Accounting Expert Highlights New Revenue Recognition Standard

Wyndham Smith, Jr., a partner at Deloitte LLP, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Smith commented on the converged revenue recognition standard issued by the Financial Accounting Standards Board’s (FASB) and the International Financial Reporting Standard (IFRS).  Companies can elect early adoption of the standard in 2017. It will take effect for public companies in 2018 and non-public companies in 2019.

According to Smith, the impact of the standard on REITs may not be as significant as for companies in other industries. He noted that the typical rental stream for REITs is governed by other guidance that lies outside the scope of the revenue recognition standard.

However, Smith said attention is being paid to the interplay between the revenue recognition standard and the new leasing standard that goes into effect a year later. Specifically, the focus is on the requirement under the leasing standard to segregate the lease and non-lease components in a lease contract, he said.

Smith noted that the revenue recognition standard also gives guidance on the derecognition of non-financial assets, or the sale of real estate. A sales contract will need to be evaluated relative to the new revenue guidance to determine when control of the asset has transferred from the seller to the buyer, he said. That will indicate when a sale should be recognized, he added, and determine the value of the sale when it is ultimately recorded.

Meanwhile, Smith said the increased use of non- Generally Accepted Accounting Principles (GAAP) reporting measures shows that users of financial statements are looking elsewhere to get the information needed for investment decisions. According to Smith, FASB is considering a project that would look at improvements to the income statement and statement of cash flows. “That could be a good use of FASB’s time,” he said.