In the year since the release of accounting standards update No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), many details remain in a state of alteration. In the biggest development to date, the Financial Accounting Standards Board (FASB) has proposed to defer the effective date of the new standards by one year (definitely seen as a relief to many!). In addition, the governing board has been drafting a proposed ASU in order to identify performance obligations and licensing. This has a comment period which ends on June 30, 2015. If necessary, the comment period may be extended another 40 days.
On March 18, the FASB made some important tentative decisions related to the implementation issues of the new #RevRec standards
- The use of practical measures on transition for certain aspects of contract modifications and completed contracts
- Practical method that would permit entities to present amounts collected from customers for taxes
- Elucidate the guidance in the new revenue standard to require that non-cash consideration be measured at contract commencement
- To revise the collectability guidance in Step 1 (Identifying the Contract) in Topic 606.
On March 30, the Transition Resource Group (TRG) regrouped to discuss some major topics including variable discounts, consideration payable to customer, material rights, and warranties. Also on the docket at that meeting were discussions surrounding significant financing component, partial satisfaction of performance obligations prior to identifying the contract, whether contributions are included or excluded from the scope and series of distinct goods and services.
Today, we can share with you briefly some of the important summary points discussed during this most recent TRG meeting.
Allocation of the Transaction Price for Discounts and Variable Considerations
It is important to note the difference that the guidance on allocating discounts to only one or some, but not all performance obligations in a contract, is different from guidance on allocating variable considerations to only one or some, but not all performance obligations.
The reason for this is because a discount is a variable consideration and some of the stakeholders have raised concerns as to whether an entity should account for such a discount by applying the guidance for allocating discounts or allocating variable consideration!
This was a big discussion with three views put forth by staff on the interpretation for consideration. However, there was unanimous support for view A, which states that variable consideration is first subject to guidance on allocation of variable consideration. And, only if criteria in paragraph 606-10-32-40-85 is not met. At that point, an entity would be subject to further consider the remaining allocation guidance in the following paragraphs. Hence, accountants must be thorough on the understanding of this subject to ensure correct guidance is applied.
Accounting for a Customer’s Exercise of a Material Right
Stakeholders at the TRG meeting raised several other concerns about accounting for a customer option that provides a material right. A few questions brought forward were:
- How should an entity account for a customer’s exercise of material right?
- How should an entity evaluate whether a customer option that provides a material right includes a significant financing component?
- Over what period should an entity recognize a non-refundable upfront fee?
TRG dealt with each of the questions and for the first one, staff proposed the guidance could either be interpreted as view A – an entity should account for the exercise as a change in the transaction price of a contract in accordance with paragraph 606-10-32-42 through 32-45 or as view B – a contract modification guidance 606-10-25-10 through 25-13. The board favored view A over view B, but thought view B necessary. The questions and answers caused a lot of debate as to whether the election of a view would either be an accounting policy election or facts and circumstances with the other two issues yet to be discussed.
Unfortunately, there were some technological difficulties during the meeting, due to which members were unable to debate the remaining issues. However, it was since suggested to summarize the conclusions for each topic discussed and share with members of the TRG, or discuss the topics at the next TRG meeting. Below, are those remaining topics:
Consideration Payable to a Customer
A lot of concern and feedback has been submitted to the board about different views that exist on whether an entity’s customers include those outside of the entity’s distribution chain. Staff added two questions in response to these issues.
- Which payments to a customer are in the scope of the consideration payable to a customer’s guidance?
- Does the guidance on consideration payable to the customers relate to customers in the distribution chain or more broadly to any customer of an entity’s customer?
The new standard does not provide a definitive stance on how to account for warranties and, hence, stakeholders raised the question – How should an entity evaluate whether a product warranty is a performance obligation in a contract with a customer when the warranty is not separately priced? (Read More Here)
Other topics included significant financing components, whether contributions are included or excluded from the scope, series of distinct good or services and partial satisfaction of performance obligations prior to identifying the contract.
The next TRG meeting is scheduled for July 13, 2015. Implementation issues can be submitted a month in advance by visiting the FASB website
Continue to visit this space as we fulfill our goal of supplying fresh and useful updates from revenue recognition affairs.