The two Boards discussed:
- customer options for additional goods and services and non-refundable upfront fees; presentation of a contract as a contract asset or a liability
- determining the nature of a license of intellectual property;
- applying the “distinct in the context of the contract” criterion;
- and evaluating contract enforceability and termination clauses to determine the contract period.
With a goal of transparency, the Board provided a Summary of Issues Discussed in the July 2014 TRG – this document discussed; Gross versus Net Revenue, Gross versus Net Revenue: Amounts Billed to Customers, Sales-Based and Usage Based Royalties in Connections with Licenses and Goods or Services Other than Licenses. The PDF summary
can be accessed by clicking here.
The TRG also discussed the topic of deferring the standard and indicated that feedback they received from constituents indicated that the deferral of the final effective date would be warranted while others indicated that they have not begun the process of adoption and therefore, the FASB will embarked on a process to do site visit and outreach to understand where companies are in their process.
This decision will be no later than early second quarter. The FASB insisted that constituents “get started” on the implementation so that they will have data to make an appropriate conclusion as to whether a deferral is necessary. (Look for the upcoming FERF Report entitled “The New Revenue Recognition Standard…Are you prepared for Change?” later this month)
The October 31st meeting was a discussion of the following topics:
Customer options for additional goods and services and nonrefundable upfront fees
The new revenue standard requires an entity to account for an option for additional good and services as a separate performance obligation if that option provides a material right to the customer, that it would not receive without entering into that contract.
In addition, the standard states that the period over which a nonrefundable upfront fee would be recognized as revenue may extend beyond the initial contractual period if the entity grants the customer an option to renew the contract and that option provides the customer with the material right.
There have been differences in interpretations of the guidance, ASC 606 (ASU 2014-09) for determining whether a customer option to acquire additional goods and services give rise to a material right. The two issues include:
The first issues was should the evaluation of whether an option provides a material right be performed in the context of only the current transaction with a customer or should the evaluation also consider past and expected future transaction with the customer?
The staff is aware that ASC 606-10-10-4 indicates that the new revenue standard applies to individual controls with a customer, some question the accounting for certain types of transactions that provide customer with rights in a current transaction that may only become material when combined with rights that have been accumulated in past transactions and/or will be accumulated in future transactions. The TRG unanimously agreed on View B, which stated: The evaluation of whether an option provides a material right should consider all relevant transactions with the customer (that is, current, past, and future).
The second issue was whether the evaluation of whether an option provides a material right solely a quantitative evaluation or should the evaluation also consider qualitative factors?
The TGR was again unanimous on view B, which stated that quantitative and qualitative factors are considered when determining whether a material right exists. Supporters of this view stated that considering qualitative factors is more consistent with the notion that indentifying promised good and services should consider valid expectations of the customer. A customer’s perspective on what constitutes a “material right” may consider any number of qualitative factors that would be known to the entity.
Presentation of a contract as a contract asset or contract liability
Constituents have questioned the application of the guidance in the new standard about the presentation of a contract with a customer in the statement of financial position and whether the standard does give enough guidance.
The first issue was how should an entity determine the presentation of a contract that contains multiple performance obligations? Constituents questioned whether an entity could have a contract asset and contract liability for a single contract when, for instance, the entity has satisfied (or partially satisfied) one performance obligation in a contract for which consideration is not yet due, but has received a prepayment in respect of another unsatisfied performance obligation in the contract. Other constituents note that ASC 606-10-45-1 and BC 317 states that contract asset or contract liability positions are determined for each contract on a net basis. In other words, an entity nets each contract to either a contract assets or a contract liability and does not recognize separately a contract asset and a contract liability for a single contract.
Issue two questioned how should an entity determine the presentation of two or more contract that have been combined under Step 1 (identify the contract with the customer) in accordance with ASC 606-10-25-9. One view is that the contract assets or contract liability position is determined for the combined contracts because the guidance states that they are accounted for as if they are one single contract. Another view is that the contract asset or contract liability position is determined for each of the individual contracts in the combined contract separately. However, under this view, to reflect the amount due from or to the individual counterpart (or related counterpart), an entity might need to adjust the amounts that would otherwise be recognized as contract assets and contract liabilities arising from satisfying the individual performance obligations in the combined contract. This is because the transaction price would be allocated across the performance obligations in the combined contract.
The final issue was when an entity can offset other balance sheet items against the contract asset or liability. The new revenue standard does not provide guidance about offsetting of balances other than the guidance under the issue #1 and #2, however, current presentation guidance exists in IFRS and GAAP apart from the new revenue standard (ie. ASC 210-20 Balance Sheet Offsetting).
The TRG concluded that the contract is the unit of account (in other words, the rights and obligations in the individual contracts are interdependent across the combined contracts and this is best reflected by combining the individual contracts as if they were a single contract), and besides margin, these issues will not affect present practice much. Members of the TRG also agreed that the guidance in the new standard is sufficient to address constituents concerns.
Next meeting is January 26th at 7:00 AM ET.
This article part of an ongoing series. For the previous article click here. Please see tomorrow's FEI Daily for continuation of the TRG discussion.