Appendix C — Summary of Issues Addressed in the FASB Staff’s Revenue Recognition Implementation Q&As and/or by the TRG

C.2 Scope (Chapter 3 of the Roadmap)

C.2.1 Fees and Reward Programs Related to Bank-Issued Credit Cards — Implementation Q&As 1 and 2 (Compiled From TRG Agenda Papers 36 and 44)

Because banks have accounted for fees and reward programs related to credit cards they issue under ASC 310, questions have arisen about whether such fees and programs would be within the scope of ASC 606 or ASC 310:

Credit card fees — The FASB staff noted that all credit card fees have historically been accounted for under ASC 310 because they are related to credit lending activities (i.e., akin to loan origination fees). The staff also noted that the revenue standard does not include consequential amendments to ASC 310. Accordingly, the staff believes that entities would continue to account for services exchanged for credit card fees under ASC 310 rather than ASC 606. However, the staff noted that as an anti-abuse measure, entities need to assess whether credit card fees and services should be accounted for under ASC 606 when the issuance of a credit card appears incidental to the arrangement (e.g., when a card is issued in connection with the transfer of (1) an automobile or (2) asset management services).
Credit card reward programs — The FASB staff indicated that if an entity concludes that the credit card arrangement is within the scope of ASC 310, the associated reward program would also be within the scope of ASC 310.

Outcomes under U.S. GAAP may differ from those under IFRS Accounting Standards because of differences between ASC 310 and IFRS 9.

C.2.2 Whether Fixed-Odds Wagering Contracts Are Revenue or Derivative Transactions — TRG Agenda Papers 47 and 49

Partly because of the revenue standard’s elimination of ASC 924-605 and partly because of comments that the IFRS Interpretations Committee made in its 2007 agenda decision related to accounting for fixed-odds wagering1 contracts,2 stakeholders reporting under U.S. GAAP questioned whether fixed-odds wagering contracts should be accounted for as revenue transactions (i.e., when or as control is transferred in accordance with the revenue standard) or as derivatives under ASC 815 (i.e., adjusted to fair value through net income each reporting period).

Many TRG members in the United States did not object to the FASB staff’s view that entities should continue to account for fixed-odds wagering contracts as revenue transactions after the revenue standard becomes effective. However, TRG members expressed concern that the wording in the revenue standard (as originally issued) did not support the staff’s view. Accordingly, TRG members recommended that the Board either (1) clarify its intent to include such contracts within the scope of ASC 606 (by issuing a technical correction excluding them from the scope of ASC 815) or (2) evaluate further whether its objective was to require entities to account for these contracts under ASC 815.

In December 2016, the FASB issued ASU 2016-20 on technical corrections to the revenue standard, which includes a derivatives guidance scope exception in ASC 924 for fixed-odds wagering contracts by adding a new Codification subtopic (ASC 924-815, Entertainment — Casinos: Derivatives and Hedging) that clarifies that such contracts are revenue contracts within the scope of ASC 606. For additional information, see Section 3.2.6.

C.2.3 Whether Contributions Are Within the Scope of the Revenue Standard — Implementation Q&A 6 (Compiled From TRG Agenda Papers 26 and 34)

Contributions3 are not explicitly excluded from the scope of the revenue standard.4 As a result, some stakeholders have questioned whether contributions are within the scope of the standard. The FASB staff affirmed its belief that because contributions are nonreciprocal transfers (i.e., they do not involve the transfer of goods or services to a customer), they are outside the scope of the guidance.

If a not-for-profit entity transfers a good or service for part or all of a contribution (i.e., a reciprocal transfer), the entity should evaluate the facts and circumstances to determine whether the reciprocal transfer should be accounted for under ASC 606. As part of the evaluation, it may be helpful for the entity to evaluate how the five-step model would be applied to the transaction. An inability to identify promised goods or services or to determine when control is transferred to the counterparty may be an indicator that the transaction is not a revenue transaction with a customer.

In June 2018, the FASB issued ASU 2018-08, which provides guidance to help entities determine whether transactions are nonreciprocal contributions or exchange transactions (i.e., reciprocal transfers).

C.2.4 Scope Considerations for Incentive-Based Capital Allocations, Such as Carried Interests — Implementation Q&A 3 (Compiled From TRG Agenda Papers 50 and 55)

Compensation for asset managers commonly consists of both management fees (usually a percentage of assets under management) and incentive-based fees (i.e., fees based on the extent to which a fund’s performance exceeds predetermined thresholds). Often, private-equity or real estate fund managers (who may be the general partner and have a small ownership percentage in the fund) will receive incentive-based fees by way of an allocation of capital from a fund’s limited partnership interests (commonly referred to as “carried interests”).

While Example 25 in the revenue standard contains implementation guidance that demonstrates how to apply the variable consideration constraint to an asset management contract, the example does not specify “whether the example applies to equity-based arrangements in which the asset manager is compensated for performance-based fees via an equity interest (that is, incentive-based capital allocations such as carried interest).”5 Consequently, stakeholders have expressed the following views on whether carried interests are within the scope of the revenue standard:

View A — Carried interests are within the scope of the revenue standard.
View B — Carried interests are outside the scope of the revenue standard.
View C — An entity’s accounting for carried interests may vary in accordance with the nature and substance of the arrangement.

The Board’s view is that these arrangements are within the scope of ASC 606 because the Board regards the incentive-based fees as compensation for services provided (i.e., part of revenue transactions). Many TRG members agreed that the arrangements are within the scope of ASC 606.

However, some TRG members expressed an alternative view that a carried interest could be regarded as an equity arrangement, because it is, in form, an interest in the entity. As a result of this view, those TRG members noted that if the arrangements are considered equity interests outside the scope of ASC 606, questions could arise in a consolidation analysis — specifically, questions related to whether the asset managers should consolidate the funds.

The SEC staff’s view is characterized in Implementation Q&A 3 as follows:

The SEC staff observer at the TRG meeting indicated that he anticipates the SEC staff would accept an application of Topic 606 for those arrangements. However, the observer noted that there may be a basis for following an ownership model. If an entity were to apply an ownership model, then the SEC staff would expect the full application of the ownership model, including an analysis of the consolidation model under Topic 810, the equity method of accounting under Topic 323, or other relevant guidance.

C.2.5 Scope Considerations for Financial Institutions

To clarify which guidance applies to the fees associated with certain common financial institution transactions, the FASB staff compiled Q&As regarding whether (1) mortgage servicing rights6 should be accounted for under ASC 860 and (2) deposit-related fees7 should be accounted for under ASC 405. In addition, the TRG discussed whether fees from financial guarantees8 should be accounted for under ASC 460 or ASC 815.

C.2.5.1 Mortgage Servicing Rights — Implementation Q&A 4 (Compiled From TRG Agenda Papers 52 and 55)

Assets and liabilities associated with mortgage servicing rights traditionally have been accounted for under ASC 860, and such practice will not change under the revenue standard. Servicing arrangements within the scope of ASC 860 are not within the scope of ASC 606, and ASC 860 addresses both the initial recognition and subsequent measurement of mortgage servicing assets and liabilities. In addition, because the subsequent measurement of the mortgage servicing assets and liabilities depends on the cash flows associated with the mortgage servicing rights, ASC 860 should be used to account for such cash flows.9

C.2.5.2 Deposit-Related Fees — Implementation Q&A 5 (Compiled From TRG Agenda Papers 52 and 55)

Entities should account for revenue from deposit-related fees in accordance with ASC 606. Financial institutions should continue to (1) record liabilities for customer deposits because the deposits meet the definition of a liability and (2) account for customer deposits in accordance with ASC 405. However, because ASC 405 does not contain specific guidance on how to account for deposit fees, financial institutions should apply ASC 606 for deposit-related fees (i.e., in a manner similar to the application of existing SEC revenue guidance by some financial institutions to account for deposit-related fees). The FASB staff suggests that implementation concerns raised by some stakeholders could be alleviated by careful analysis of the contract terms between the financial institution and the customer. Because customers generally have the right to cancel their depository arrangement at any time, the FASB staff believes that most contracts would be short term (e.g., day to day or minute to minute). As a result, revenue recognition patterns would be similar regardless of the number of performance obligations identified.

C.2.5.3 Fees Related to Financial Guarantees — TRG Agenda Papers 52 and 55

The TRG generally agreed that fees related to financial guarantees should be accounted for in accordance with either ASC 460 or ASC 815. The basis for the TRG’s view is partly due to its belief that “the fee would not be received unless the guarantee was made, and the guarantee liability is typically reduced (by a credit to earnings) as the guarantor is released from the risk under the guarantee.”10 Further, ASC 460 or ASC 815 provides a framework that addresses both initial recognition and subsequent measurement of the guarantee. In addition, the FASB staff cited paragraph BC61 of ASU 2014-09 as further evidence of the Board’s intent to exclude guarantees from the scope of ASC 606. The FASB staff also noted that it may suggest technical corrections to the Board to clarify the scope for fees from financial guarantees in ASC 942-825-50-2 and ASC 310-10-60-4. See also Chapter 18.

Footnotes

Fixed-odds wagers are wagers placed by bettors (i.e., customers) who typically know the odds of winning in gaming activities (e.g., table games, slot machines, keno, bingo, and sports and race betting) at the time the bets are placed with gaming industry entities.

In its 2007 agenda decision (reported in the July 2007 IFRIC Update), the IFRS Interpretations Committee noted that an unsettled wager is a financial instrument that is likely to meet the definition of a derivative financial instrument under IAS 39. Currently, an entity that is required to adopt IFRS 9 should apply IFRS 9 rather than IAS 39 when accounting for derivatives.

Contributions are defined as nonreciprocal transfers to a not-for-profit entity. They are distinguishable from exchange transactions, which are reciprocal transfers.

This topic applies only to U.S. GAAP because IFRS Accounting Standards do not provide industry-specific guidance for not-for-profit entities. See ASC 958-605 for guidance on revenue recognition by not-for-profit entities under existing U.S. GAAP.

Quoted from paragraph 12 of TRG Agenda Paper 50.

After originating a loan (or selling an originated loan but retaining rights to service the loan), a financial institution may perform services that include communicating with the borrower; collecting payments for interest, principal, and other escrow amounts; and performing recordkeeping activities.

Deposit-related fees are those that a financial institution charges to a customer for amounts on deposit with the financial institution. Fees may be charged to give customers access to their funds and to cover other activities, including recordkeeping and reporting. In addition, fees may be transaction-based (such as fees to withdraw funds through an automated teller machine) or may not be transaction-based (such as account maintenance fees).

Fees charged by a financial institution to a borrower on a loan, for example, in return for the financial institution’s acting as a third-party guarantor on the borrower’s debt.

Paragraph 11 of TRG Agenda Paper 52 notes that some entities believe that there is a close link between ASC 860’s asset and liability remeasurement requirements and the collection of servicing fees (which gives rise to mortgage servicing income).

Quoted from paragraph 61 of TRG Agenda Paper 52.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.