The U.S. Financial Accounting Standards Board and the International Accounting Standards Board say they could include insurance contracts in a revenue recognition principles project.[@@]
FASB, Norwalk, Conn., and IASB, London, refer to insurance several times in a newly released discussion paper on preliminary views on revenue recognition in contracts with customers.
FASB and IASB are thinking about teaming up for a revenue recognition project because the U.S. Generally Accepted Accounting Principles approach is much different from the International Financial Reporting Standards approach, officials at the boards say.
The IFRS system uses 2 conflicting standards that can be difficult to understand and apply, and the U.S. GAAP system uses many different industry-specific standards, many of which conflict, officials say.
"The boards' objective is to improve the existing guidance in both IFRSs and US GAAP by developing a single revenue model that can be applied consistently regardless of industry," officials say.
The boards note that they already are working on an insurance contracts project.
In the discussion paper itself, officials write that IASB and FASB still could decide to exclude insurance contracts from the scope of a revenue recognition standard.
For most types of revenue, the boards tend to prefer a revenue recognition approach called the "allocated transaction price" approach.
When a company uses the allocated transaction price approach, "performance obligations are measured initially at the transaction price," officials write. "That transaction price is allocated to each performance obligation on the basis of the relative stand-alone selling prices of the goods and services underlying the performance obligation. The amount initially allocated to each performance obligation is not updated subsequently (the initial measurement is "locked-in") unless a performance obligation is deemed onerous."
The allocated transaction price approach works better for contracts with relatively predictable outcomes than for contracts with highly variable outcomes, officials write.
