United States

FASB proposes more changes to new revenue and cost deferral guidance

FINANCIAL REPORTING INSIGHTS  | 

On May 18, 2016, the Financial Accounting Standards Board (FASB) issued proposed Accounting Standards Update (ASU), Technical Corrections and Improvements to Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The proposed ASU would make the following changes to the new revenue recognition and cost deferral guidance added to the FASB’s Accounting Standards Codification (ASC) by ASU 2014-09:

  • Preproduction costs related to long-term supply contracts. The proposed ASU would eliminate from the ASC the specific guidance on how to account for such costs. Instead, such costs would be accounted for in the same manner as other costs incurred to fulfill a customer contract.  
  • Impairment testing on deferred costs related to customer contracts. The proposed ASU would clarify the guidance on recognizing and measuring an impairment loss on deferred costs related to customer contracts as follows: (a) specify that the contract consideration included in the impairment test should include both the contract consideration the entity expects to receive in the future as well as the contract consideration the entity already has received, but has not yet recognized as revenue, and (b) specify that the impairment test should take into consideration expected contract renewals and extensions with the same customer. In addition, the proposed ASU would clarify which assets should be tested for impairment before (e.g., inventory) and after (e.g., property, plant and equipment, goodwill) deferred costs related to customer contracts are tested for impairment.   
  • Loss contracts for construction-type and production-type contracts. Because the FASB decided not to provide in ASU 2014-09 guidance on how to account for loss contracts, it retained and amended the current guidance on that subject in ASC 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The proposed ASU would clarify that the testing level to which this guidance applies is the combined contract level or the contract level (depending on whether the contract combination criteria in ASC 606-10-25-9 are met). However, the proposed ASU also would provide an accounting policy election that allows an entity to use performance obligations as the testing level for this guidance. If the accounting policy is elected, it would have to be applied in the same manner for similar contracts.
  • Insurance contracts. The proposed ASU would clarify that all contracts within the scope of ASC 944, Financial Services — Insurance, would be excluded from the scope of the new revenue recognition guidance and not just insurance contracts within the scope of ASC 944.
  • Fixed-odds wagering contracts of casinos. The proposed ASU would clarify that certain fixed-odds wagering contracts entered into by a casino are excluded from the scope of ASC 815-10, Derivatives and Hedging – Overall. In doing so, a specific statement would be added indicating that such contracts should be accounted for in accordance with the new revenue recognition guidance.
  • Offering costs of advisors to public and private funds. The proposed ASU would clarify that the cost-capitalization guidance in ASC 946-720, Financial Services — Investment Companies – Other Expenses, applies to offering costs incurred by advisors to both public and private funds.
  • Disclosures about remaining performance obligations. The new revenue recognition guidance requires disclosure of the aggregate amount of the transaction price allocated to wholly or partially unsatisfied performance obligations at the end of the reporting period. While two practical expedients to this disclosure requirement already are provided, the proposed ASU would provide a third practical expedient that allows an entity not to estimate variable consideration related to wholly or partially unsatisfied performance obligations for disclosure purposes when the entity was not required to estimate that consideration for revenue recognition purposes. If any of the practical expedients related to this disclosure requirement are elected, an entity would have to disclose its election of the practical expedient(s) and provide additional information about the contract and the variable consideration excluded from the disclosure.

In addition, the proposed ASU would make changes to a contract modification example to better align the example’s solution with the contract modification accounting model included in the new revenue recognition guidance.

Many of these proposed revisions resulted from the activities of the Joint Transition Resource Group, which was established by the FASB and the International Accounting Standards Board (IASB) to discuss application issues arising in practice with respect to the new revenue recognition and cost deferral guidance as originally issued in ASU 2014-09 and International Financial Reporting Standard (IFRS) 15, Revenue from Contracts with Customers (as originally issued), respectively. The FASB already has finalized many significant changes to the new guidance, all of which are discussed in our summary, Revenue recognition: In motion. For information about the revisions made to IFRS 15, refer to our article, IASB issues amendments to IFRS 15.

The new revenue recognition and cost deferral guidance 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 new guidance is effective in the year ending December 31, 2019, and interim periods in 2020.