FASB makes additional revenue recognition clarifications

FASB issued a third round of clarifications to its revenue recognition standard on Monday, focusing on narrow-scope changes and practical expedients.

In coordination with the International Accounting Standards Board (IASB), FASB is responding to preparers’ concerns about implementing the revenue recognition standard the boards issued jointly in May 2014. In some cases, the boards came to different conclusions about issuing clarifications.

The IASB issued its changes last month in Clarifications to IFRS 15. FASB has taken a piecemeal approach to the changes, and on Monday issued Accounting Standards Update (ASU) No. 2016-12, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.

Previously, FASB issued ASU No. 2016-10, which addresses licensing and identifying performance obligations, and ASU No. 2016-8, which addresses principal versus agent considerations. Issues addressed in Monday’s ASU include collectibility, contract modifications, completed contracts at transition, and noncash considerations.

The ASU issued Monday:

• Clarifies the objective of the collectibility criterion in Step 1 of the standard’s five-step process for revenue recognition.
• 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.

The changes take effect at the same time as the new revenue recognition standard.

Preparers’ implementation concerns were brought to the boards’ attention through their joint transition resource group.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.