Collectibility threshold added in significant change to rev rec proposal

FASB and the International Accounting Standards Board (IASB) made a significant change in a major project Wednesday by adding a collectibility threshold to the converged financial reporting standard they are developing for revenue recognition.

In what’s scheduled to be their last joint meeting on a project that will significantly affect financial statements across the world, the boards voted to tentatively approve a collectibility threshold that contracts must meet for revenue to be recognized. Entities would have to determine that collectibility is probable in order to recognize revenue.

This threshold would introduce slight divergence into the standard, because “probable” means “more likely than not” under IFRS, but means “likely to occur” under U.S. GAAP, as defined in FASB Accounting Standards Codification Topic 450, Contingencies.

“We’re not really coming together, are we, because we’re saying the same word, but we’re meaning something different, which concerns me,” IASB member Stephen Cooper said during the joint meeting. “It’s not my preferred solution. I don’t think it fits with the model, but I guess I agree … that it’s an acceptable compromise.”

As the project moves toward an apparent conclusion, FASB plans to meet in a few weeks to discuss some minor issues and call for a formal vote on the proposal, FASB Chairman Russell Golden said. An IASB-only review of the proposal and vote also will take place in November, IASB Senior Technical Manager Allison McManus said.

The boards may give additional review and consideration to transition and the mandatory effective date because eight months have elapsed since they decided on those topics. According to the previous tentative decisions, the proposed standard would take effect for reporting periods beginning after Dec. 15, 2016 (FASB), or reporting periods beginning on or after Jan. 1, 2017 (IASB).

FASB and the IASB also made tentative decisions at Wednesday’s joint meeting on the objective of the constraint on estimates of variable consideration. The boards voted to:

• Require an entity to include an estimate of variable consideration in the transaction price to the extent that it is probable (U.S. GAAP) or highly probable (IFRS) that a significant revenue reversal will not occur. A significant revenue reversal will occur if there is a significant downward adjustment on the amount of cumulative revenue recognized from that contract with that customer.
• Require an entity to update the estimated transaction price at each reporting date.
• Create an exception to the constraint guidance when an entity licenses intellectual property in which the consideration is in the form of a sales- or usage-based royalty. In these cases, the entity shall include that consideration in the transaction price only when the subsequent sales or usage occurs.

The boards also voted to clarify the criteria for differentiating between licenses that provide a customer with access to the entity’s intellectual property as it exists at any given time, and licenses that provide a customer with a right to use the entity’s intellectual property at a point in time.

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