FASB proposes more clarifications to revenue standard

FASB proposed another round of technical corrections and changes to its new revenue recognition standard Wednesday that would include clarifications to guidance on contract costs, and on preproduction costs related to long-term supply arrangements.

In May 2014, FASB and the International Accounting Standards Board (IASB) issued a converged revenue recognition standard. Through the boards’ joint Transition Resource Group, financial statement preparers presented issues that the boards decided to clarify.

The boards agreed on some clarifications and disagreed on others. The IASB issued its changes in Clarifica­­tions to IFRS 15 last month. FASB has issued accounting standards updates addressing narrow-scope improvements and practical expedients, licensing and identifying performance obligations, and principal versus agent considerations.

FASB proposed more changes Wednesday in Proposed Accounting Standards Update, Technical Corrections and Improvements to Update No. 2014-09, Revenue Fro­­m Contracts With Customers (Topic 606).

The changes proposed Wednesday would:

• Clarify which contracts are in the scope of existing guidance in Subtopic 340-10, Other Assets and Deferred Costs—Overall, and which are in the scope of the new guidance in Subtopic 340-40, Other Assets and Deferred Costs—Contracts With Customers.
• Clarify that when performing impairment testing for contract costs capitalized in accordance with the recognition provisions of Subtopic 340-40, an entity should consider expected contract renewals and extensions and should include both the amount of consideration it already has received but has not recognized as revenue and the amount the entity expects to receive in the future.
• Clarify that impairment testing first should be performed on assets outside the scope of Topic 340, Other Assets and Deferred Costs (such as Topic 330, Inventory), then assets within the scope of Topic 340, then asset groups and reporting units within the scope of Topic 360, Property, Plant, and Equipment, and Topic 350, Intangibles—Goodwill and Other.
• Require that provisions for losses on construction- and production-type contracts be determined at least at the contract level. The proposal would allow an entity to determine the provision for losses at the performance obligation level as an accounting policy election.
• Remove the term “insurance” from a scope exception to Topic 606 that exists for insurance contracts within the scope of Topic 944, Financial Services—Insurance. The proposed amendment would clarify that all contracts within the scope of Topic 944 are excluded from the scope of Topic 606.
• Provide practical expedients to the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. The proposed amendments also would expand the information disclosed when an entity applies one of the practical expedients.
• Change Example 7 in the standard to remove what some have perceived as minor inconsistencies with the contract modifications guidance in Topic 606.
• Create a new Subtopic 924-15, Entertainment—Casinos—Derivatives and Hedging, which would include a scope exception from derivatives guidance for fixed-odds wagering contracts. The proposed amendments also would include a scope exception within Topic 815, Derivatives and Hedging, for fixed-odds wagering contracts issued by casino entities.
• Align the cost-capitalization guidance for advisers to both public funds and private funds in Topic 946, Financial Services—Investment Companies.

The proposed changes would take effect at the same time as the new revenue recognition standard. Comments will be accepted through July 2 and can be made at FASB’s website.

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