No. 2016-24
10 May 2016
To the Point
FASB — final guidance
FASB issues narrow-scope
amendments and practical
expedients for its revenue standard
The amendments
are intended to
reduce the cost
and complexity of
applying the new
revenue standard.
What you need to know
•
The FASB amended its new revenue recognition guidance on transition, collectibility,
noncash consideration and the presentation of sales and other similar taxes.
•
The amendments clarify that, for a contract to be considered completed at transition,
all (or substantially all) of the revenue must have been recognized under legacy GAAP.
•
The amendments also clarify how an entity should evaluate the collectibility threshold
and when an entity can recognize nonrefundable consideration received as revenue if
an arrangement does not meet the standard’s contract criteria.
Overview
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update
(ASU) 1 that is intended to reduce the cost and complexity of applying the new revenue
standard 2 and result in more consistent application. The amendments on transition,
collectibility, noncash consideration and the presentation of sales and other similar taxes
address implementation issues discussed by the Joint Transition Resource Group for Revenue
Recognition (TRG) created by the FASB and the International Accounting Standards Board (IASB).
The FASB previously issued two ASUs 3 amending its guidance on licenses of intellectual property
and identifying performance obligations and principal versus agent considerations. The FASB
also has voted to propose eight technical corrections and improvements related to the revenue
standard that primarily involve consequential amendments to other accounting topics affected
by the standard and to add a practical expedient that would allow an entity not to disclose
variable consideration allocated to unsatisfied performance obligations in certain situations.
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The IASB, which developed its revenue standard 4 jointly with the FASB, recently issued a
single set of amendments to its standard, including some that are converged with or are
similar to the FASB’s amendments. The IASB didn’t amend its guidance on collectibility,
noncash consideration, the presentation of sales and other similar taxes or the definition of
completed contracts, and its amendments related to practical expedients at transition differ
from those of the FASB. The FASB said that this new ASU could “create generally minor
differences in financial reporting outcomes between GAAP and IFRS.”
Transition
Completed contracts
The FASB’s amendments clarify that for a contract to be considered completed at transition, all
(or substantially all) of the revenue must have been recognized under legacy GAAP. The FASB
noted in the ASU that the accounting for contract elements that do not affect revenue under
legacy GAAP (e.g., historical cost accruals for loyalty points) are irrelevant to the assessment of
whether a contract is complete. These clarifications are important because entities that use the
modified retrospective transition approach need to apply the standard only to contracts that
are not complete as of the date of initial application, and entities that use the full retrospective
approach may apply certain practical expedients to completed contracts.
The guidance previously stated that, for a contract to be considered complete at transition,
the entity must have transferred all of the identified goods and services in accordance with
today’s revenue guidance before the date of initial application. Stakeholders said it could have
been difficult to determine when a contract should be considered complete.
The amendments also give entities the option of applying the modified retrospective transition
approach to all contracts, not just those that are not complete. Entities that elect to do this will
apply the standard to all contracts, as they would under the full retrospective approach, but will
present the effects of the new standard in the year of adoption without recasting prior periods.
The IASB’s amendments give entities a similar option but retain the original definition of a
completed contract. The IASB also added a practical expedient that will allow an entity that uses
the full retrospective approach to apply the new standard only to contracts that are not complete
(rather than all contracts, which would otherwise be required) as at the beginning of the earliest
period presented in the financial statements; the FASB did not make a similar amendment.
How we see it
The clarification of the definition of a completed contract will likely affect the population of
contracts entities will have to evaluate under both the full and modified retrospective
transition approaches. It also may influence an entity’s selection of a transition approach.
Contract modifications
The FASB added a practical expedient to provide some relief when accounting for contracts
that were modified prior to adoption under both the full and modified retrospective transition
approaches. The practical expedient will be especially helpful for entities with multi-year
contracts that have been modified many times.
An entity that elects this option will avoid having to evaluate the effects of each contract
modification from contract inception through the beginning of the earliest period presented
under the new standard (i.e., 1 January 2016 or 1 January 2018 for a calendar-year public
entity that uses the full or modified retrospective approach, respectively, and does not early
adopt the standard).
2 | To the Point FASB issues narrow-scope amendments and practical expedients for its revenue standard 10 May 2016
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An entity will instead determine the transaction price for all satisfied and unsatisfied
performance obligations in the contract at the beginning of the earliest period presented
under the new standard and then perform a single allocation of the transaction price to those
performance obligations based on their relative standalone selling prices. Any modifications
after the beginning of the earliest period presented under the new standard will be accounted
for under the standard. An entity that elects to apply this practical expedient is required to
apply it to all contracts with similar characteristics.
The IASB added a similar practical expedient, but under the modified retrospective transition
approach, an entity may also apply the practical expedient under IFRS 15 to the beginning of
the earliest period presented in the financial statements.
Disclosure
The FASB made a technical correction to its transition guidance to clarify that an entity that
uses the full retrospective approach does not need to disclose the effect of the accounting
change on affected financial statement line items in the period of adoption (e.g., 2018), as
would otherwise be required by Accounting Standards Codification (ASC) 250, Accounting
Changes and Error Corrections. This technical correction aligns with an existing exemption in
the IASB’s revenue standard.
The amendments
will provide some
transition relief
on accounting
for modified
contracts.
Collectibility
The FASB clarified that an entity should consider the probability of collecting substantially all
of the consideration to which it will be entitled in exchange for the goods or services expected
to be transferred to the customer rather than the total amount promised for all the goods or
services in the contract. The FASB also clarified that an entity may consider its ability to manage
its exposure to credit risk (e.g., through advance payments from the customer, the right to
stop transferring additional goods or services to the customer) as part of the collectibility
assessment. For example, in a service contract with a stated three-year term that an entity
could terminate upon nonpayment by the customer, the entity will evaluate collectibility only
for the period during which it expects to transfer the service. The amendments include
examples to illustrate these concepts.
The amendments clarify that an entity should not consider whether it can repossess an asset
it transferred to a customer in this assessment. Further, an entity will apply these
amendments only to determine whether it has a valid contract under the revenue standard.
This guidance will not affect the contract term an entity considers when applying the rest of
the model (e.g., when determining or allocating the transaction price).
The FASB also added a third event that will trigger recognition of nonrefundable consideration
received as revenue when collectibility is not probable. Under the amendments, an entity will
recognize nonrefundable consideration received as revenue if it has transferred control of the
goods or services and has stopped transferring (and has no obligation to transfer) additional
goods or services, if applicable.
The guidance previously stated that if an arrangement does not meet the collectibility
criterion (or any of the other four criteria to be considered a contract), an entity will recognize
nonrefundable consideration received as revenue only when one of two events has occurred —
(1) it has completed performance and received substantially all consideration or (2) the contract
has been terminated.
3 | To the Point FASB issues narrow-scope amendments and practical expedients for its revenue standard 10 May 2016
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Noncash consideration
The amendments clarify that the fair value of noncash consideration (e.g., equity) should be
measured at contract inception when determining the transaction price. Any subsequent
changes in the fair value of the noncash consideration due to its form (e.g., changes in share
price) are not included in the transaction price and should be recorded, if required, as a gain
or loss in accordance with other accounting guidance and not as revenue. Example 31 in the
standard was revised accordingly.
The FASB also clarified that when the variability of noncash consideration is due to both its
form (e.g., shares of stock) and other reasons (e.g., performance considerations that affect
the amount of noncash consideration), the constraint on variable consideration applies only to
the variability for reasons other than the form.
How we see it
The requirement to measure the fair value of noncash consideration at contract inception
may change practice for some entities. For example, under today’s guidance, entities
receiving customer equity as payment for goods or services generally measure the fair
value of the equity when performance is complete (upon vesting).
Presentation of sales and other similar taxes
The amendments allow an entity to make an accounting policy election to exclude from the
transaction price certain types of taxes collected from a customer (i.e., present revenue net
of these taxes) if it discloses that policy. As a result, entities that make this election won’t
need to evaluate taxes they collect (e.g., sales, use, value-added, some excise taxes) in all
jurisdictions in which they operate to determine whether a tax is levied on the entity or the
customer. This type of evaluation would otherwise be necessary to meet the standard’s
requirement to exclude from the transaction price any “amounts collected on behalf of third
parties (for example, some sales taxes).”
Endnotes:
1
2
3
4
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SCORE No. 00931-161US
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ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients.
ASC 606, Revenue from Contracts with Customers, originated by ASU 2014-09.
ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and
Licensing, and ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net).
IFRS 15 Revenue from Contracts with Customers.
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
4 | To the Point FASB issues narrow-scope amendments and practical expedients for its revenue standard 10 May 2016