FASB addresses various issues in latest changes to new revenue guidance
FINANCIAL REPORTING INSIGHTS |
On May 9, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This ASU makes the following changes to the guidance originally included in ASU 2014-09, Revenue from Contracts with Customers (Topic 606):
- Assessing collectibility in determining whether a contract exists. A customer contract must meet certain criteria (the contract existence criteria) before it is accounted for using the revenue recognition model in Topic 606 of the FASB’s Accounting Standards Codification (ASC). One of those criteria requires it to be probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. The objective of that requirement has been clarified to emphasize that its purpose is to assist in determining whether a substantive contract exists between the entity and the customer. Additional guidance and examples have been added to clarify how this requirement should be applied.
- Accounting when the contract existence criteria are not met (e.g., collectibility is not probable). In situations in which one or more of the contract existence criteria (see the previous bullet point) are not met at contract inception, the entity recognizes a liability for any consideration received until the earlier of: (a) all criteria are subsequently met (at which point the revenue recognition model in ASC 606 is applied) or (b) one of the events in ASC 606-10-25-7 occurs (at which point the liability is recognized as revenue). Another event has been added to ASC 606-10-25-7 that provides for the liability to be recognized as revenue when all of the following are true: (a) the consideration received by the entity is nonrefundable, (b) the entity has transferred control of the goods or services to which the nonrefundable consideration relates and (c) the entity has stopped transferring additional goods or services to the customer and is under no obligation to transfer any additional goods or services.
- Excluding from the transaction price sales (and similar) taxes collected from customers. An accounting policy election has been added that allows an entity to exclude from the transaction price (i.e., the amount ultimately recognized as revenue) sales (and similar) taxes collected from customers.
- Measuring noncash consideration. The guidance on noncash consideration has been clarified to indicate that such consideration should be measured at its fair value at contract inception and should not be adjusted after contract inception for changes in its fair value due to the form of the consideration (e.g., changes in the entity’s stock price). In addition, when the amount of noncash consideration varies due to reasons other than the form of the consideration (e.g., it varies as a result of the entity’s performance), that variability should be treated as variable consideration.
- Transition — Practical expedient for contract modifications. A practical expedient has been added to the transition guidance in ASC 606 that allows an entity to consider contract modifications in the aggregate (for those that occurred before the beginning of the earliest reporting period presented in accordance with ASC 606) when determining the following in accordance with ASC 606: (a) the satisfied and unsatisfied performance obligations, (b) the transaction price and (c) the amount of the transaction price that should be allocated to the satisfied and unsatisfied performance obligations.
- Transition — Definition of completed contract. The definition of a completed contract for transition purposes has been clarified to indicate that a completed contract is one for which all (or substantially all) of the revenue was recognized in accordance with legacy U.S. generally accepted accounting principles before the date of initial application of ASC 606.
- Transition — Modified retrospective transition approach. If the modified retrospective transition approach is elected, an entity may choose to apply it to either: (a) all contracts at the date of initial application or (b) only those contracts that are not considered completed contracts (see the previous bullet point) at the date of initial application.
- Transition — Disclosures under the full retrospective transition approach. An entity that elects the full retrospective transition approach does not have to disclose the effects of applying ASC 606 on the current period. However, the entity must still disclose the effects of applying ASC 606 on those prior periods that have been retrospectively adjusted.
These revisions resulted from the activities of the Joint Transition Resource Group established by the FASB and International Accounting Standards Board (IASB) to discuss application issues arising in practice with respect to applying ASC 606 as originally issued in ASU 2014-09 and International Financial Reporting Standard (IFRS) 15, Revenue from Contracts with Customers (as originally issued), respectively. For information about other revisions to ASC 606 recently issued by the FASB, refer to these articles: (a) FASB revises new revenue guidance on licenses and performance obligations and (b) Revenue recognition: FASB revises new principal vs. agent guidance. For information about the revisions made to IFRS 15, refer to our article, IASB issues amendments to IFRS 15.
The guidance in ASC 606 (as revised) is effective in the quarter and year beginning January 1, 2018, for public entities with a calendar year-end. For all other entities with a calendar year-end, the guidance in ASC 606 is effective in the year ending December 31, 2019, and interim periods in 2020.