FASB brought U.S. GAAP closer to the approach FASB and the International Accounting Standards Board (IASB) have outlined in their preliminary views documents for their joint revenue recognition project that is scheduled for completion in 2011.
FASB ratified the consensus approach reached at the Sept. 9–10 Emerging Issues Task Force (EITF) meeting on two EITF issues related to revenue recognition. The approach taken in these EITFs is basically the same as the approach revealed in FASB’s preliminary views document for its joint revenue recognition project with the IASB, according to AICPA Accounting Standards Executive Committee (AcSEC) Chairman Jay Hanson, who is also a member of the EITF.
The EITFs, which can be adopted early, show FASB’s commitment to the approach taken in the preliminary views document, says Glenn Bradley, who chairs the AcSEC task force that prepared the AcSEC comment letter on the document.
The first, EITF Issue no. 08-1, Revenue Arrangements with Multiple Deliverables, applies to multiple-deliverable revenue arrangements that are currently within the scope of FASB Accounting Standards Codification (ASC) Subtopic 605-25 (previously included in EITF Issue no. 00-21, Revenue Arrangements with Multiple Deliverables).
EITF Issue no. 08-01 provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. It also requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price. The guidance eliminates the use of the residual method, requires entities to allocate revenue using the relative-selling-price method and significantly expands the disclosure requirements for multiple-deliverable revenue arrangements.
The second, EITF Issue no. 09-3, Certain Revenue Arrangements That Include Software Elements, focuses on determining which arrangements are within the scope of the software revenue guidance in ASC Topic 985 (previously included in AICPA Statement of Position no. 97-2, Software Revenue Recognition) and which are not. This EITF removes tangible products from the scope of the software revenue guidance if the products contain both software and non-software components that function together to deliver a product’s essential functionality and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue guidance.
Both EITFs have the same disclosure requirements, effective date and transition methods. They are effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, an entity can elect to adopt the EITFs retrospectively. Early application is permitted; however, entities must adopt both EITFs in the same period using the same transition method. In the initial year of application, companies are required to make qualitative and quantitative disclosures about the impacts of the changes.
The EITFs are incorporated into the FASB Accounting Standards Codification by ASU 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, and ASU 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. The ASUs are available at asc.fasb.org (login required).
Both AcSEC and the AICPA accounting standards staff have assessed the potential impact of the preliminary views document and have provided comments to FASB. AICPA staff members have summarized the issues and provided links to resources including the potential impact on specific industries in a frequently asked questions document available at tinyurl.com/ybr7hnq.