Certified Public Accountants & Business Consultants
FASB Issues Revenue Recognition NarrowScope Amendments And Practical
Expedients
June 1, 2016
The FASB has issued Accounting Standards Update 2016-12, which is intended to improve
the guidance on collectability, noncash consideration, and completed contracts at transition
in the new revenue recognition standard. Additionally, the update provides an accounting
policy election related to the presentation of sales taxes and other similar taxes collected
from customers.
The amendments in the update do not change the core principle of the
guidance in Topic 606, Revenue from Contracts with Customers. Rather, the
update only affects the narrow aspects discussed below.
Collectability
The update clarifies the objective of the collectability criterion in Step 1 of the
revenue model. The objective of this assessment is to determine whether the
contract is valid and represents a genuine 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 FASB also clarified when revenue would be recognized for a contract that
fails to meet the criteria in Step 1. Under the guidance, a company will
recognize nonrefundable consideration received as revenue if it has transferred
control of the goods or services, it has stopped transferring additional goods or
services and has no obligation to transfer additional goods or services.
For more information, please contact:
Felicia M. Malter, CPA, CGMA — St.
Louis
Partner-In-Charge
Assurance Services Group
314.290.3249
[email protected]
Kaleb J. Lilly, CPA — Kansas City
Partner
Assurance Services Group
913.499.4417
[email protected]
Rodney Rice, CPA, CGMA — Denver
Partner
Assurance Services Group
303.952.1233
[email protected]
David Duckwitz, CPA — Kansas City
Director of Quality Control
Assurance Services Group
913.499.4433
[email protected]
Noncash Consideration
The guidance specifies that the measurement date for noncash consideration
is contract inception when determining the transaction price. Any subsequent
changes in the fair value of the noncash consideration due to its form are not
included in the transaction price and are to be recorded, if required, as a gain or
loss in accordance with other accounting guidance and not as revenue.
The update also clarifies that the variable consideration guidance applies only
to variability resulting from reasons other than the form of the consideration.
Contract Modifications at Transition
The guidance adds 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. This expedient is helpful for
entities that have contracts that extend over many years and that have been
modified several times. The practical expedient permits an entity to determine
and allocate the transaction price on the basis of all satisfied and unsatisfied
performance obligations in a modified contract as of the beginning of the
earliest period presented (rather than from the inception of the contract) in
accordance with the new guidance in Topic 606.
Completed Contracts at Transition
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Certified Public Accountants & Business Consultants
In order to provide clarity on when a contract should be considered
“completed” for purposes of applying the revenue recognition model, the FASB
clarified that a completed contract for purposes of transition is a contract for
which all (or substantially all) of the revenue was recognized under legacy
GAAP before the date of initial application. 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. These clarifications are
important because companies 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.
In addition, the amendments in this update permit an entity to apply the
modified retrospective transition approach either to all contracts or to
completed contracts only.
Presentation of Sales and Other Similar Taxes
The update permits an entity, as an accounting policy election, to exclude
amounts collected from customers for all sales (and other similar) taxes from
the transaction price. If an accounting policy is elected, companies would not
need to evaluate taxes they collect in all jurisdictions in which they operate to
determine whether a tax is levied on the entity or the customer.
This ASU will go into effect with the new revenue recognition standard. That
standard will be effective for a public entity for annual periods beginning after
December 15, 2017, including interim periods within that reporting period. For all other entities (nonpublic entities), the new revenue recognition standard
will be effective for annual periods beginning after December 15, 2018 and
interim periods within annual periods beginning after December 15, 2019.
Early adoption will be permitted but not earlier than the original effective date for
public entities which is for annual periods beginning after December 15, 2016.
The full text of the ASU is available here.
Readers should not act upon information presented without individual professional
consultation.
DENVER | KANSAS CITY | NASHVILLE | ST. LOUIS | ST. LOUIS CORTEX
www.rubinbrown.com | 1.800.678.3134