In a March 2016 speech, Securities and Exchange Commission (SEC) Chief Accountant James Schnurr caught many by surprise when he commented:
I would strongly encourage a registrant, whether domestic or foreign, to consult with the Office of the Chief Accountant if the registrant intends to select and implement an accounting policy for revenue that is inconsistent with TRG [Transition Resource Group] discussions.
With this comment, Schnurr effectively made TRG discussions authoritative for all SEC filers. This change is likely to have significant and unintended consequences during implementation of Accounting Standards Codification (ASC) 606 over the next several years. This article provides a brief introduction to the TRG and a discussion of the potential consequences of its new role as authoritative discussant.
Background on the TRG
Shortly after issuing ASU 2014-09 (later codified as ASC 606), the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) formed the Revenue Recognition Transition Resource Group (TRG), a committee of 19 members representing financial statement preparers, auditors, and stakeholders from a wide spectrum of industries, geographical locations, and organizations. As stated on the FASB’s website, the TRG’s limited purpose is:
- To solicit, analyze, and discuss stakeholder issues arising from implementation of the new guidance.
- To inform the FASB and the IASB (the Boards) about those implementation issues, which will help the Boards determine what, if any, action will be needed to address those issues.
- To provide a forum for stakeholders to learn about the new guidance from others involved with implementation.
When a question or concern related to the new revenue standard is submitted to the FASB, the staff first considers whether it warrants further consideration. If the staff determines that the question requires clarification or guidance, but that the question does not need to be discussed in a public forum, the staff may answer the question via the technical inquiry process. If the staff determines that the question requires further consideration in a public forum, the staff adds the topic to a future TRG meeting agenda. In these meetings, which are public and broadcast live on the FASB’s and IASB’s websites, TRG members discuss and explore the issues in depth. The meeting agenda and issue papers are made public shortly before each meeting, and discussion summaries are posted on the FASB’s website after the meeting.
TRG discussions have already prompted the Boards to issue clarifying guidance on a number of issues. The TRG was also a catalyst in the Boards’ decision to delay the effective dates of ASC 606 and IFRS 15. Positions taken by the TRG represent the latest thinking on different elements of ASC 606, are intended to assist organizations implementing ASC 606 and serve as a resource for the Boards as they set standards. To date, the TRG has discussed over 50 issues.
Changes in TRG’s Role
Although the TRG plays an important deliberative and educational role in the transition effort, the FASB and IASB have repeatedly and explicitly stated that the TRG alone is not authoritative and is prohibited from unilaterally issuing guidance. As the FASB stated rather emphatically on the TRG website, “The TRG will not issue guidance.” Schnurr himself echoed this policy in his March 2016 speech at the 12th Annual Life Sciences Accounting and Reporting Congress, stating that the TRG merely discusses implementation issues.
So, it was all the more surprising when later in that same speech, Schnurr indicated that registrants whose policies are inconsistent with TRG discussions would be subject to additional scrutiny. This comment effectively elevated the TRG to a role never intended by its architects. In essence, Schnurr’s position is that public companies and their auditors must reflexively adhere to TRG positions just as they would adhere to guidance from the FASB and IASB. This policy could also have unforeseen consequences for private companies, as they often choose to adhere to SEC guidance.
Some argue that the TRG is composed of knowledgeable preparers, auditors, and other stakeholders, and as a result, the TRG’s discussions are likely sound and generally representative of the profession as a whole. If this is the case, the SEC can expect that registrants will select revenue recognition policies that are consistent with TRG discussions. This argument is flawed for at least two reasons.
First, as noted above, the TRG was never meant to issue authoritative guidance. Imagine how differently TRG discussions might have gone had its members understood that the discussions themselves would become authoritative guidance for public filers. TRG members likely would have been more open to alternative views or reasons for those views, allowing more latitude for preparers and auditors when implementing the new standard.
Second, and perhaps much more importantly, the vast majority of issues and concerns submitted thus far to the TRG likely originated from auditors and a small subset of preparers. Although the TRG does not report submissions by stakeholder categories (e.g., preparers, auditors, investors), recent surveys by accounting firms indicate that very few companies have actually begun to implement the new standard. For example, Deloitte’s survey in January 2016 found that less than 10 percent of preparers surveyed were executing a transition plan. About 50 percent had not even initiated the transition process. Such results suggest that most preparers are nowhere near the point where they can identify concerns and implementation issues in the new standard, and this means that the concerns and issues addressed so far by the TRG are likely biased toward auditors’ and a small subset of companies’ concerns.
At this point, some may argue that preparers all had the chance to submit concerns and implementation questions during TRG deliberations. But this argument ignores the fact that constrained budgets and an already large burden of implementing existing financial reporting guidance mean that most preparers will only turn attention to a new standard when it becomes utterly necessary. For most preparers, that is finally happening in mid-2016, as many consulting and advisory firms specializing in revenue recognition can confirm. At the very least, the SEC should be wary of such sweeping statements about reliance on TRG discussions until the majority of preparers have begun implementing the new standard.
Because TRG discussions are now authoritative, preparers may overwhelm the TRG with a flood of new inquiries when they realize they have questions that need answers prior to implementation. This eleventh-hour deluge may yet again delay implementation of the standard or worse, lead to industry-specific guidance as TRG members feel pressure to discuss these last-minute issues. The possibility of this result is far from remote.
Interestingly, the IASB withdrew from the TRG in January 2016 to assure its stakeholders that they can move forward confidently in their transition efforts. In other words, the IASB signaled that IFRS 15 will not be subject to further changes. The FASB, on the other hand, has scheduled additional TRG meetings in 2016 because the SEC and the FASB think there are more implementation issues that need to be addressed. The number of issues is likely to increase even more over the next year as preparers finally start implementing the new standard. This may lead to differences between ASC 606 and IFRS 15 as the FASB makes changes to its version of the revenue standard and the IASB does not.
RevenueHub continues to monitor developments with respect to the TRG and will provide updates on its evolving role. Going forward, we will consider TRG statements in applicable articles. We will also distinguish conclusions in our analyses based on TRG pronouncements and those stemming directly from the Codification.
In the “Resources Consulted” section below, we have included a link to the FASB webpage dedicated to the TRG meetings. The FASB provides a collection of links to various memos, including staff papers and meeting summaries; agendas; and video archives of each meeting.
- Deloitte, Heads Up: “The New Revenue Standard — Adoption and Transition Observations.” 14 January 2016.
- EY, “SEC in Focus: Issue 2.” April 2018. “Other SEC Activities.”
- FASB Joint Transition Resource Group for Revenue Recognition. “About the Group,” “Overview,” “Meetings.” Accessed 30 April 2016.
- IASB, Project News: “IASB completes decision-taking on clarifications to its Revenue Standard.” 21 January 2016.
- Schnurr, James V. “Remarks before the 12th Annual Life Sciences Accounting and Reporting Congress.” 22 March 2016.