Discussions of the FASB/IASB joint Transition Resource Group’s (TRG) have highlighted increased concerns about potential implementation issues that may arise from the Revenue from Contracts with Customers – Topic 606 standard, particularly on the Identifying Performance Obligation Licensing guidance.
In response to these concerns, the FASB has released a new exposure draft (ED) on Identifying Performance Obligation and Licensing. This ED will not change the core principles within the new standard; but, is intended to amend guidance and provide clarity on the following:
Identifying Performance Obligations: Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The Board is proposing to reduce the cost and complexity of applying the guidance on identifying promised goods or services by adding the following guidance:
- An entity would not be required to identify goods or services promised in a contract with a customer that are immaterial in the context of the contract.
- An entity would be permitted to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service.
Licensing Implementation Guidance: Topic 606 includes implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to access the entity’s intellectual property (which is satisfied over time) or a right to use the entity’s intellectual property (which is satisfied at a point in time). The amendments in this proposed Update are intended to improve the operability and understandability of the licensing implementation guidance by clarifying the following:
- An entity’s promise to grant a customer a license to intellectual property that has significant standalone functionality (for example, the ability to process a transaction, perform a function or task, or be played or aired) does not include supporting or maintaining that intellectual property during the license period. Rather, the nature of the entity’s promise is to provide a right to use the entity’s intellectual property as that intellectual property exists at the time the license is granted unless the entity is expected to undertake activities (that do not transfer a promised good or service to the customer) that will change the functionality of the intellectual property to which the customer has rights. An entity’s promise to provide a customer with a right to use the entity’s intellectual property is satisfied at the point in time the customer is able to use and benefit from the license, because the entity’s promise in granting the license is solely to make the underlying intellectual property available for the customer’s use and benefit. Functional intellectual property includes software, biological compounds or drug formulas, and completed media content (for example, films, television shows, or music).
- An entity’s promise to grant a customer a license to symbolic intellectual property (that is, intellectual property that does not have significant standalone functionality) includes supporting or maintaining that intellectual property during the license period. Therefore, the nature of the entity’s promise to the customer is both to (a) grant the customer rights to use and benefit from the entity’s intellectual property and make that underlying intellectual property available for the customer’s use and benefit and (b) support or maintain the intellectual property during the license period (or over the remaining economic life of the intellectual property, if shorter). Consequently, a license to symbolic intellectual property is satisfied over time. Symbolic intellectual property includes brands, team or trade names, logos, and franchise rights.
- An entity needs to consider the nature of its promise in granting a license that is not a separate performance obligation to apply the other guidance in Topic 606 to a single performance obligation that includes a license and other goods or services (in particular, the guidance on determining whether a performance obligation is satisfied over time or at a point in time and the guidance on how best to measure progress toward the complete satisfaction of a performance obligation satisfied over time).
The FASB has requested feedback on eight questions provided within the ED. The comments are due on
June 30, 2015. The IASB has not issued a corresponding proposal in this area at this time.
Feeling overwhelmed with implementing the new standard, in particular, understanding the in-depth intricacies of this exposure draft and the new standard? FEI is here to help you! FEI is hosting a one-day conference on June 26, 2015 to focus on implementation issues. Scott Taub, TRG member and former Deputy Chief Accountant of the U.S. Securities and Exchange Commission (SEC), is the conference chair leading the roster of speakers and panelists from public accounting firms, legal counsel, investor relations, analyst and the preparer community.
If you can’t attend in person, we are offering a live webcast stream. Please visit our website at www.financialexecutives.org to learn more or click here to register.