FASB revises revenue guidance on licenses and performance obligations
FINANCIAL REPORTING INSIGHTS |
On April 14, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This ASU makes the following changes to the guidance originally included in ASU 2014-09, Revenue from Contracts with Customers (Topic 606):
- Identification of promised goods or services. Guidance has been added with respect to accounting for goods or services that are immaterial in the context of the contract.
- Treating a series of distinct goods or services as a performance obligation. An example has been added to illustrate whether a series of distinct goods or services should be accounted for as one performance obligation and, if so, how variable consideration related to such a performance obligation should be recognized.
- Separately identifiable from other promises in the contract. A promised good or service must meet two criteria to be considered a performance obligation (i.e., a unit of account), one of which is that it must be separately identifiable from other promises in the contract (i.e., distinct within the context of the contract). The objective of that criterion has been clarified, and the factors used to determine whether it has been met have been aligned with the clarified objective. In addition, revised and additional examples illustrating the clarified objective and re-aligned factors have been provided.
- Contractual restrictions in license arrangements. The guidance on making the following determinations has been clarified: (a) whether contractual restrictions included in a license of intellectual property (IP) should affect the identification of performance obligations and (b) whether a performance obligation is satisfied over time or at a point in time.
- Shipping and handling activities. Guidance has been added with respect to the accounting for both shipping and handling activities that occur: (a) before the customer obtains control of the promised goods (in which case the entity should account for them as fulfillment activities) and (b) after the customer obtains control of the promised goods (in which case the entity may make an accounting policy election to account for them as fulfillment activities).
- Application of the constraint on sales-based and usage-based royalties. The guidance on when and how the constraint on sales-based and usage-based royalties should be applied has been clarified.
- Determining the nature of the entity’s promise in granting a license. Significant revisions have been made related to determining whether a license of IP represents the right to access the entity’s IP (in which case revenue is recognized over time) or the right to use the entity’s IP (in which case revenue is recognized at a point in time). Existing examples have been revised and new examples added to better illustrate how this determination should be made. In addition, guidance has been added on how the nature of the entity’s promise in granting a license should be considered in determining how and when to recognize revenue for a single performance obligation consisting of a license and other promised goods or services.
- Timing of recognizing revenue from a license of IP. Guidance has been provided with respect to when an entity may begin to recognize revenue from a license of IP.
Additional information about each of these revisions, as well as a complete list of all of the pending and finalized revisions to the new guidance, can be found in our summary, Revenue recognition: In motion. These revisions have resulted from the activities of the Joint Transition Resource Group established by the FASB and International Accounting Standards Board to discuss application issues that have arisen in practice with respect applying Topic 606 as originally issued in ASU 2014-09.
The new guidance in ASC 606, including the revisions made by ASU 2016-10, 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.