FASB proposes narrow changes to revenue recognition standard

The US Financial Accounting Standards Board (FASB) on Wednesday proposed changes that are designed to improve guidance on collectibility, noncash consideration, and completed contracts at transition in the new revenue recognition standard.

Proposed Accounting Standards Update, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, also would provide:

• A practical expedient for contract modifications at transition.
• An accounting policy election related to the presentation of sales taxes and other, similar taxes collected from customers.

The proposed changes would affect only narrow portions of the revenue recognition guidance that arose through questions to the transition resource group created by FASB and the International Accounting Standards Board (IASB) in an effort to aid implementation of the new, converged standard.

FASB and the IASB issued the standard jointly in May 2014, but implementation questions from financial statement preparers led the boards to consider certain narrow aspects of the standard, as well as the implementation date.

The standard is designed to provide guidance that’s more principles-based than the industry-specific rules US entities have used in the past. The boards also constructed the standard to enable comparability across industries and jurisdictions.

The amendments FASB proposed Wednesday would:

• Clarify the objective of the collectibility criterion in Step 1 of the standard, and add a new criterion to clarify when revenue would be recognised for a contract that fails to meet the criteria in Step 1.
• Specify that the measurement date for noncash consideration is contract inception, and clarify that the variable consideration guidance in the standard applies only to variability resulting from reasons other than the form of the consideration.
• Clarify that in a completed contract for purposes of transition, all or substantially all of the revenue was recognised under legacy GAAP before the date of initial application. Accounting for elements of a contract that do not affect revenue under legacy GAAP would be irrelevant to the assessment of whether a contract is complete. Also an entity would be permitted to apply the modified retrospective transition approach either to all contracts or to completed contracts only.

The proposed amendments are not identical to changes proposed by the IASB, but FASB expects that the proposal would not result in financial outcomes that are significantly different from those reported under IFRS for similar transactions.

FASB is seeking comments, which can be submitted at the board’s website, by November 16th.

Previously, FASB proposed changes related to licensing and identifying performance obligations in the revenue recognition standard and delayed the effective date of the standard. The IASB also has proposed changes to the standard and delayed the effective date.

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