Revenue recognition: New differences emerging

Except for a few minor differences, the revenue recognition standard released by US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in May 2014 contained converged financial reporting guidance.

But that handful of differences in the revisions that the boards plan to propose could move their guidance further apart. In response to implementation concerns from financial statement preparers, FASB and the IASB decided at a February 18th meeting to propose revisions to clarify the standard to reduce diversity in practice.

A recap on FASB’s website of the tentative decisions made by the boards provides details on the changes the boards plan to propose. Both boards agreed that amendments to the guidance are needed to reduce the potential for diversity in practice. But, in general, FASB decided to propose more changes than the IASB did.

The clarifications the boards decided last week to propose dealt with two topics—licences of intellectual property and identifying performance obligations. Here are areas where the boards differed, according to FASB’s recap:

Licences of intellectual property

Although the boards agreed on many substantive clarifications to propose, FASB alone decided to propose further clarifications in the guidance:

• FASB plans to propose that when an entity grants a licence to symbolic intellectual property, it is presumed that the entity’s promise to the customer in granting a licence includes undertaking activities that significantly affect the utility of the intellectual property to which the customer has rights. Intellectual property is considered symbolic when it does not have significant stand-alone functionality, such as brands, team or trade names, or logos.
• FASB decided to propose clarifying that, in some cases, an entity would need to determine the nature of a licence that is not a separate performance obligation in order to appropriately apply the general guidance on whether a performance obligation is satisfied over time or at a point in time and/or to determine the appropriate measure of progress for a combined performance obligation that includes a licence.
• FASB decided to propose clarifying that certain contractual restrictions (as described in Accounting Standards Codification Paragraph 606-10-55-64 in the standard) are attributes of the licence and therefore do not affect the identification of promised goods or services in the contract.

Identifying performance obligations

The boards agreed to propose adding some illustrative examples to clarify how they intend the guidance on identifying performance obligations to be applied.

But FASB alone decided to propose further amendments to address implementation issues about:

1. Identifying promised goods or services that would be subject to the separation guidance.
2. Application of the guidance related to the concept of “distinct in the context of the contract.”
3. Accounting for shipping and handling activities.

FASB alone also decided to make certain technical corrections to the guidance on identifying performance obligations.

FASB instructed its staff to begin drafting a proposed Accounting Standards Update based on the tentative decisions reached for both licences of intellectual property and identifying performance obligations.

The IASB decided to develop a single exposure draft of proposed clarifications to IFRS 15, which also will include any other clarifications the IASB deems necessary as a result of the discussions of the boards’ joint transition resource group in January and March. At its June meeting, the IASB expects to approve the clarifications that will be included in its exposure draft.

The boards also have demonstrated a difference of opinion on delaying the standard’s effective date. FASB is considering such a delay, particularly in light of the revisions that are proposed. IASB members have said their constituents have not voiced a need for a delay, but IASB member Patrick Finnegan said last week that a delay might be inevitable because of the revisions the boards are proposing.

A decision on the effective date could come as early as March.

Currently, the standard is scheduled to take effect for reporting periods beginning after December 15th 2016 for US public companies, or reporting periods beginning on or after January 1st 2017 for companies that use IFRS.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine editorial director.