FASB assists with licensing guidance, identifying performance obligations

By Ken Tysiac

FASB on Thursday issued guidance designed to assist preparers with identifying performance obligations and implementing licensing guidance under the new revenue recognition standard.

Along with the International Accounting Standards Board (IASB), FASB issued the converged revenue recognition standard in May 2014. The standard is designed to provide principles-based guidance and enable comparability across industries and jurisdictions for some of the most important metrics in financial reporting.

Through the boards’ Transition Resource Group, preparers informed FASB and the IASB of implementation concerns related to the standard. The boards issued a one-year delay in the effective date of the standard and have been working to address the implementation concerns.

The boards worked together on developing clarifications but did not always reach the same conclusions. In March, FASB issued an update related to determining whether an entity is a principal or an agent, and the IASB earlier this week issued Clarifications to IFRS 15.

In the guidance issued Thursday, Accounting Standards Update (ASU) No. 2016-10, Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing, FASB addressed identifying performance obligations and implementing licensing guidance.

FASB also is expected to issue an ASU related to the revenue recognition standard on collectibility, contract modifications, completed contracts at transition, and noncash considerations.

In ASU 2016-10, in an effort to reduce the cost and complexity of applying the guidance for identifying performance obligations, FASB added the following guidance:

  • An entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
  • An entity is permitted, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service.

Under the revenue recognition standard, an entity evaluates whether promised goods and services are distinct to identify performance obligations in a contract. One of the two criteria for determining whether promises to transfer goods or services are distinct is that the promises are separately identifiable. The update issued Thursday is designed to assist in the assessment of whether promises are separately identifiable by:

  • Emphasizing that an entity determines whether the nature of its promise in the contract is to transfer each of the goods or services, or whether the promise is to transfer a combined item (or items) to which the promised goods and/or services are inputs.
  • Revising the related factors and examples to align with the improved articulation of the separately identifiable principle.

Licensing guidance

ASU No. 2016-10 also is designed to clarify guidance in the revenue recognition standard on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time).

In addition, the update clarifies the scope and applicability of implementation guidance on when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property.

The amendments in FASB’s update are not identical to the amendments the IASB made in Clarifications to IFRS 15. FASB acknowledges that there are three principal areas of its update that could create minor differences in financial reporting outcomes between U.S. GAAP and IFRS.

But FASB expects that the amendments generally will maintain the convergence that was achieved in the revenue recognition standard by reducing the potential for diversity arising in practice.

ASU No. 2016-10 will take effect at the same time as the new revenue recognition standard.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

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