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 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.
- 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.
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