FASB, IASB tentatively change revenue recognition constraint


The cumulative amount of revenue entities recognize under a new converged standard should not be subject to a significant revenue reversal or downward adjustment under guidance tentatively approved this week by FASB and the International Accounting Standards Board (IASB).

The boards met Monday by videoconference to discuss elements of the revenue recognition standard, which is scheduled to be released in the first half of next year.

Tentative decisions made by the boards were posted on FASB’s website. The boards decided that an entity would meet the objective of the constraint if the entity possesses experience or evidence supporting its assessment that the cumulative amount of revenue recognized should not be subject to a significant revenue reversal.

A reversal is a downward adjustment that might arise from subsequent changes in the estimate of the amount of variable consideration to which the entity is entitled. The standard would require an entity to reassess this objective as changing facts and circumstances come to light.

The assessment the entity would perform would be qualitative and would need to consider all the facts and circumstances associated with:

  • The risk of revenue reversal arising from an uncertain future event.
  • The magnitude of the reversal if that event were to occur.


The level of confidence would need to be relatively high for an entity to recognize revenue for variable consideration, but the boards did not define that level of confidence. The boards tentatively agreed to place the constraint in Step 3 of the five-step revenue recognition process described in the 2011 exposure draft, unless unintended consequences are identified in the drafting of the standard. The five-step process works as follows:

  • Step 1: Identify the contract with a customer.
  • Step 2: Identify the separate performance obligations in the contract.
  • Step 3: Determine the transaction price.
  • Step 4: Allocate the transaction price to the separate performance obligations in the contract.
  • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.


The language in the constraint objective in the 2011 ED would have limited the cumulative revenue an entity recognized to the amount to which it was reasonably assured to be entitled in exchange for satisfying performance obligations. That constraint was located in Step 5 in the ED.

“What we tried to do is get that balance right between helping the boards define the constraints in a way that achieves the objective … but at the same point not making it so restrictive that it inhibits the entities from providing useful information when they record revenue,” IASB Practice Fellow Gary Berchowitz told the boards.

The boards also made tentative decisions with regard to customer credit risk in contracts without a significant financing component. The boards decided that the transaction price and revenue should be measured at the amount to which the entity is entitled and not adjusted for customer credit risk.

Corresponding impairment losses arising from such contracts with customers would be recognized in accordance with financial instruments standards, presented prominently as an expense in the statement of comprehensive income.

In addition, the boards tentatively decided that the standard’s implementation guidance should require an assessment of the nature of a license arrangement that grants a customer a right to use intellectual property before applying the revenue recognition standard.

When the license promises to transfer a right, the performance obligation would be satisfied at a point in time. When the license provides access to intellectual property, the performance obligation is satisfied over time.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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