March 2015 Meeting — Summary of Issues Discussed and Next Steps

2. The purpose of this paper is to provide a summary of (a) the issues discussed at the March 30, 2015 meeting, (b) the views expressed at the meeting by the TRG members and FASB-IASB staff views about those issues, and (c) the Boards’ planned next steps, if any, for each of those issues.

4. The staff papers for each of those topics were made public to all stakeholders before the TRG meeting and are available on the FASB’s and the IASB’s websites. A direct link to the staff papers is also included within each topic below. This summary should be read in conjunction with those staff papers which contain a more detailed description of the issues, views, and staff analysis.

5. A replay of the entire meeting is available on the FASB’s and the IASB’s websites. Due to some technical difficulties, most portions of the TRG meeting were conducted separately by the FASB and the IASB. The websites also contain a log of questions submitted to the TRG.

7. TRG members agreed with the staff view that paragraph 606-10-32-41 [86] establishes a hierarchy for allocating variable consideration such that when a contract includes variable consideration, an entity should first apply the guidance on allocating variable consideration before considering the guidance on allocating discounts. TRG members also pointed out that not all discounts are variable and that if a discount is fixed, it does not result in variable consideration. In those cases, an entity would apply the guidance on allocating discounts and would not consider the guidance on allocating variable consideration.

8. Because the discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believe is consistent with the standard, the staff recommend that the Boards take no further action.

10. Subsequent to the October 2014 TRG meeting, some stakeholders raised other questions about the accounting for a customer option that provides a material right. The questions are as follows.

11. On Issue 1, most TRG members agreed with the staff view that View C (the exercise of a material right should be accounted for as variable consideration) is not supported by the guidance in the new revenue standard. TRG members agreed with the staff view that the guidance in the standard could be interpreted to support the following views.

1. View A: At the time a customer exercises a material right, an entity should update the transaction price of the contract to include any consideration to which the entity expects to be entitled as a result of the exercise. The additional consideration should be allocated to the performance obligation underlying the material right and should be recognized when or as the performance obligation underlying the material right is satisfied.
2. View B: The exercise of a material right should be accounted for as a contract modification. That is, the additional consideration received and/or the additional goods or services provided when a customer exercises a material right represent a change in the scope and/or price of a contract. An entity should apply the modification guidance in paragraphs 606-10-25-10 through 25-13 [18–21].

12. Although most TRG members thought both Views A and B were supportable by the new revenue standard, most TRG members leaned toward View A. Other TRG members thought that View B could be acceptable based on the definition of a contract modification in the standard. The staff agrees with TRG members that both View A and View B could be in accordance with the guidance in the new revenue standard, depending on the facts and circumstances. TRG members observed that in most, but not all, cases the financial reporting outcome of applying View A or View B would be similar. Only in cases in which the optional goods or services are determined to be not distinct from the original promised goods or services, would the results appear to differ. The staff thinks that an entity typically would conclude that an optional good or service is distinct. The method used to account for the exercise of a material right will depend on the facts and circumstances of the arrangement. TRG members agreed with the staff view that the method used should be applied consistently by an entity to similar types of material rights with similar facts and circumstances.

13. On Issue 2, TRG members agreed with the staff view that an entity should consider the effects of the time value of money when determining the transaction price. This evaluation would include consideration of whether a significant financing component exists in the contract as a result of a material right. The TRG agenda paper noted that the standard includes factors to evaluate in determining whether a significant financing component does or does not exist. The factor in paragraph 606-10-32-17(a) [62(a)] is whether the timing of transfer of goods (that were paid for in advance) is at the discretion of the customer. This factor may apply to some customer options.

14. On Issue 3, TRG members agreed with the staff view that the period over which a nonrefundable fee, such as an activation fee, will be recognized depends on whether the nonrefundable fee provides the customer with a material right. If an entity concludes that the activation fee provides the customer with a material right, the fee would be recognized over the service period during which the customer is expected to benefit from not having to pay an activation fee upon renewal of service. Conversely, if an entity concludes that the activation fee does not provide the customer with a material right, the activation fee is, in effect, an advance payment for the promised goods or services in the contract.

15. Because the discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believe is consistent with the standard, the staff recommend that the Boards take no further action.

17. On Issue 1, TRG members discussed the following three views.

1. View A: Entities should assess all consideration payable to a customer
2. View B: Entities should assess consideration payable to a customer only within the context of that contract with a customer (or combined contracts)
3. View C: Entities should assess consideration payable to a customer only within a contract with a customer (or combined contracts) and to a customer in the distribution chain of that contract with a customer.

18. TRG members had mixed views between Views A and B. No TRG member agreed with View C. Many U.S. TRG members considered that, while they thought the scope of the transactions subject to the consideration payable to a customer guidance in the new revenue standard was similar to the scope of transactions subject to the guidance in existing U.S. GAAP, they did not think the standard would require entities to evaluate whether the consideration payable to the customer exceeds the fair value of distinct goods or services that the entity receives from the same customer for each and every transaction (as might be implied by View A). Those TRG members that supported View B generally expressed the view that a significant underpayment or overpayment in a subsequent contract (that is, one not linked to the original contract by the contract combinations guidance in Topic 606 [IFRS 15]) should be evaluated to determine whether it is a modification of the original contract. Several TRG members noted that they thought that reasonable applications of either View A or View B should result in similar financial reporting outcomes in most cases.

19. On Issue 2, some TRG members agreed with the staff view that the guidance on consideration payable to a customer is applicable only to entities within a distribution chain (that is, it applies to the customer and other parties that purchase the entity’s goods or services from the customer). Some TRG members highlighted that in the example in the staff paper, the analysis of which entities are in the distribution chain is dependent on how the marketing agent determines its customer. The marketing agent may consider it has more than one customer among the various parties. Many U.S. TRG members thought that this guidance has the same scope as existing U.S. GAAP. However, a couple of U.S. TRG members stated there is some diversity in practice under existing U.S. GAAP because some entities that are marketing agents view the end customer in scenarios like the example in the staff paper as its (or one of its) customer(s).

20. On Issue 3, TRG members discussed when the reduction in revenue for consideration payable to a customer should be recognized. The guidance on consideration payable to a customer states that such amounts should be recognized as a reduction of revenue at the later of when the related revenue is recognized or the entity pays or promises to pay such consideration (promises could be implied by customary business practices); however, the guidance on changes in the transaction price in paragraphs 606-10-32-42 [87] through 32-45 [90] states that the transaction price changes when facts or circumstances change the amount of consideration to which an entity expects to be entitled. That is, it would require an entity to estimate amounts and reduce the transaction price at the point the entity decides to grant the discount or rebate (and, therefore, no longer would expect to be entitled to the original amount in the contract), which may be before the entity “promises to pay” the consideration.

21. TRG members had different views on the interaction of the guidance on changes in the transaction price and consideration payable to a customer. Some TRG members thought that the reduction in revenue should be recognized as of the date management intends to grant the discount, consistent with the guidance applicable to changes in the transaction price, especially in circumstances in which the entity has a past practice of granting a discount. Some TRG members highlighted that the scope of transactions that should be impacted by this issue would be fairly narrow (that is, this issue should only arise when an entity has no history of granting discounts and has no expectation of granting a discount or rebate as of contract commencement).

22. No conclusions were drawn by the TRG on those three potential implementation issues. Because the discussion on this topic was held separately by TRG members in Norwalk and London due to technology issues and TRG members had different views about the issues, the staff think it would be beneficial for the TRG members to discuss this topic jointly. The staff plan to perform additional research on the issues and an updated staff paper will be discussed at the July 2015 TRG meeting.

24. TRG members agreed with the staff view that revenue should be recognized on a cumulative catch-up basis for performance obligations satisfied over time (in accordance with paragraph 606-10-25-27 [35]), reflecting the entity’s progress towards complete satisfaction of the performance obligation(s) at the date the contract meets the criteria in paragraph 606-10-25-1 [9]. An entity should consider the requirements in paragraphs 606-10-25-23 [31] through 25-37 [45] to determine the goods or services that the customer controls and, therefore, what portion of the costs should be included in any measure of progress towards satisfaction of a performance obligation that is used to calculate the cumulative catch-up adjustment. For example, this would mean an entity should not include in its measure of progress uninstalled materials that the customer does not control as of the date a contract is identified under the new revenue standard.

25. TRG members agreed with the staff view that costs may be capitalized as costs to fulfill an anticipated contract (subject to the criteria in paragraph 340-40-25-5 [95]) with immediate expensing of those costs at the date the contract is established if the costs relate to progress made to date or to services already transferred to the customer. However, costs that do not satisfy the criteria in other relevant U.S. GAAP or IFRS or in the guidance in paragraph 340-40-25-5 [95] for recognition as an asset would be expensed as incurred in accordance with paragraph 340-40-25-8 [98(a)].

26. Because the discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believe is consistent with the standard, the staff recommend that the Boards take no further action.

28. TRG members agreed with the staff analysis of the guidance on accounting for warranties. The staff analysis concluded that, under the new revenue standard:

1. An entity would account for a warranty as a performance obligation if it has an option to purchase the warranty, such as when it is separately priced or negotiated.
2. Warranties also would be accounted for as performance obligations if the warranty provides the customer with a service in addition to the assurance that the product complies with agreed upon specifications. Therefore, the accounting for warranties under the new revenue standard is different from existing U.S. GAAP and IFRS. Entities might account for some warranties as performance obligations under the new revenue standard that are not separate deliverables (or elements) under existing revenue guidance.

29. The evaluation of whether a warranty provides a service in addition to the assurance that the product complies with agreed-upon specifications will require judgment based on the facts and circumstances. The Boards included factors in paragraph 606- 10-55-33 [B31] to assist entities in making judgments in this area.

30. Because the discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believe is consistent with the standard, the staff recommend that the Boards take no further action.

32. On Issue 1, TRG members agreed that there is no presumption in the standard that a significant financing component exists or does not exist when there is a difference in timing between when goods and services are transferred and when the promised consideration is paid. An entity will need to apply judgment to determine whether the payment terms are providing financing or are for another reason. TRG members discussed the factor in paragraph 606-10-32-17(c) [62(c)] relating to whether the difference in promised consideration and cash selling price is for a reason other than financing, noting that it might be more likely that an advance payment would meet that factor compared to payments in arrears. However, TRG members also agreed that there is no presumption as to whether advance payments do or do not contain significant financing components and that advance payments should be assessed under the new revenue standard. However, several members stressed that when entities consider whether the difference in promised consideration and cash selling price is for a reason other than financing, they also must consider whether the difference between those amounts is proportional to the reason for the difference. Many TRG members noted that it will require significant judgment in some circumstances to determine whether a transaction does, or does not, include a significant financing component, and they thought that when the Boards developed the new revenue standard they understood judgment may often be required in this area.

33. On Issue 2, TRG members agreed with the staff view that the difference, if any, between the amount of promised consideration and the cash selling price is only one indicator (because it is one of two factors in paragraph 606-10-32-16 [61] in a list that is stated to be non-exhaustive), not a presumption, in determining whether a significant financing component exists.

34. Some TRG members asked the staff to provide clarification on the intention of the analysis in paragraph 26 of the staff paper which states “However, if the list price, the cash selling price, and the promised consideration are all, in fact, equal (including after careful consideration of whether the list price is the cash selling price), that might indicate that the contract does not include a significant financing component.” The staff clarified that the intention of this was not to imply that if list price, cash selling price, and promised consideration are equal that a financing component cannot exist. Rather, this paragraph was written in the context of suggesting entities carefully evaluate whether those items are all, in fact, equal. Determining a “cash selling price” may require judgment and the fact that an entity provides “zero interest financing” does not necessarily mean that the cash selling price is the same as the price another customer will pay over time. Entities would consider the cash selling price as compared to the promised consideration in making the evaluation based on the overall facts and circumstances of the arrangement.

35. On Issue 3, TRG members agreed with the staff view that the standard does not preclude accounting for financing components that are not significant in the context of the contract.

36. TRG members discussed the example in the staff paper on Issue 4 as to how to determine whether or not the practical expedient in paragraph 606-10-32-18 [63] may be applied. That practical expedient allows an entity not to adjust promised consideration for the amount of a significant financing component when the period between when the entity transfers a promised good or service to a customer and when a customer will pay for that good or service will be one year or less. TRG members discussed the difficulty in determining when a customer has paid for a particular good or service in a contract with a customer because of the fungible nature of cash. In some circumstances, it may not be clear whether cash collected relates to a specific performance obligation in a contract. In other instances, it may be clear that a cash payment is related to a specific performance obligation based on the terms of the contract. The overall view was that judgment will need to be applied to determine whether or not the practical expedient may be applied based on the facts and circumstances.

37. TRG members acknowledged that calculating the adjustment of revenue in arrangements that contain a significant financing component (Issue 5) and how to apply the significant financing component guidance when there are multiple performance obligations (Issue 6) may be complex in some scenarios. However, TRG members agreed that the standard provides a framework to deal with those issues. In calculating the impact of the significant financing component, the new revenue standard includes guidance on selecting a discount rate and other U.S. GAAP (Subtopic 835-30) and IFRS (IFRS 9) provide guidance on subsequent accounting.

38. As it relates to Issue 6, the standard is clear that when determining the transaction price, the effect of financing is excluded from the transaction price prior to the allocation of the transaction price to performance obligations. TRG members agreed with the staff view that it may be reasonable in some circumstances to attribute a significant financing component to one or more, but not all, of the performance obligations in the contract. Some TRG members agreed that, practically, this might be in a manner analogous to the guidance on allocating variable consideration or allocating a discount.

39. Because the discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believe is consistent with the standard, the staff recommend that the Boards take no further action.

41. Because the discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believe is consistent with the standard, the staff recommend that the Boards take no further action.

43. TRG members agreed that entities should evaluate the criteria in paragraphs 606-10- 25-14(b) [22b] and 25-15 [23] and that it is not necessary that (a) the goods will be delivered or services will be performed consecutively or (b) the accounting result would be the same as if the underlying distinct goods and services each were accounted for as a separate performance obligations.

44. Some TRG members expressed the view that the intent of the series provision is to simplify application of the revenue guidance, but that, in practice, this is not always going to be the result. Therefore, although TRG members agreed with the staff that the requirements of the standard are clear, some TRG members requested that the Boards consider whether the series provision could be amended to be a practical expedient, rather than a requirement. Board members directed the staff to perform additional research on this topic. The objective of the research is to obtain an understanding of the potential consequences if the series provision were changed to a practical expedient.

46. As of the date of the March TRG meeting, the only other topic not yet discussed at a public Board meeting relates to the effective date of the standard. The FASB discussed this on April 1, 2015. Refer to the FASB's Tentative Board Decisions for further details. The IASB discussed this topic at a public Board meeting on April 28, 2015. Refer to the IASB Update for further details.