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

C.5 Step 3 — Determine the Transaction Price (Chapter 6 of the Roadmap)

C.5.1 Presentation of Amounts Billed to Customers (Gross or Net) — Implementation Q&A 27 (Compiled From TRG Agenda Papers 2 and 5)

In determining the transaction price under the revenue standard, an entity should exclude “amounts collected on behalf of third parties” (e.g., some sales taxes) in accordance with ASC 606-10-32-2. In many scenarios, however, it may be unclear whether amounts billed to an entity’s customer (e.g., shipping and handling fees, out-of-pocket expenses, taxes and other assessments remitted to governmental authorities) are collected on behalf of third parties.

An entity can apply the principal-versus-agent implementation guidance in the standard to the payments of shipping and handling fees, other out-of-pocket expenses, and taxes (by analogy) to determine whether the nature of the entity’s promise is to provide the specified good or service itself or to arrange for another party to provide the good or service. The FASB staff outlined considerations related to the application of the principal-versus-agent guidance to these fees. An entity may consider whether it (1) is responsible for directly providing or procuring the service, (2) has discretion in setting the price charged (including whether the profit margin it earns is variable or fixed), and (3) bears credit risk.

An entity that elects to exclude sales taxes from the transaction price, as allowed under ASC 606-10-32-2A, is required to provide the accounting policy disclosures in ASC 235-10-50-1 through 50-6. For additional information, see Section 6.7.

C.5.2 Variable Consideration

C.5.2.1 Level of Application of the Constraint on Variable Consideration — Implementation Q&A 30 (Compiled From TRG Agenda Papers 14 and 25)

Stakeholders have questioned the unit of account for recognizing variable consideration (i.e., whether variable consideration should be assessed at the contract level or at the performance obligation level). Variable consideration is included in the transaction price if the entity concludes that it will not result in a significant revenue reversal. An entity may reach a different conclusion depending on whether the evaluation of significance is performed against the transaction price allocated to a single performance obligation or against the total contract transaction price. The evaluation of the constraint on variable consideration should be applied at the contract level because the contract is the unit of account for determining the transaction price.

C.5.2.2 Application of the Portfolio Practical Expedient to Variable Consideration — Implementation Q&A 39 (Compiled From TRG Agenda Papers 38 and 44)

When an entity applies the expected value method in estimating variable consideration, it may consider evidence from similar contracts to form its estimate of expected value. In a manner consistent with the overall objective of the revenue standard, an entity is also permitted to use a portfolio approach as a practical expedient to account for a group of contracts with similar characteristics rather than account for each contract individually. However, an entity may only apply the practical expedient if it does not expect the results to be materially different from applying the guidance to individual contracts.17

Stakeholders have questioned whether the evaluation of evidence from similar contracts would mean that an entity is applying the portfolio practical expedient (and would therefore need to meet the condition of reasonably expecting that the results would not differ materially).

An entity is not necessarily applying the portfolio practical expedient when it considers evidence from similar contracts to develop an estimate under the expected value method.

C.5.2.3 Application of the Variable Consideration Constraint — Implementation Q&A 40 (Compiled From TRG Agenda Papers 38 and 44)

Stakeholders have questioned whether a transaction price estimated under the expected value method can be an amount that is not a possible outcome for an individual contract. If an entity applies the expected value method by using a portfolio of data, the transaction price may be an amount that is not one of the possible outcomes because the entity is not required to switch from the expected value method to the most likely amount method when applying the constraint. However, the entity must still consider the constraint on variable consideration when determining the transaction price.

C.5.2.4 Assessing Whether a Contract Includes a Price Concession — Implementation Q&A 28 (Compiled From TRG Agenda Papers 13 and 25)

When an entity determines that it will collect less than the stated contract price, it must use judgment to determine whether this lower amount is attributable to a price concession (and should be accounted for as variable consideration) or to credit risk (which may affect the collectibility assessment as part of step 1). ASC 606-10-32-7 provides factors for an entity to consider in making this determination, including historical experience. Example 3 in ASC 606-10-55-102 through 55-105 also provides factors for an entity to consider, including (1) the customer’s intention and ability to pay and (2) the entity’s intentions and acceptance of consideration. Implementation Q&A 28 further notes that paragraph BC193 of ASU 2014-09 “discusses how an entity should consider its intentions and not only refer to past experience in assessing if a price concession has been granted to a customer.”

C.5.2.5 Accounting for an Undefined Quantity of Outputs With a Fixed Contractual Rate per Unit — Implementation Q&A 41 (Compiled From TRG Agenda Papers 39 and 44)

The determination of whether a contract with an undefined quantity of outputs and a fixed contractual rate per unit contains variable consideration depends on an evaluation of the entity’s promise. If the promise is to provide a daily integrated service or to stand ready to deliver an undefined quantity of goods or services, the consideration is variable. If the contract includes a defined number of goods or services to be delivered at a stated rate, the consideration is not variable. Implementation Q&A 41 states that an entity should consider all substantive contractual terms, including “contractual minimums or other clauses that would make some or all of the consideration fixed.”

C.5.3 Consideration Payable to a Customer

C.5.3.1 Assessing Which Payments to a Customer Are Within the Scope of the Guidance on Consideration Payable to a Customer — Implementation Q&A 25 (Compiled From TRG Agenda Papers 19, 25, 28, 34, 37, and 44)

The TRG and the FASB staff considered the following views:

An entity should assess all consideration payable (broadly, all payments) to a customer.
An entity should assess only payments within the current contract (or combined contracts, if the revenue standard’s contract combination requirements are met).

TRG members generally concluded that an entity should not be required to strictly apply either of these views. Instead, a reasonable application that considers both views should lead to an appropriate outcome.

In effect, an entity should evaluate a payment to a customer (or to a customer’s customer) — particularly when no goods or services have been transferred — to determine the commercial substance of the payment and whether the payment is linked (economically) to a revenue contract with the customer.

C.5.3.2 Determining Who Constitute an Entity’s Customers — Implementation Q&A 26 (Compiled From TRG Agenda Papers 19, 25, 28, 34, 37, and 44)

An entity’s customers include customers in the distribution chain and might include a customer’s customer beyond the distribution chain. In addition, a contractual obligation to provide consideration to a customer’s customer (e.g., beyond the distribution chain) would be considered a payment to a customer.

C.5.3.3 Determining the Timing of Recognition of Variable Consideration Payable to a Customer — Implementation Q&A 29 (Compiled From TRG Agenda Papers 19, 25, 28, 34, 37, and 44)

Although the revenue standard’s variable consideration guidance would arguably apply to consideration payable to a customer if such consideration is variable, some stakeholders believe that a requirement to include variable consideration payable to a customer in the transaction price may be inconsistent with the requirement to delay the recognition of consideration payable to a customer until the entity pays or promises to pay.

Implementation Q&A 29 states that the reversal of revenue from variable consideration or consideration payable to a customer “should be made at the earlier of the date that there is a change in the transaction price in accordance with paragraph 606-10-32-25 or the date at which the consideration payable to a customer is promised in accordance with paragraph 606-10-32-27.” The determination of when the transaction price changes will require judgment. In addition, the promise to pay consideration may occur before a formal offer is made because there could be an implied promise based on customary business practice.

C.5.3.4 Up-Front Payments to Customers and Potential Customers — Implementation Q&A 43 (Compiled From TRG Agenda Papers 59 and 60)

The FASB staff believes that the revenue standard is clear about the accounting for payments made to a customer when the payments are made entirely as part of a current contract with the customer. However, the FASB staff believes that the revenue standard is less clear about the timing of recognizing an up-front payment as a reduction of revenue when either (1) a revenue contract does not exist (i.e., an entity makes a payment to incentivize the customer to enter into a revenue contract with the entity) or (2) the up-front payment is related to goods or services to be transferred under a current contract and anticipated future contracts. Accordingly, stakeholders have articulated the following two views about when an up-front payment to a customer should be recognized as a reduction of revenue:

View A — Up-front payments to customers should be recognized as an asset and “amortized” as a reduction of revenue as the related goods or services are provided to the customer, which may continue beyond the current contract term.
View B — Up-front payments to customers should be recognized as a reduction of revenue only over the current contract term (i.e., recognition of the up-front payment should not extend beyond the current contract term). If a contract does not exist, the up-front payments should be recognized as a reduction of revenue immediately.

View A would be appropriate in many circumstances. However, when applying View A, an entity should consider whether the payment meets the definition of an asset, which requires consideration of whether the payment results in a probable future economic benefit. Consequently, TRG members acknowledged that View B would be appropriate in some situations. The accounting for up-front payments to customers under View A or View B is not a policy election. Rather, as stated in Implementation Q&A 43, “an entity should understand the reasons for the payment, the rights and obligations resulting from the payment (if any), the nature of the promise(s) in the contract (if any), and other relevant facts and circumstances for each arrangement when determining the appropriate accounting.”

C.5.4 Noncash Consideration — TRG Agenda Papers 15 and 25

Stakeholders have noted that there are different interpretations regarding when noncash consideration should be measured and that the measurement date for noncash consideration has been variously viewed as (1) the time of contract inception, (2) the time at which the noncash consideration is received (or is receivable), and (3) the earlier of when the noncash consideration is received (or is receivable) or when the related performance obligation is satisfied (or as the performance obligation is satisfied, if satisfied over time).

In addition, stakeholders have indicated that it is unclear from the revenue standard:

How to apply the guidance on the inclusion of variable consideration in the transaction price when variability in fair value is attributable to both the form of consideration (e.g., changes in the share price of publicly traded shares of stock received as noncash consideration) and reasons other than the form of consideration (e.g., the number of shares of publicly traded stock that can be given as noncash consideration may change).
How to apply the constraint to transactions in which variability in the fair value of noncash consideration is attributable to both the form of consideration and reasons other than the form of consideration.

The TRG did not reach general agreement on how the revenue standard should be applied to address the implementation issues noted. As a result, TRG members noted that additional clarification would be helpful.

ASU 2016-12 clarifies that an entity’s calculation of the transaction price for contracts containing noncash consideration would include the fair value of the noncash consideration to be received as of the contract inception date. Further, subsequent changes in the fair value of noncash consideration after contract inception would be included in the transaction price as variable consideration (subject to the variable consideration constraint) only if the fair value varies for reasons other than its form. For additional information, see Chapter 6.

C.5.5 Significant Financing Components

C.5.5.1 How Broadly to Interpret the Factor in ASC 606-10-32-17(c) 18 — Implementation Q&A 31 (Compiled From TRG Agenda Papers 20, 25, 30, and 34)

ASC 606-10-32-17(c) does not contain a rebuttable presumption that an entity would need to overcome (e.g., regarding the existence or nonexistence of a significant financing component). Rather, an entity will need to use judgment to evaluate the facts and circumstances of a transaction when there is a difference in timing between when goods and services are transferred and when the promised consideration is paid. An entity should consider both advance payments and payments in arrears to determine whether there is a significant financing benefit to the customer or itself. When an entity makes this assessment, it must consider whether any difference between the cash selling price and the promised consideration is proportional to the reason for the difference before concluding that the difference arises for reasons other than providing financing.

C.5.5.2 How to Apply the Guidance When the Promised Consideration Is Equal to the Cash Selling Price — Implementation Q&A 32 (Compiled From TRG Agenda Papers 20, 25, 30, and 34)

An entity should not automatically presume that no significant financing component exists if the list price, cash selling price, and promised consideration are the same. Further, a difference in those amounts does not create a presumption that a significant financing component exists; rather, it would require an evaluation.

C.5.5.3 Whether an Entity Can Account for Financing Components That Are Not Significant — Implementation Q&A 33 (Compiled From TRG Agenda Papers 30 and 34)

The revenue standard neither requires entities to account for insignificant financing components nor precludes them from doing so.

C.5.5.4 Whether the Practical Expedient 19 Can Be Applied When There Is a Single Payment Stream for Multiple Performance Obligations — Implementation Q&A 34 (Compiled From TRG Agenda Papers 30 and 34)

The FASB staff cited an example of a two-year customer contract under which an entity delivers a device at contract inception and provides a service over the two-year term, with monthly payments. There are two alternative views on determining whether the practical expedient applies in this situation (i.e., determining the period between the transfer of goods or services and the receipt of payment):

View A — An entity would first allocate the monthly consideration to only the first item delivered (i.e., the device in the example, which would be delivered at contract inception). In this situation, because the timing of the transfer of the goods and services and receipt of the customer’s payment is less than one year (i.e., monthly revenue was first allocated to the device), the entity could apply the practical expedient.
View B — An entity would proportionately allocate the monthly consideration to the device and services. Use of the practical expedient in this situation would not be permitted because the period between the transfer of goods and services (collectively) and the receipt of payment is greater than a year (i.e., two years).

In some cases, it may be clear that cash collected is related to specific performance obligations; in other cases, that may not be clear. For the example discussed, the FASB and IASB staffs indicated in TRG Agenda Paper 30 that View B is appropriate because they believed that View A did not appropriately reflect the economics of the transaction. Further, the staffs acknowledged, and TRG members generally agreed with the staffs, that assessing whether an entity can apply the practical expedient when there is a single payment stream for multiple performance obligations may be complex and will require judgment on the basis of the facts and circumstances.

C.5.5.5 How to Calculate Interest for a Significant Financing Component — Implementation Q&A 36 (Compiled From TRG Agenda Papers 30 and 34)

The revenue standard does not explicitly address subsequent measurement, but entities should apply the guidance in ASC 835-30.

C.5.6 Accounting for Restocking Fees and Related Costs — Implementation Q&As 42 and 77 (Compiled From TRG Agenda Papers 35 and 44)

Stakeholders have raised questions regarding the appropriate accounting for restocking fees collected from customers and restocking costs (e.g., estimated shipping or repackaging) for expected returns.

An entity should include restocking fees for expected returns as part of the transaction price when control is transferred. In addition, a returned product subject to a restocking fee should be accounted for in a manner similar to how an entity would account for a partial return right (i.e., the restocking fee should be included in the transaction price if the entity is entitled to that amount).

Further, Implementation Q&A 77 states that an entity’s restocking costs for expected returns “should be recognized as a reduction of the carrying amount of the asset expected to be recovered at the point in time control of the product transfers to the customer.”

Footnotes

ASC 606-10-10-4.

The guidance states that there is no significant financing component when the “difference between the promised consideration and the cash selling price of the good or service (as described in [ASC] 606-10-32-16) arises for reasons other than the provision of finance to either the customer or the entity, and the difference between those amounts is proportional to the reason for the difference. For example, the payment terms might provide the entity or the customer with protection from the other party failing to adequately complete some or all of its obligations under the contract.”

ASC 606-10-32-18 states, “As a practical expedient, an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.”

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