United States

Revenue recognition: In motion

INSIGHT ARTICLE

[Updated September 30, 2016]

In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued substantially converged revenue recognition standards. The new guidance provides a comprehensive revenue recognition model that replaces virtually all existing revenue recognition guidance in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards. For additional information about the standard issued by the FASB, Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), refer to our white paper, Revenue recognition: A whole new world.

To help address issues identified by entities as they implement the new guidance, the FASB and IASB established the Joint Transition Resource Group (TRG). Constituents submit issues to the TRG for discussion and to the extent the TRG discussions on an issue lead the FASB and (or) IASB to believe additional standard setting is necessary, they add the issue to their respective agendas. The TRG has met several times since the new guidance was issued. Summaries of these meetings can be found on the FASB’s website. These summaries provide information related to both those issues the TRG does not think require additional standard setting as well as those issues the TRG believes may require additional standard setting by the FASB and IASB.

The FASB and IASB have added projects to their agendas to address several of the TRG issues. While there are some issues where the FASB and IASB are moving in lockstep, there are also several issues where that is not the case. For many issues, the FASB has decided to undertake additional standard setting (e.g., provide clarifications or additional guidance) while the IASB has decided not to do so. In addition, while the FASB has scheduled and held TRG meetings in 2016, the IASB has not, and does not plan to, schedule or hold any further meetings.

The issues discussed by the FASB thus far include the following:

Scope

Step 1: Identify the contract with a customer

Step 2: Identify the performance obligations in a contract

Step 3: Determine the transaction price

Step 5: Recognizing revenue when (or as) each performance obligation is satisfied

Cost deferral

Other

The table below provides information about each of these issues, including the decisions reached by the FASB and their overall status. For additional information about the TRG issues discussed by the IASB and the IASB’s decisions on those issues, refer to the IASB’s website. In addition, on April 12, 2016, the IASB issued amendments to IFRS 15, Revenue from Contracts with Customers. For additional information about these amendments, refer to our article, IASB issues amendments to IFRS 15. The IASB has no further changes to IFRS 15 pending.

Issue and decisions reached

Additional resources

Status

Scope: Insurance contracts

The FASB proposed clarifying that all contracts within the scope of Topic 944, Financial Services—Insurance, in the Accounting Standards Codification (ASC) should be excluded from the scope of Topic 606 and not just insurance contracts within the scope of Topic 944.

RSM US LLP (RSM) article, FASB proposes more changes to new revenue and cost deferral guidance

Proposed ASU issued on May 18, 2016

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Scope: Fixed-odds wagering contracts of casinos

The FASB proposed clarifying that certain fixed-odds wagering contracts entered into by a casino should be excluded from the scope of ASC Subtopic 815-10, Derivatives and Hedging – Overall. In doing so, the FASB proposed adding a specific statement indicating that such contracts should be accounted for in accordance with Topic 606.

RSM article, FASB proposes more changes to new revenue and cost deferral guidance

Proposed ASU issued on May 18, 2016

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Scope: Derecognition guidance for nonfinancial assets

The FASB proposed clarifying that the guidance in ASC Subtopic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, should be applied to the derecognition of all nonfinancial assets and in substance nonfinancial assets unless other specific guidance applies. The FASB also proposed guidance clarifying the accounting for partial sales of nonfinancial assets.

RSM article, Proposed clarification of derecognition guidance for nonfinancial assets

Proposed ASU issued on June 6, 2016

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Scope: Loan guarantee fees

The FASB proposed clarifying that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606.

RSM article, FASB proposes additional corrections to new revenue guidance

Proposed ASU issued on September 19, 2016

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Step 1: Identify the contract with a customer – Assessing collectibility

The FASB clarified the objective of the collectibility criterion that must be met (along with several other criteria) before a customer contract is accounted for using the revenue recognition model in Topic 606. As clarified, the objective of the collectibility criterion is to assist in determining whether a substantive contract exists between the entity and the customer. In addition, the FASB clarified that the collectibility criterion is focused on collection of substantially all (and not all) of the consideration to which the entity will be entitled to in exchange for the promised goods or services that will be transferred to the customer (which may not be all of the promised goods or services in the contract). The FASB also added more guidance and examples to better explain and illustrate how the collectibility criterion should be applied.

RSM article, FASB addresses various issues in latest changes to new revenue guidance

Final ASU issued on May 9, 2016


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Step 1: Identify the contract with a customer – Accounting when collectibility is not probable

The FASB added an additional event under which revenue should be recognized when a contract does not meet the necessary criteria to be accounted for in accordance with the revenue recognition model in Topic 606 (one of which relates to determining whether collectibility is probable [see the previous issue in this table]). The additional event occurs 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.

RSM article, FASB addresses various issues in latest changes to new revenue guidance

Final ASU issued on May 9, 2016

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Step 2: Identify the performance obligations in a contract – Identification of promised goods or services

The FASB revised its guidance on identifying promised goods or services to indicate that goods or services that are immaterial in the context of the contract do not have to be identified as promised goods or services for purposes of further evaluation under the rest of the revenue recognition model. This revision does not change the requirements in Topic 606 used to evaluate optional goods or services to determine whether they represent a material right to the customer. In addition, the revisions indicate that the costs related to goods or services that are immaterial in the context of the contract should be accrued when revenue is recognized before all of the promised goods or services are transferred to the customer.

RSM article, FASB revises new revenue guidance on licenses and performance obligations

Final ASU issued on April 14, 2016

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Step 2: Identify the performance obligations in a contract – Treating a series of distinct goods or services as a performance obligation

The FASB revised its guidance to provide an example illustrating 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.

RSM article, FASB revises new revenue guidance on licenses and performance obligations

Final ASU issued on April 14, 2016

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Step 2: Identify the performance obligations in a contract – 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 FASB revised its guidance to: (a) clarify the objective of this criterion and (b) align the factors used to determine whether this criterion has been met with the clarified objective. In addition, the FASB revised existing examples and added more examples to better illustrate how the clarified objective and re-aligned factors should be applied.

RSM article, FASB revises new revenue guidance on licenses and performance obligations

Final ASU issued on April 14, 2016

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Step 2: Identify the performance obligations in a contract – Contractual restrictions in license arrangements

The FASB revised its guidance to clarify that when restrictions of time, geographical region or use are included in a license of intellectual property (IP), they represent attributes of the license and should not affect the identification of a contract’s promised goods or services or the determination as to whether a performance obligation is satisfied over time or at a point in time.

RSM article, FASB revises new revenue guidance on licenses and performance obligations

Final ASU issued on April 14, 2016

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Step 2: Identify the performance obligations in a contract – Shipping and handling activities

The FASB revised its guidance to indicate that shipping and handling activities that occur before the customer obtains control of the promised goods should be considered fulfillment activities and not promised services that have to be evaluated under the rest of the revenue recognition model. In addition, the FASB revised its guidance to allow an entity to make an accounting policy election to treat shipping and handling activities that occur after the customer obtains control of the promised goods as fulfillment activities and not promised services that have to be evaluated under the rest of the revenue recognition model. In addition, the revisions indicate that the costs related to shipping and handling activities should be accrued when revenue is recognized before those activities occur.

RSM article, FASB revises new revenue guidance on licenses and performance obligations

Final ASU issued on April 14, 2016

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Step 3: Determine the transaction price – Noncash consideration

The FASB clarified the accounting for noncash consideration 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). The FASB also clarified that 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.

RSM article, FASB addresses various issues in latest changes to new revenue guidance

Final ASU issued on May 9, 2016

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Step 3: Determine the transaction price – Application of the constraint on sales-based and usage-based royalties

The constraint on sales-based and usage-based royalties results in such royalties not being included in the transaction price (and, ultimately, revenue) until the later of: (a) the resolution of the related uncertainty (i.e., sales or usage occur) or (b) the satisfaction of the related performance obligation in whole or in part. The FASB revised its guidance to clarify that this constraint applies when the only, or predominant, item to which the royalty relates is the license of IP and that it should only be applied on an all-or-nothing basis (i.e., it should not be applied to just a part of the royalty stream). The FASB also revised certain examples to illustrate how the constraint should be applied when revenue for the related license of IP is recognized over time.

RSM article, FASB revises new revenue guidance on licenses and performance obligations

Final ASU issued on April 14, 2016

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Step 3: Determine the transaction price – Sales taxes collected from customers

The FASB added an accounting policy election that allows an entity to exclude sales and similar taxes collected from customers from the transaction price (i.e., the amount ultimately recognized as revenue). If an entity does not elect this accounting policy, it must apply the principal vs. agent guidance in Topic 606 to determine whether sales and similar taxes should or should not be included in the transaction price.

RSM article, FASB addresses various issues in latest changes to new revenue guidance

Final ASU issued on May 9, 2016

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Step 5: Recognizing revenue when (or as) each performance obligation is satisfied – Determining the nature of the entity’s promise in granting a license

The FASB made significant revisions to its accounting model for licenses. Based on those revisions, whether the 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) depends on whether the IP has significant standalone functionality. If it does not have significant standalone functionality, the IP should be considered symbolic IP (e.g., a trade name), and a license for symbolic IP is considered a right to access the IP. If it does have significant standalone functionality (e.g., software), it should be considered functional IP. A license for functional IP is considered a right to use the IP, unless certain narrowly-focused criteria are met. The FASB revised existing examples and added more examples to illustrate how its revised accounting model for licenses should be applied. The FASB also added guidance to indicate that the nature of the license (right to use vs. right to access) should be taken into consideration in determining how and when to recognize revenue for a single performance obligation consisting of a license and other promised goods or services (because the license and other promised goods or services did not meet the criteria to be considered separate performance obligations).

RSM article, FASB revises new revenue guidance on licenses and performance obligations

Final ASU issued on April 14, 2016

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Step 5: Recognizing revenue when (or as) each performance obligation is satisfied – Timing of recognizing revenue from a license of IP

The FASB revised its guidance to indicate that revenue from a license of IP cannot be recognized before both of the following occur: (a) the entity provides the customer with a copy of the IP or otherwise makes the IP available to the customer and (b) the beginning of the license period (which, when the license is being renewed, means the beginning of the renewal period).

RSM article, FASB revises new revenue guidance on licenses and performance obligations

Final ASU issued on April 14, 2016

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Cost deferral: Preproduction costs related to long-term supply contracts

The FASB proposed: (a) eliminating the specific guidance on how to account for preproduction costs related to long-term supply contracts from the ASC and (b) requiring such costs to be accounted for in the same manner as other costs incurred to fulfill a customer contract.

RSM article, FASB proposes more changes to new revenue and cost deferral guidance

Proposed ASU issued on May 18, 2016

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Cost deferral: Impairment testing on deferred costs related to customer contracts

The FASB proposed clarifying the guidance on recognizing and measuring an impairment loss on deferred costs related to customer contracts as follows: (a) specifying 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 has already received, but has not yet recognized as revenue and (b) specifying that the impairment test should take into consideration expected contract renewals and extensions with the same customer. The FASB also proposed clarifying 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.

RSM article, FASB proposes more changes to new revenue and cost deferral guidance

Proposed ASU issued on May 18, 2016

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Cost deferral: Offering costs of advisors to public and private funds

The FASB proposed clarifying that the cost-capitalization guidance in ASC Topic 946-720, Financial Services—Investment Companies – Other Expenses, applies to offering costs incurred by advisors to both public and private funds.

RSM article, FASB proposes more changes to new revenue and cost deferral guidance

Proposed ASU issued on May 18, 2016

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Cost deferral: Advertising costs

The FASB proposed reinstating the guidance on the accrual of advertising costs that had been included within Subtopic 340-20, Other Assets and Deferred Costs – Capitalized Advertising Costs, and was superseded by ASU 2014-09.

RSM article, FASB proposes additional corrections to new revenue guidance

Proposed ASU issued on September 19, 2016

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Loss contracts: Construction-type and production-type contracts

The FASB proposed clarifying the level at which the loss contract guidance in ASC Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts, should be applied. Under the proposed clarification, the loss contract guidance would be applied at 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 FASB also proposed an accounting policy election that would allow an entity to apply the loss contract guidance at the performance obligation level. If the accounting policy is elected, it would have to be applied in the same manner to similar contracts.

RSM article, FASB proposes more changes to new revenue and cost deferral guidance

Proposed ASU issued on May 18, 2016

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Presentation – Principal vs. agent considerations

The FASB revised its principal vs. agent guidance to include the following two key steps: (a) identifying the specified goods or services being provided to the customer and (b) determining whether the entity obtains control of the specified goods or services before transferring control of those goods or services to the customer. Additional information about each of these steps is included in the revised guidance, including better explanation of the supporting role that the principal vs. agent indicators (e.g., primary responsibility for fulfillment, inventory risk) play in determining whether the entity obtains control of the specified goods or services before transferring control of those goods or services to the customer. In addition, the FASB clarified the existing examples and added two examples to better illustrate application of the revised principal vs. agent guidance.

RSM summary, Revenue recognition: FASB revises new principal vs. agent guidance

Final ASU issued on March 17, 2016

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Presentation – Contract asset versus receivable

The FASB proposed changing Example 38, Case B in Topic 606 to provide a better link between this analysis and the receivables presentation guidance in Topic 606 by no longer indicating that an entity cannot record a receivable before its due date.

RSM article, FASB proposes additional corrections to new revenue guidance

Proposed ASU issued on September 19, 2016

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Presentation – Refund liability

The FASB proposed removing from the journal entry in Example 40 in Topic 606 the reference to the term contract liability so it would no longer indicate that a refund liability should be characterized as a contract liability.

RSM article, FASB proposes additional corrections to new revenue guidance

Proposed ASU issued on September 19, 2016

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Disclosures – Remaining performance obligations

The FASB proposed providing a third practical expedient related to disclosing the aggregate amount of the transaction price allocated to wholly or partially unsatisfied performance obligations at the end of the reporting period. Under the proposed practical expedient, an entity would be allowed to not estimate variable consideration related to wholly or partially unsatisfied performance obligations for disclosure purposes when it is not required to do so for revenue recognition purposes. When the proposed practical expedient (or one or both of the other practical expedients related to the disclosure requirement) is elected, the FASB also proposed requiring an entity to disclose its election of the practical expedient(s) and to provide additional information about the contract and the variable consideration excluded from the disclosure.

RSM article, FASB proposes more changes to new revenue and cost deferral guidance

Proposed ASU issued on May 18, 2016

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Effective date – Deferral

The FASB has provided a one-year delay in the ASU’s effective date and is allowing early adoption for all entities as of the original effective date for public business entities.

RSM article, It’s official: Effective date of new revenue guidance deferred by one year

Final ASU issued on August 12, 2015

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Transition – Contract modifications

The FASB provided an additional practical expedient to the transition guidance in Topic 606 that allows an entity to consider contract modifications in the aggregate (for those that occurred before the initial application date for Topic 606) when determining the following in accordance with Topic 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.

RSM article, FASB addresses various issues in latest changes to new revenue guidance

Final ASU issued on May 9, 2016

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Transition – Definition of completed contract

The FASB clarified the definition of a completed contract for transition purposes 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. GAAP before the date of initial application of Topic 606.

RSM article, FASB addresses various issues in latest changes to new revenue guidance

Final ASU issued on May 9, 2016

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Transition – Modified retrospective transition approach

The FASB provided an option that allows an entity to apply the modified retrospective transition approach 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 issue in this table) at the date of initial application.

RSM article, FASB addresses various issues in latest changes to new revenue guidance

Final ASU issued on May 9, 2016

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Transition – Disclosures under full retrospective method

The FASB clarified that an entity that elects the full retrospective transition approach does not have to disclose the effects of applying Topic 606 on the current period. However, the entity must still disclose the effects of applying Topic 606 on those prior periods that have been retrospectively adjusted.

RSM article, FASB addresses various issues in latest changes to new revenue guidance

Final ASU issued on May 9, 2016

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