The Financial Accounting Standards Board’s (FASB) new revenue recognition reporting standards have “weakened US GAAP” and might result in “greater abuses”, the chairman of the US Senate's Permanent Subcommittee on Investigations told FASB chairman Russell Golden in a letter.
The long-time Democrat senator said that FASB’s convergence project with its international accounting counterpart, the International Accounting Standards Board (IASB), which saw US GAAP’s revenue recognition rules adapted to a more principles-based approach, allows for organizations to use more estimates which could lead to more “deceptive financial reporting.”
The core principle of the new standard is for companies to recognize revenue “to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services,” FASB said at the time of the rule update.
In response to Sen. Levin’s letter, FASB spokesperson Robert Stewart said in an email to pfm: “The specific issues he has raised regarding the new revenue recognition standard – and the broader issues regarding the appropriate relationship between the FASB and the IASB – are very important. We will address both in a detailed response that we are preparing to the senator’s letter.”
Private fund managers may have sympathy with Sen. Levin’s view as the new revenue standard may have a hidden impact on the private funds community. Today, most GPs record carry in the books as it’s achieved – so either when a portfolio company is exited, or when a fair value estimate indicates they’ve achieved the performance fee on paper.
The new revenue standard may change that. The rules say that any carry subject to clawback (which most funds provide for) isn’t actually firm revenue until it’s certain the cash will stay firmly in the GP’s pocket. In other words, carry isn’t actually carry until it becomes impossible for a single bad investment to result in the “revenue” being clawed back.