FASB makes additional revenue recognition clarifications

FASB issued another round of clarifications to the revenue recognition standard that it first issued jointly with the International Accounting Standards Board (IASB) in May 2014. In some cases, the boards reached different conclusions regarding clarifications.

FASB’s third set of clarifications was published in Accounting Standards Update (ASU) No. 2016-12, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. FASB also proposed an additional set of changes in Proposed ASU, Technical Corrections and Improvements to Update No. 2014-09, Revenue From Contracts With Customers.

The proposal would include clarifications to guidance on contract costs and on preproduction costs related to long-term supply arrangements. Comments will be accepted through July 2 and can be made at FASB’s website, fasb.org.

The completed ASU No. 2016-12:

• Clarifies the objective of the collectibility criterion in Step 1 of the revenue recognition process.
• Permits an entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price.
• Specifies that the measurement date for noncash consideration is contract inception and clarifies that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration.
• Provides a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented in accordance with the standard when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.
• Clarifies that a completed contract for the purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application.
• Permits an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts.
• Clarifies that an entity that retrospectively applies the guidance in the standard to each prior reporting period is not required to disclose the effect of the accounting change for the periods of adoption. But an entity is still required to disclose the effect of the changes on any prior periods retrospectively adjusted.