FASB Proposes Revisions to Revenue Recognition Standardby
The Financial Accounting Standards Board (FASB) issued an exposure draft on Sept. 30 that outlines changes that are being proposed to certain areas of its revenue recognition standard, which will go into effect starting in 2018.
The areas of the standard that the FASB is hoping to improve include collectibility, sales or other taxes collected from customers, noncash consideration, contract modifications, and completed contracts at transition.
The revisions in the proposed Accounting Standards Update, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, would not change the core principles contained in the standard's guidance, just in ânarrow aspectsâ of the standard, the FASB stated.
âThe board decided to add a project to its technical agenda to improve Topic 606 by reducing the risk of diversity in practice at initial application, and the cost and complexity of applying Topic 606 â both at transition and on an ongoing basis,â the FASB wrote in the exposure draft.
The changes the FASB is proposing include:
Collectibility. Clarifies the objective of the collectibility criterion in Step 1 (Identify the contract[s] with a customer) of the five-step process companies would use to achieve the standard's core principle of ârecognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.â
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.
The proposal also would add a new criterion to clarify when revenue would be recognized for a contract that fails to meet the criteria in Step 1.
Sales taxes and other similar taxes collected from customers. Permits an entity, as an accounting policy election, to exclude amounts collected from customers for all sales and other similar taxes from the transaction price.
Noncash consideration. Specifies that the measurement date for noncash consideration is contract inception. It also clarifies that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration.
Contract modifications at transition. Provides 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. 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 the expedient consistently to similar types of contracts.
Completed contracts at transition. Clarifies that a completed contract for purposes of transition is a contract for which all or substantially all of the revenue was recognized 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. In addition, an entity would be permitted to apply the modified retrospective transition approach either to all contracts or to completed contracts only.
The FASB said the proposed amendments are not identical to those proposed by the International Accounting Standards Board (IASB), and some are incremental to changes proposed by the IASB. The FASB expects that the amendments would not result in financial reporting outcomes that are significantly different from those reported under International Financial Reporting Standards for similar transactions.
Written comments on the proposed changes to the revenue standard must be sent to the FASB by Nov. 16. Instructions on how to submit comments are included in the exposure draft.