maybe the paragraphs as they stand aren’t entirely sufficient:

  • “… As for the FASB TRG material, the (Canadian Securities Adminstrators) representative indicated that there is nothing published by the FASB that is required to be followed by an issuer preparing financial statements in accordance with IFRSs. However, the FASB TRG material represents a relevant body of literature that may help to inform an issuer’s views if IFRSs did not provide a clear answer for a particular set of facts and circumstances.
  • The Group discussed various interpretations of paragraph 12 in IAS 8 in relation to the TRG guidance. There was some discussion around whether ‘other accounting literature’ in this paragraph means only authoritative guidance. A CSA representative thought that this paragraph should be interpreted more broadly, and the FASB TRG material fits into paragraph 12 of IAS 8 as being part of ‘other accounting literature.’ One Group member noted that although large entities may look at multiple sources of guidance, smaller entities often lack the resources to do so and may not be knowledgeable about the discussions of the FASB TRG. The Group member was concerned that not considering the FASB TRG material may have implications for the internal control certifications.

It would seem to me entirely inappropriate if a Canada-only issuer were ever to be accused (say) of following an inadequate practice for determining an accounting policy, because it didn’t look for guidance in a place where it clearly wasn’t compelled to look. The process of setting accounting policies should surely be driven by clarity and openness, not set up as a mean-spirited trap. And if a Canadian preparer applies an accounting policy that reflects the principles and substance of IFRS 15, then that should be good enough, regardless that they could have done something else that might have followed someone else’s idea of how to reflect those principles and substance. Of course, consistency between entities is generally a virtue, but not at the cost of neurotically stifling the facilitative structure of the IFRS standards. Honestly, what kind of imagined harm is anyone being protected from here?

Anyway, at the following meeting, after further discussion among the CSA Chief Accountants, the CSA representative commented that the FASB TRG material could (my emphasis) also be considered “other accounting literature” in the  sense set out above. Which of course isn’t the same as saying that it “would” or “should”…

The opinions expressed are solely those of the author

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