FASB Proposes Improvements in Two Areas of New Revenue Standardby
The Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update on May 12 that provides clarity in two areas of the new revenue recognition standard: performance obligations and licensing.
The improvements included in the proposed Accounting Standards Update, Revenue from Contracts with Customers (Topic 606)—Identifying Performance Obligations and Licensing, are based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders.
The proposal seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis, according to the FASB.
It has been nearly a year since the FASB and the International Accounting Standards Board (IASB) issued their final joint standard on how companies should recognize revenue from contracts with customers under both US Generally Accepted Accounting Principles and International Financial Reporting Standards (IFRS).
But after some companies expressed to the FASB that they would not have enough time to update their systems and processes before the rule changes were scheduled to take effect in 2017, the FASB issued a proposed Accounting Standards Update on April 29 that would delay the effective date of the revenue standard until 2018. The comment period for that proposal ends on May 29. The IASB also proposed deferring the revenue standard for one year for companies that use IFRS.
For the latest proposal on improvements to performance obligations and licensing, individuals and organizations have until June 30 to submit written comments to the FASB. Instructions on how to submit feedback can be found in the proposed Accounting Standards Update.
Identifying Performance Obligations
Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The FASB is proposing to reduce the cost and complexity of applying the guidance on identifying promised goods or services by adding the following:
- An entity would not be required to identify goods or services promised in a contract with a customer that are immaterial in the context of the contract.
- An entity would be permitted to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service.
Topic 606 also includes two criteria for assessing whether promises to transfer goods or services are separately identifiable:
- Improving the articulation of the principle for determining whether promises to transfer goods or services to a customer are separately identifiable. An entity would determine whether the nature of its promise in the contract is to transfer each of the goods or services, or whether the promise is to transfer a combined item (or items) to which the promised goods and/or services are inputs.
- Revising the related factors and examples so they align with the improved articulation of the separately identifiable principle.
Licensing Implementation Guidance
Topic 606 also includes implementation guidance on when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property. Under the proposal:
- An entity would not split a sales-based or usage-based royalty into a portion subject to the guidance on sales-based and usage-based royalties and a portion that is not subject to that guidance.
- The guidance on sales-based and usage-based royalties would apply to a sales-based or usage-based royalty whenever the predominant item to which the royalty relates is a license of intellectual property.