No. 2016-16
10 May 2016
FASB issues narrow-scope improvements and practical
expedients to the new revenue recognition standard
Background
On 9 May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606):
Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 updates guidance in ASU 2014-09,
Revenue from Contracts with Customers (Topic 606), and addresses implementation issues identified under
Topic 606 by the FASB-IASB Joint Transition Resource Group for Revenue Recognition (TRG).
What’s new?
The amendments in ASU 2016-12 are intended to address certain issues identified by the TRG in the
new revenue recognition guidance on assessing collectibility, presentation of sales taxes, noncash
consideration, and completed contracts and contract modifications at transition.
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The amendments clarify the objective of the collectibility criterion in Step 1 of the new revenue
model (i.e., identify the contract(s) with a customer). The objective of this assessment is to
determine whether the contract is valid and represents a substantive transaction on the basis of
whether a customer has the ability and intention to pay the promised consideration in exchange
for the goods or services that will be transferred to the customer. The amendments also add a new
criterion to paragraph 606-10-25-7 to clarify when revenue would be recognized for a contract that
fails to meet the criteria in Step 1 of the new revenue model. That criterion allows an entity to
recognize revenue in the amount of consideration received when the entity has transferred control
of the goods or services, the entity has stopped transferring goods or services (if applicable) and
has no obligation under the contract to transfer additional goods or services, and the consideration
received from the customer is nonrefundable.
The amendments permit an entity, as an accounting policy election, to exclude amounts collected
from customers for all sales (and other similar) taxes from the transaction price.
The amendments specify that the measurement date for noncash consideration is contract
inception. Some stakeholders indicated that it is unclear how the constraint on variable
consideration is applied in circumstances in which the fair value of noncash consideration varies
both because of the form of the consideration and for reasons other than the form of
consideration. ASU 2016-12 clarifies that the variable consideration guidance applies only to
variability resulting from reasons other than the form of the consideration.
The amendments provide a practical expedient that permits an entity to reflect the aggregate effect
of all contract modifications that occur before the beginning of the earliest period presented in
accordance with Topic 606 when identifying the satisfied and unsatisfied performance obligations,
determining the transaction price, and allocating the transaction price to the satisfied and
unsatisfied performance obligations.
The amendments clarify that a completed contract for purposes of transition to ASC 606 is a
contract for which all (or substantially all) of the revenue was recognized under legacy generally
accepted accounting principles (GAAP) before the date of initial application of ASC 606.
Accounting for elements of a contract that do not affect revenue under legacy GAAP are
irrelevant to the assessment of whether a contract is complete.
The amendments also permit an entity to apply the modified retrospective transition method
either to all contracts or only to contracts that are not completed contracts.
The amendments clarify that an entity that retrospectively applies the guidance in Topic 606 to
each prior reporting period is not required to disclose the effect of the accounting change for the
period of adoption. However, an entity is still required to disclose the effect of the changes on any
prior periods retrospectively adjusted.
Fill the GAAP • FASB issues narrow-scope improvements and practical expedients to the new revenue recognition standard
1
No. 2016-16
10 May 2016
Effective dates and transition requirements
The effective date and transition requirements in ASU 2016-12 are the same as the effective date and
transition requirements of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 201514, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date
of ASU 2014-09 by one year. ASC 606 is effective for public entities for fiscal years, and interim
periods within the fiscal years, beginning after 15 December 2017. All other entities will apply the
guidance for fiscal years beginning after 15 December 2018 and interim periods within fiscal years
beginning after 15 December 2019.
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