Boards agree to propose additional changes to revenue standard

By Ken Tysiac

FASB and the International Accounting Standards Board (IASB) voted Wednesday to propose additional changes to the converged revenue recognition standard to address implementation concerns of financial statement preparers.

Both boards voted to propose a practical expedient to the transition guidance to allay preparers’ concerns about evaluating contract modifications.

The proposed changes that came to a vote Wednesday add to previous proposed clarifications that were voted on in February. The possible clarifications agreed upon previously would relate to the standard’s guidance for licenses of intellectual property and identifying performance obligations.

The boards’ staffs will draft proposals seeking comment on the potential revisions.

There was no detailed discussion Wednesday of a possible delay in the standard’s effective date. FASB plans to discuss that issue in April.

The standard is scheduled to take effect for reporting periods beginning after Dec. 15, 2016, for U.S. public companies, or reporting periods beginning on or after Jan. 1, 2017, for companies that use IFRS.

FASB is considering changing the effective date because some preparers have said they need more time to change their systems and processes to implement the standard. The IASB has said there has not been a clamoring for a change from preparers who use IFRS.

As was the case during the February meeting, FASB agreed Wednesday to propose more clarifications than the IASB:

- Practical expedients upon transition – contract modifications and completed contracts: Preparers are concerned that the frequency and extent of contract modifications may make an evaluation of each of those modifications during transition complex and costly. In some cases, evaluation of modifications may not be possible because data no longer are available.

FASB and the IASB both agreed to propose a “use of hindsight” expedient. It would permit an entity to account for a modified contract by determining the transaction price at the contract modification adjustment date and performing a single stand-alone selling price allocation (with the benefit of hindsight) that would include all satisfied and unsatisfied performance obligations in the concept from inception.

The IASB also voted to propose a practical expedient to permit an entity electing the full retrospective approach to apply the new revenue standard retrospectively only to contracts that are not completed as of the beginning of the earliest period presented. FASB voted not to propose this expedient.

- Sales tax presentation – gross versus net:
FASB agreed to add a project to its technical agenda to propose revisions to the standard that would permit a practical expedient for presentation of sales taxes. FASB will propose the practical expedient to allow an election for net reporting for all in-scope sales taxes with disclosure of the policy. The IASB voted not to propose this revision.

- Revenue recognition – noncash consideration:
FASB voted to propose clarifying the guidance for determining the measurement date for noncash consideration, explaining that noncash consideration is measured at contract inception.

In addition, FASB voted to propose applying the constraint on variable consideration only to transactions in which the fair value of noncash consideration might vary for reasons other than the form of the consideration.

The IASB voted not to propose clarifying this guidance.

- Collectibility – accounting for cash received: FASB voted to propose revisions to the collectibility guidance.

Preparers have voiced concerns about applying the guidance in situations when they sign a contract to provide goods or services with a customer with low credit quality, or a customer whose credit quality deteriorates after the contract is signed.

FASB voted to improve the articulation of the guidance in ASC Paragraph 606-10-25-7[15] of the standard, and improve the articulation of the guidance for the collectibility threshold in Step 1 of the standard.

The IASB will make decisions at a future meeting about whether and how to clarify the collectibility guidance.

The staffs also updated the boards on their research regarding gross versus net revenue reporting. The boards did not make any decisions on this topic because the staffs plan to perform additional outreach and research and will discuss the topic at a later meeting.

Ken Tysiac is a JofA editorial director.


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