On July 18, the FASB and the IASB held their first Joint Transition Resource Group for Revenue Recognition (TRG). Jim Kroeker of the FASB stated, “We are committed to understanding the transition issues, identifying the issues and determining whether or not something needs to be done from our standpoint.” The IASB and FASB boards discussed potential implementation issues, although no conclusions have been made.
Gross vs. Net Revenue:
Stakeholders informed the staff that there may be multiple interpretations of the application of the guidance in Accounting Standards Update No. 2014-09, Revenue from Contract with Customers (ASU 2014-09), and IFRS 15 Revenues from Contracts with Customers (IFRS 15) (collectively “new guidance”) about determining and accounting for whether the entity is a principal or an agent to contracts for certain intangible goods or services. This ultimately arose from use of internet, including social networking websites and mobile apps stores. The standard defines principal versus agent in ASU 606-10-55-36. It states:
“Under this guidance, an entity should determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (that is, the entity is a principal) or to arrange for the other party to provide those goods or services (that is, the entity is an agent).”
The potential implementation issues in this area are:
Issue 1: Application of the agency indicators in paragraph 606-10-55-39 (IFRS 15, paragraph B37)
1a: Interaction of the agency indicators with the principle that a principal controls the good or service before its transfer to the customer
1b: Application of the agency indicators to some types of contracts (specifically, those for intangible goods or services and those for which the indicators provide contradictory evidence)
Issue 2: If an entity determines that it is the principal, which typically results in gross revenue, what amount of revenue should the entity recognize if it received a net amount of cash and does not know the gross amount?
Issue 3: How should the transaction price allocation guidance be applied to a transaction in which the entity is a principal for some of the deliverables and an agent for others?
Gross vs. Net Revenue: Amounts Billed to Customers:
Another area where stakeholders indicated that there may be multiple interpretations of ASU 2014-09 and IFRS 15 is in determining whether to present certain items billed to customers as revenue or as a reduction of costs. Examples of those amounts billed to customers include shipping and handling fees, reimbursements of other out-of-pocket expenses, and taxes or other assessments collected from customers and remitted to governmental authorities for which explicit guidance in U.S. GAAP was superseded by the new revenue standard.
The potential implementation issue in this area is how should entities determine the presentation of amounts billed to customers under the new standard?
Guidance in the new standard (ASU 606-10-32-2) states that the transaction price should exclude “amounts collected on behalf of third parties.” On the other hand, if it is not collecting on behalf of a third party that amount should be included in the transaction price. As this may cause confusion, stakeholders suggested that an entity could apply the principal-agent framework in the new standard to determine whether it is a conduit for the amounts collected or whether it is the principal with respect to the obligation.
Sales-Based and Usage-Based Royalties in Contracts with Licenses and Goods or Services Other than Licenses
Interpretation difference may also occur regarding sales-based and usage-based royalties promised in exchange for licenses of intellectual property to a contract that includes a promise to deliver:
- One or more licenses of intellectual property,
- One or more goods or services that are not licenses of intellectual property.
The two potential implementation issues presented to the TGA in this area were:
Issue 1: When is a sales-based or usage-based royalty “promised in exchange for a license of intellectual property” such that the royalties’ constraint should apply? This primarily involves a portion of the licensor’s compensation to be in the form of a sales-or usage based royalty. The stakeholders have identifited three different interpretations for this issue and the difference in interpretation could result in differing revenue recognition between companies.
Issue 2: Can a royalty be partially within the scope of the royalty constraint? Contingent on Issue 1, stakeholders believe that royalty constraints should be applied partially to a single sales or usage based royalty – that is the part that would be paid in exchange for the license of intellectual property.
Impairment Testing of Capitalized Contract Costs
The Boards also discussed implementation of new guidance addressing impairment testing of the asset recognized from the incremental costs of obtaining a contract or costs incurred in fulfilling with a contract with a customer (the “capitalized contract cost”). Potential implementation issues arise from the use of the principles for determining the transaction price to ascertain the cash flow that the entity expects to receive in exchange for the good or service to which the asset relates, especially the question as to whether or not the consideration expected to be received during renewal or extension periods should be considered in the impairment analysis. As a result the staff has received two different views. View 1 – based on the application of paragraph 49, ASU 606-10-32-4, renewals and extension may not be considered for impairment test, and View 2 – based on principles in paragraph 99 (ASC 340-40-35-1 Other assets) and 101 (ASC 340-40-35-3) renewals and extensions may be considered for impairment test. [iv]
To view the archived webcast and for access to read further stakeholders views please visit: http://www.ifrs.org/Meetings/Pages/Joint-TRG--for-Revenue-Recognition-July-2014.aspx
The next TRG meeting is scheduled for October 31, 2014. More details about that meeting will be available on the FASB website.
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