News & Analysis

FASB may delay new revenue recognition standard

The deadline extension could make it more difficult for private fund managers to easily scan financial statements during due diligence. 

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At its Wednesday meeting, the Financial Accounting Standards Board (FASB) voted to propose delaying implementation of its new revenue recognition standard by one year. The decision follows criticism from stakeholders that the original timetable didn’t provide enough time to revamp their practices.

After six years of work, FASB agreed to the new standard alongside its international counterpart the International Accounting Standards Board (IASB) last year.

Under the proposal, public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. Non-public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2018, but would have the option of adopting the new rules one year earlier alongside their public counterparts.

Meanwhile, companies using IFRS must apply the new revenue standard for reporting periods beginning on or after January 1, 2017 – but they can begin doing so today, regardless of their public/private status. In practice, this means companies will start taking different paths in how they measure revenue, as they decide whether early adoption makes sense for them, warn tax and accounting advisers.

The delay could cause consternation amongst private fund professionals. GPs, armed with a staff of young analysts, scan hundreds of potential deal opportunities per week. During a transitional period between the old and new revenue standards, analysts will have to determine if a private company adopted the rules earlier before assessing its top-line growth.

Similar concerns will need to be made for companies used for benchmarking purposes. Revenue is also a key metric for how the industry measures fair value, meaning a portfolio company’s exit value could experience a sudden swing because of the way it measures revenue.

The FASB plans to expose its decisions for a 30-day public comment period in a proposed Accounting Standards Update (ASU), which is expected to be issued in the coming weeks.