The impact of different types and amounts of guidance on the implementation of an accounting principle

Transfer of asset control is a central principle in the revenue recognition standard jointly developed and issued by the FASB and IASB (Boards) in 2014. Guidance with respect to this principle will be very important in applying the new standard. This study examines the effect of type and amount of guidance on the judgment of whether control has been transferred. Study participants receive different hypothetical standards and provide judgments with respect to the transfer of control in a construction-type contract case setting. Results indicate that adding guidance to the basic principle in the form of either key indicators or an illustrative example results in participants being more likely to judge the customer as having control during the construction period. Participants perceive indicators as being more useful than examples in forming their judgments. The nature of the example (affirmative or counter) does not have a differential impact on judgments when added to a principle-only standard. On the other hand, when an example is added to a standard that contains a principle and key indicators, judgments are significantly different when a counter example is present than when an affirmative example is part of the standard. This study provides the Boards with research results that may be useful in determining the type and amount of guidance to be provided in a principle-based standard.