FASB affirms revenue recognition clarifications

The US Financial Accounting Standards Board (FASB) affirmed narrow-scope changes and practical expedients to its revenue recognition standard this week on issues including collectibility, contract modifications, and completed contracts at transition.

In response to feedback from financial statement preparers and others, FASB has been considering clarifying changes to its revenue recognition standard, which was issued in May 2014. The standard was designed to replace industry-specific guidance with a principles-based approach that would promote comparability across industries as well as across jurisdictions as a result of a convergence effort with the International Accounting Standards Board (IASB).

When preparers sought clarifications to the standard through the boards’ joint transition group, the boards engaged in additional standard-setting. FASB and the IASB agreed on some clarifications but disagreed on others.

Together, the boards in December affirmed amendments they had proposed to clarify principal vs. agent guidance in the standard.

The IASB completed its decision-making on clarifications to its revenue recognition standard in January and expects to publish its clarifications in March.

FASB continues to work on clarifying its guidance. In redeliberations this week, FASB considered feedback on Proposed Accounting Standards Update, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The board affirmed most of the amendments in the proposal, which was issued in September.

FASB directed the staff to draft a final accounting standards update for vote by written ballot.
 
With regard to collectibility, FASB affirmed its proposals to:

• Clarify the objective of the collectibility criterion in Paragraph 606-10-25-1. 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.
• Add a new criterion to Paragraph 606-10-25-7 clarifying when revenue would be recognised for a contract that fails to meet the criteria in Paragraph 606-10-25-1. That criterion will allow an entity to recognise revenue in the amount of consideration received when the entity has transferred control of the goods or services, the entity has stopped transferring additional goods or services and has no obligation to transfer additional goods or services, and the consideration received from the customer is nonrefundable.

The board decided to retain the collectibility threshold in Paragraph 606-10-25-1(e). The threshold is probable, which is defined in Topic 606 as “likely to occur.”

After redeliberating issues related to contract modifications and completed contracts at transition, FASB affirmed its proposals to:

• Provide a practical expedient that 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 in accordance with the guidance in Topic 606. Thus, an entity would not be required to separately evaluate the effects of each contract modification. An entity that chooses to apply the practical expedient would apply it consistently to similar types of contracts.
• Clarify that a completed contract for purposes of transition is a contract for which 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 completed.
• Permit an entity to apply the modified retrospective transition approach either to all contracts at the date of initial application or only to contracts that are not completed at the date of initial application.

FASB’s discussions of noncash consideration led to affirmation of its proposals to:

• Specify that the measurement date for noncash consideration is contract inception.
• Clarify that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration.

The board decided not to specify the definition of fair value related to noncash consideration.

FASB also affirmed its proposal to permit an accounting policy election to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price.

The board did not reach a decision on whether to add a practical expedient for the disclosure requirement for remaining performance obligations in Paragraphs 606-10-50-13 through 606-10-50-14. The board asked its staff to perform additional research on the topic, and will discuss the practical expedient at a later date.

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