Accounting

Revenue Recognition Standard Update: Latest from the FASB/IASB Transition Resource Group


by FEI Daily Staff

Almost a year since its release, Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) is still migrating and changing.

Most recently, the FASB has decided to defer the effective date of the new standard by one year, as well as, drafting a proposed ASU on Identifying Performance Obligations and Licensing with a comment period ending June 30, 2015 or to extend to a 40-day comment period, if necessary.

On March 18, the FASB made the following tentative decisions relating to the implementation issues: The use of practical expedients on transition for certain aspects of Contract Modifications and Completed Contracts; Practical expedient that would permit entities to present amounts collected from customers for taxes net of the related amounts remitted; Principal versus agent (reporting revenue gross versus net) Clarify the guidance in the new revenue standard to require that noncash consideration be measured at contract inception; and to amend the collectibility guidance in Step 1 (Identifying the Contract) in Topic 606. For tentative decisions reached on February 18, please refer to FEI Daily.

The TRG subsequently met on March 30. Main topics discussed include: Variable Discounts; Material Rights, Consideration Payable to a Customer; Partial Satisfaction of Performance Obligations Prior to Identifying the Contract; Warranties; Significant Financing Component; Whether Contributions are Included or Excluded from the Scope; and, Series of Distinct Goods and Services.

Below is a summary of the discussions:

Allocation of the Transaction Price for Discounts and Variable Considerations:  Guidance on allocating discounts to only one or some, but not all performance obligations in a contract is different from the guidance on allocating variable consideration to only one or some but not all performance obligations. Because a discount can be a variable consideration, some stakeholders have raised questions as to whether an entity should account for such a discount by applying the guidance for allocating discounts or allocating variable consideration. The staff proposed three views on interpretation for consideration. There was unanimous support for View A, which states that variable consideration is first subject to guidance on allocating variable consideration. Only if criteria in paragraph 606-10-32-40-85 are not met, would an entity further consider the remaining allocation guidance in paragraphs 606-10-32-28 through 32-38.

The staff suggests that View A is supported by paragraph 606-10-32-41 which establishes a hierarchy for allocating variable consideration such that when a contract includes variable consideration, an entity should first apply the guidance on allocating variable consideration before considering the guidance on allocating discounts.

Accounting for a Customer’s Exercise of a Material Right: Stakeholders have raised other questions concerning the accounting for a customer option that provides a material right. Some questions brought forth are:

  • How should an entity account for a customer’s exercise of material right?
  • How should an entity evaluate whether a customer option that provides a material right includes a significant financing component?
  • Over what period should an entity recognize a non-refundable upfront fee?
For the first question raised - How should an entity account for a customer’s exercise of material right- the staff thought the guidance could either be interpreted as View A – an entity should account for the exercise as a change in the transaction price of a contract in accordance with paragraph 606-10-32-42 through 32-45 or as View B – a contract modification guidance 606-10-25-10 through 25-13. The Board seemed to lean towards View A over View B, but they thought View B was also necessary. There was much debate as to whether the election of a view would either be an accounting policy election or facts and circumstances with the other two issues yet to be discussed.

Unfortunately, due to technical difficulties, the members were unable to debate the remaining issues but decided to summarize the conclusions for each topic discussed and share with members of the TRG, or discuss the topics at the next TRG meeting.

The Boards were not able to discuss the following agenda items.

Consideration Payable to a Customer: The Boards received feedback that there may be different views on whether an entity’s customers include those outside of the entity’s distribution chain. Also, there are differences in views on which amounts paid to a customer require an entity to assess whether the payment relates to a distinct good or service acquired at an amount that does not exceed fair value, and thus, would not require an entity to reduce the transaction price. Therefore, the staff added two questions to address these issues: Question 1: Which payments to a customer are in the scope of the consideration payable to a customer’s guidance?

Question 2: Does the guidance on consideration payable to the customers relate to customers in the distribution chain or more broadly to any customer of an entity’s customer?

Partial Satisfaction of Performance Obligations Prior to Identifying the Contract: A difference in interpretation has emerged regarding how to account for revenue and costs recognized for work done prior to the contract meeting the criteria in the new revenue standard.   Pre-Contract Establishment[1] activities may be administrative tasks that neither result in the transfer of a good or service to the customer, nor fulfill the anticipated contract; activities to fulfill the anticipated contract but which do not result in the transfer of a good or service, such as set-up costs; or activities that transfer a good or service to the customer at or subsequent to the Contract Establishment Date.

Warranties: The new standard does not provide a bright line on how to make the distinction of when a warranty provides a service if the customer has the option to purchase a warranty, such as when it is separately priced and negotiated. Therefore, stakeholders have raised the question - How should an entity evaluate whether a product warranty is a performance obligation in a contract with a customer when the warranty is not separately priced? Views vary as to certain types of ways separate performance obligation should be treated.

Significant Financing Components: Transition questions have been received by the staff regarding implementation of significant finance components; specifically, determining when the difference between the promised consideration and the cash selling price of the good or service is not a significant financing component; application of the guidance when the promised consideration is equal to the selling price; insignificant financing components; determining whether the practical expedient can apply to single payment stream for multiple performance obligations; calculation of interest; and application of significant financing guidance when a contract contains multiple performance obligation. These transition issues have been formulated into questions within Agenda Ref #30.

Whether Contributions are Included or Excluded from the Scope: There is uncertainty about whether contributions are in the scope of the new revenue standard. There are requests to remove contributions from the scope of the standard. This topic only relates to GAAP because IFRS does not have industry specific guidance. As per this Agenda paper, “A contribution is not given in exchange for goods or services that are an output of the entity’s ordinary activities.  Therefore, the FASB staff interpretation is that a contribution is not in the scope of the new revenue standard.”

Series of Distinct Good or Services: Stakeholders have questioned when to apply the guidance on a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer (the series provision). In order to apply the series provision, must the goods be delivered or service be performed consecutively and in order to apply the series provision (that is, account for an arrangement as a single performance obligation), does the accounting result need to be the same as if the underlying distinct goods and service each were accounted for as a separate performance obligation?

The next TRG meeting is scheduled on July 13, 2015, submit any implementation issues a month in advance.

[1] Date at which the criteria defined in section ASC 606-10-25-1 are satisfied