Revenue recognition implementation: What are FASB’s plans?

The staff of the US Financial Accounting Standards Board (FASB) plans to report results of research on two key revenue recognition issues to the board next month – and report to the board early in the second quarter of 2015 on research related to a possible deferral in the effective date in the new, converged standard, staff members said Monday.

The new revenue recognition standard was issued in May of last year by FASB and the International Accounting Standards Board (IASB). The standard creates a five-step process for revenue recognition based on the transfer of control of goods or services.

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. But after receiving numerous questions about implementation, FASB instructed its staff to conduct research on the possible need for a delay in the effective date, and on three other key implementation issues.

FASB staff members provided an update on that research Monday during a meeting of the revenue recognition joint transition group of FASB and the IASB. FASB’s staff and its board members have performed outreach with financial statement preparers across different industries; IASB staff members have observed a handful of those meetings.

After completing outreach with preparers and performing further consultation with other interested parties such as auditors and financial statement users, FASB’s staff will summarise its findings for FASB at a board meeting early in the second quarter of this year, at which time FASB will decide whether to propose a deferral.

The IASB has not received as much feedback requesting a delay in the effective date but has received letters from members of one industry expressing concern about readiness for implementation. Those concerns related more to the implementation of systems than accounting interpretations.

Implementation questions

FASB staff members also are researching three specific implementation questions related to the revenue recognition standard, and they plan to discuss two of them with the board in February. Those issues are related to:

Licences of intellectual property. The staff is considering issues related to determining whether a licence is satisfied at a point in time or over time, as well as the guidance on accounting for sales- and usage-based royalties as they relate to licences of intellectual property.

Potential improvements have been identified that could more clearly define and delineate the line between licences that would be satisfied at a point in time and those that would be satisfied over time. The staff also is developing alternatives for the boards to consider that may improve the articulation of the scope and application of the royalties constraint.

Performance obligations in the context of a contract. This research is related to identifying promised goods or services in a contract with a customer. Some preparers appear to be questioning whether they should be identifying significantly more promised goods or services under the new revenue standard than deliverables under previous US GAAP or IFRS guidance.

Questions also are arising about if and when the shipment of goods is a promised service and therefore a separate performance obligation in a contract with a customer, particularly in circumstances where control of the goods transfers before shipment, such as in free on board (FOB) shipping.

In addition, preparers have asked questions related to determining whether goods or services are distinct in the context of a contract.

A third area, related to principal-vs.-agent analysis, has been researched, and drafts of possible improvements have been shared with selected stakeholders. FASB practice fellow Scott Muir said at the meeting that it’s unclear whether any potential improvements would substantially reduce the judgement that’s required in the standard.

Muir said that in some respects, the questions being received regarding judgement on this issue have been long-standing questions that exist in current US GAAP and IFRS and would be likely to continue under the current standard. As a result, the licences and performance obligation research have been prioritised, ahead of the principal-vs.-agent discussion.

Expedients considered

FASB’s staff also is considering a number of practical expedients related to the standard. These include expedients related to:

• Presentation of sales tax.
• Whether shipping is a separate performance obligation.
• A transition issue for contract modifications.

“We hope to complete that work fairly soon because we recognise that if they’re actually going to be helpful to anyone, we have to enact the expedients as quickly as we can,” FASB Assistant Director Cullen Walsh said at the meeting.

Along with FASB’s staff, the IASB staff is continuing to monitor the research and issues as they develop.

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