Narrow-Scope Improvements to Revenue Recognition Standard

telescope (3)FASB has proposed fine tuning a few aspects of the new revenue recognition standard, recently issuing Proposed Accounting Standards Update (PASU), Revenue from Contracts with Customers (Topic 606); Narrow-Scope Improvements and Practical Expedients. The amendments in this PASU would only affect narrow aspects of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and would not change the core principle of that guidance.

The following is a “nutshell” explanation of the areas slated for improvement and a summary of the related proposed amendments.

Assessing the Collectability Criterion and Accounting for Contracts That Do Not Meet the Criteria for Step 1

The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply several steps to include identifying the contract(s) with the customer (“Step 1”). One criterion in Step 1 is that it is probable that an entity will collect the consideration to which it will be entitled in exchange for the goods or services.

  • The objective of the collectability criterion in Step 1 is unclear.

Amendment: The objective is to determine whether the contract is valid and represents a genuine transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services.

  • It is unclear when revenue should be recognized for a contract that does not meet the criteria in Step 1.

Amendment: A new criteria would be added that would allow an entity to recognize revenue in the amount of consideration received when the entity has transferred control and stopped transferring goods and services and has no obligation to transfer additional goods and services, and the consideration received is nonrefundable.

Presentation of Taxes Collected from Customers

  • An entity is required to determine the transaction price of the contract which excludes amounts collected on behalf of third parties, such as taxes. Due to variations and changes in tax laws, this determination may be a complex and costly analysis.

Amendment: Update would permit an entity, as an accounting policy election, to exclude amounts collected from customers for all sales and other similar taxes from the transaction price.

Noncash Consideration

  • Noncash consideration is measured at fair value but does not specify the measurement date of the noncash consideration.

Amendment: The measurement date is contract inception.

  • It is unclear how the constraint on variable consideration is applied when the fair value of noncash consideration varies due to the form of consideration and for reasons other than the form of consideration.

Amendment: The variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration.

Contract Modifications at Transition

  • An entity is required to evaluate contract modifications that occurred before the initial date of adoption for the purposes of applying the transition guidance. This analysis may be complex and costly in instances where an entity has a significant volume of contract modifications or when the modifications have occurred over a long period of time.

Amendment: Update would provide a practical expedient which would not require an entity to separately evaluate the effects of each contract modification.

Completed Contracts at Transition

  • It is unclear when a contract is considered “completed” for purposes of applying the transition guidance.

Amendment: A completed contract is a contract for which all, or substantially all, of the revenue was recognized under legacy generally accepted accounting principles (GAAP) before the date of initial application of Topic 606.

Technical Correction

  • An entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is required to provide accounting change disclosures in the period of adoption which would significantly increase transition costs.

Amendment: Update would clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. An entity would still be required to disclose the effect of the changes on any prior periods retrospectively adjusted.

The amendments in the PASU would affect entities with transactions included in the scope of ASU No. 2014-09 and also mirror its effective date.

Suggested questions for respondents and methods for the submission of those comments are included in the PASU and are due November 16, 2015.

For more information regarding the new revenue recognition standard and PYA’s audit services, please contact PYA (800) 270-9629.

 

Other Insights on this Topic:

http://www.pyapc.com/fasb-issues-guidance-on-revenue-recognition-for-healthcare-entities/

http://www.pyapc.com/revenue-recognition-changes-issued-fasb/

http://www.pyapc.com/pya-white-paper-navigates-revenue-recognition-rules-healthcare-providers/


Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

Related Posts
In the nonprofit world, organizations are fueled and sustained by generous contributions and grants, which are used to support the organization’s mission.  Although such funding can often be the deciding...
Read More

“Threading the Needle”—Accounting Standards Update Closes Hole in Nonprofit Grant Guidance

PYA, a national professional services firm headquartered in Knoxville, has been awarded a 2018 Top Workplaces honor by the Knoxville News Sentinel. The award is a result of employee feedback...
Read More

Knoxville News Sentinel Names PYA a Winner of the Greater Knoxville Area 2018 Top Workplaces Award

The new Tax Cuts and Jobs Act (TCJA) can be confusing for many-- especially small business owners.  Although many aspects of the TCJA have been discussed, one component of the...
Read More

Government Clamps Down on “Deductible Fun” for Businesses

A recent Accounting Standards Update (ASU) addresses land easements and their accounting under the new lease standards.  In January 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-01 Leases:...
Read More

Land Easements—Guidance for Implementing New Lease Accounting Standards

Stakeholders seeking clarity were behind the latest Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB).  In response to questions raised, the FASB released ASU 2018-03: Technical...
Read More

Measuring Fair Value: New ASU Offers Clarity

Businesses are increasingly reliant on technology to achieve organizational objectives. However, with the convenience and efficiency of technology come intensifying risks of data loss and theft. High-profile data breaches top...
Read More

Cybersecurity Framework “SOCs” It to Cyber Threats

PYA has released a white paper that discusses the importance of the AICPA’s cybersecurity risk management framework and System and Organization Controls for Cybersecurity in assessing the strength and effectiveness...
Read More

New PYA White Paper: Framework Offers Companies Solution for Cybersecurity Risk

The Financial Accounting Standards Board (FASB) has set forth amended guidance aimed at simplifying and reclassifying certain features of financial instruments. Accounting Standards Update (ASU) No. 2017-11 – Earnings Per...
Read More

The Update on Down Round—FASB Reclassifies Earnings Per Share

PYA is pleased to announce the promotions of Michael Ramey, Matt Stuart, and Jeff Pate to the level of Equity Principal. PYA has announced the promotion of Senior Manager Michael...
Read More

PYA Announces Three New Equity Principals

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

* indicates required
Monthly eNewsletters
See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop