Revenue transition group debates difficult implementation issues

By Ken Tysiac

A lively discussion by a new revenue recognition transition resource group gave FASB and the International Accounting Standards Board (IASB) plenty of views to consider as they ponder how to help preparers with implementation questions related to the revenue recognition standard issued in May.

The resource group, which met for the first time Friday, does not issue interpretations or guidance. Rather, as a meeting of preparers, auditors, and financial statement users, the resource group is tasked with discussing implementation problems and questions submitted by interested parties.

Following the discussion by videoconference in London and Norwalk, Conn., FASB and the IASB will decide what action—if any—needs to be taken to address the questions presented in the transition resource group meetings.

Three of the four issues that were discussed produced spirited debate and plenty of questions for the boards to consider. Many of the discussions ended with little or no consensus or resolution, though.

“We successfully discussed, I think, four reasonably good issues, and had a good discussion,” IASB Vice Chairman Ian Mackintosh said at the end of the meeting. “We’ll try to work out what our conclusion, if any, is after those discussions.”

The first topic of conversation was a concern that there may be multiple interpretations of application of the guidance about determining and accounting for whether the entity is a principal or an agent to contracts for certain intangible goods and services.

The video gaming industry was one example of a potential area for confusion cited in the meeting documents. The documents cited publishers of online games that sell virtual goods to players to enhance their game-playing experience, where the sale goes through an intermediary such as a social networking website or mobile app store.

Another example of an area of potential confusion cited during the meeting was gift cards. Resource group members debated the application of the standard to a restaurant, for example, whose gift cards may be sold to the public at a grocery store or pharmacy.

Other topics discussed included:

Revenue or cost reduction. There is concern that there may be multiple interpretations of the application of the guidance in determining whether to present certain items billed to customers as revenue or as a reduction of costs. Examples included shipping and handling fees; reimbursements of other out-of-pocket expenses; and taxes or other assessments collected from customers and remitted to governmental authorities for which explicit guidance in U.S. GAAP was superseded by the new revenue recognition standard.

Sales-based and usage-based royalties. Different interpretations exist about applying the new standard to sales-based and usage-based royalties promised in exchange for licenses of intellectual property to a contract that includes a promise to deliver both:

  • One or more licenses of intellectual property, and
  • One or more goods or services that are not licenses of intellectual property.

Software licenses commonly sold with post-contract customer support, other services, and/or hardware was one example cited. Another example was franchise licenses sold with consulting or training services and/or equipment.

Impairment of capitalized contract costs. Clarity was sought on impairment testing of the asset recognized from the incremental costs of obtaining a contract or costs incurred in fulfilling a contract with a customer, and the use of the principles for determining the transaction price to ascertain the cash flows that the entity expects to receive in exchange for the goods or services to which the asset relates, especially the question of whether or not the consideration expected to be received during renewal or extension periods should be considered in the impairment analysis. There was little debate on this topic, as the members of the group overwhelmingly agreed on View 2, which states that renewals and extensions may be considered for the impairment test.

FASB Vice Chairman James Kroeker said that after issues are discussed by the transition resource group, the boards hope to be able to provide updates at the following meeting on their assessment of the issues. The next meeting is scheduled for Oct. 31.

“Sometimes the update at the next meeting might be a status update, meaning that we don’t have anything to tell you, but it’s still in play,” Kroeker said. “But we do hope to be able to come back … and say, ‘Here’s what we heard, and here are the intended steps,’ whether it’s no action, or it continues to be an issue, or we feel there’s education needed.”

More information on the new revenue recognition standard is available on the AICPA’s website and in an audio webcast produced by the AICPA.

Ken Tysiac ( ) is a JofA editorial director.

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