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

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

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 Chapter 3.

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).

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 determination of whether a termination provision is substantive will require judgment and would be evaluated both quantitatively and qualitatively. Data about the frequency of contract terminations may be useful in such a determination (i.e., a high frequency of payments made to terminate contracts may suggest that the termination provision is not substantive).

When the term of a contract is less than the contract’s stated term (e.g., when a 12-month contract is determined to be a month-to-month contract rather than for a year, indicating that the penalty is not substantive), an entity would have to (1) reassess the allocation of the transaction price, (2) include the termination penalty in the transaction price (subject to the constraint on variable consideration, if appropriate), and (3) assess whether the termination provisions provide the customer with a material right (similarly to how the entity would assess renewal options in a contract).

In May 2016, the FASB issued ASU 2016-12, which amends certain aspects of the revenue standard. ASU 2016-12 clarifies the objective of the entity’s collectibility assessment and contains new guidance on when an entity would recognize as revenue consideration it receives if the entity concludes that collectibility is not probable.

The following issues were discussed by the TRG but are not addressed in the Implementation Q&As:

• The revenue standard clearly prohibits entities from recognizing revenue when collectibility is not probable despite any nonrefundable cash payments that may have been received. Essentially, cash-based accounting will no longer be permitted under the revenue standard.
• An assessment of whether a price adjustment is due to collectibility (i.e., credit) or a price concession is complex but can be performed in practice.

For additional information, see Chapter 4.

TRG members discussed various options, including whether to (1) specifically address “perfunctory or inconsequential” items in the text of the revenue standard, (2) delete the wording from paragraph BC90 (as quoted above), and (3) add other implementation guidance.

While some TRG members discussed the potential need to add the concept of “inconsequential or perfunctory” to the revenue standard, there appeared to be general agreement that such an addition would not be necessary. Further, most TRG members believed that the evaluation of promised goods or services in a contract would lead to about the same number of deliverables as under legacy U.S. GAAP.

In April 2016, the FASB issued ASU 2016-10, which amends certain aspects of the revenue standard, including the guidance on identifying performance obligations. ASU 2016-10 states that an entity “is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.” In addition, the ASU indicates that an entity should consider materiality of items or activities only at the contract level (as opposed to aggregating such items and performing an assessment at the financial statement level). For additional information, see Chapter 5.

The following broad types of promises or arrangements may constitute stand-ready obligations:

• Type A — The obligation to deliver goods or services is within the entity’s control, but additional development of the goods, services, or intellectual property (IP) is required.
• Type B — The obligation to deliver goods or services is outside both the entity’s and the customer’s control.
• Type C — The obligation to deliver goods or services is solely within the customer’s control.
• Type D — The obligation is a promise to make goods or services available to the customer continuously over the contractual period.

The principle in the revenue standard requires an entity to understand the nature of the promise. For example, in a contract to provide a specified number of goods or services, the nature of the promise to the customer is to provide those specified goods or services regardless of whether the customer was able to specify the timing of transfer.

Further, Type A promises (e.g., a promise in a software or biotechnology licensing arrangement to provide updates or upgrades when and if available) should be closely evaluated to determine whether, in addition to a stand-ready obligation, there are implicit promises to provide specified goods or services. An implicit promise to provide a specified good or service may result from the entity’s customary business practices, specific statements, or other communications. All facts and circumstances should be evaluated to determine the nature of the promise in the contract.

Stakeholder views differ on whether (and, if so, to what extent) the existence of factors such as a customized or complex design, an entity’s learning curve to produce the contractual goods or services, or the customer’s motivation for purchasing the goods or services affects whether goods or services are distinct in the context of the contract.

While TRG members generally agreed that such factors are not individually determinative of whether goods or services are distinct in the context of the contract, there were inconsistent views on whether the evaluation should be performed (1) from the customer’s perspective, (2) from the entity’s perspective, or (3) only on the basis of the contract. Some TRG members believed that the entity should consider what items the customer has been promised and whether the promised items will be integrated in some way. For example, many TRG members agreed that an entity would need to evaluate the impact of design services it performs in determining the performance obligations under a contract (e.g., if the customer obtains control of the rights to the manufacturing process developed by the entity).

The TRG also discussed how the entity’s knowledge of its customer’s intended use of the goods or services would affect the determination of whether the goods or services were highly interrelated. Many TRG members expressed the view that an entity should consider whether the goods or services could fulfill their intended purpose on a stand-alone basis or whether they are inseparable because they affect the ability of the customer to use the combined output for which it has contracted.

ASU 2016-10 refines the criteria for assessing whether promised goods and services are distinct, specifically the “separately identifiable” principle (the “distinct within the context of the contract” criterion) and supporting factors. To further clarify this principle and the supporting factors, the ASU adds six new examples and amends other examples to demonstrate the application of the guidance to several different industries and fact patterns. For further information, see Chapter 5.

The FASB staff noted that:

• Goods or services do not need to be transferred consecutively (i.e., an entity should look to the series provision criteria in ASC 606-10-25-15 to determine whether the goods or services are a series of distinct goods or services for which the entity is not explicitly required to identify a consecutive pattern of performance). Further, while the term “consecutively” is used in the Background Information and Basis for Conclusions of ASU 2014-09, the FASB staff noted that whether the pattern of performance is consecutive is not determinative of whether the series provision applies.
• The accounting result for the series of distinct goods or services as a single performance obligation does not need to be the same as if each underlying good or service were accounted for as a separate performance obligation. Implementation Q&A 20 states that “[s]uch a requirement would almost certainly make it more difficult for entities to meet the requirement, and because the series provision is not optional, it likely would require entities to undertake a ‘with and without’ type analysis in a large number of circumstances to prove whether the series provision applies or not.”

Implementation Q&A 18 provides four examples that illustrate the application of the framework for determining whether an entity is required to apply the series guidance. The FASB staff’s analysis of one of those examples in relation to step 2 of the revenue standard is summarized below.

Questions continually arise about how an entity would determine whether a product warranty that is not separately priced is a performance obligation (i.e., whether the warranty represents a service rather than a guarantee of the product’s intended functionality). For illustrative purposes, the FASB staff offered an example in which a luggage company provides a lifetime warranty to repair any damage to the luggage free of charge and noted that such a warranty would be a separate performance obligation because the company agreed to fix repairs for any damage (i.e., repairs extend beyond those that fix defects preventing the luggage from functioning as intended).

The luggage example illustrates a relatively straightforward set of facts and circumstances. However, the conclusion for other warranty arrangements may be less clear. Accordingly, an entity will need to assess the substance of the promises in a warranty arrangement and exercise judgment on the basis of the entity’s specific facts and circumstances.

In addition, while the duration of the warranty (e.g., the lifetime warranty in the luggage company example discussed) may be an indicator of whether a warranty is a separate performance obligation, it is not determinative.

In January 2021, the FASB issued ASU 2021-02, which allows a franchisor that is not a PBE (a “private-company franchisor”) to use a practical expedient when identifying performance obligations in its contracts with customers (i.e., franchisees) under ASC 606. When using the practical expedient, a private-company franchisor that has entered into a franchise agreement would treat certain preopening services provided to its franchisee as distinct from the franchise license. In addition, a private-company franchisor that applies the practical expedient must make a policy election to either (1) apply the guidance in ASC 606 to determine whether the preopening services that are subject to the practical expedient are distinct from one another or (2) account for those preopening services as a single performance obligation. The practical expedient and policy election are intended to reduce the cost and complexity of applying ASC 606 to preopening services associated with initial franchise fees. For additional information, see Section 5.3.5.

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 Chapter 6.

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.

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.”

TRG members generally agreed with the FASB and IASB staffs that ASC 606-10-32-41 establishes a hierarchy that requires an entity to identify, and allocate variable consideration to, performance obligations before applying other guidance (e.g., the guidance on allocating a discount). Accordingly, an entity would first determine whether a discount is variable consideration. If the entity concludes that the discount is variable consideration, it would apply the variable consideration allocation guidance if the related criteria are met. Otherwise, the entity would look to the discount allocation guidance to determine how to allocate the discount.

There could be times when an entity may recognize an immaterial asset (e.g., work in progress) under a recognition-over-time model because the entity’s selected measure of progress may not perfectly match its performance.

The invoice practical expedient could be used for both contract examples because the respective price and rate changes reflect the “value to the customer of each incremental good or service that the entity transfers to the customer.”21 For the energy contract, the changing prices “reflect the value to the customer because the rates are based on one or more market indicators”;22 and the changing prices in the IT outsourcing contract “reflect the value to the customer, which is corroborated [through] (1) the benchmarking (market) adjustment and (2) declining costs (and level of effort) of providing the tasks that correspond with the declining pricing of the activities.”23

In addition, the FASB staff discussed up-front and back-end fees, noting that while such fees do not preclude application of the invoice practical expedient, entities must use judgment in determining whether the value of the fee to the customer corresponds to the amount transferred to the customer.

A common (i.e., single) measure of progress is required for a single performance obligation. Selecting a common measure of progress may be challenging when a single performance obligation contains more than one good or service or has multiple payment streams, and the selection is not a free choice. Further, while a common measure of progress that does not depict the economics of the contract may indicate that the arrangement contains more than one performance obligation, it is not determinative.

The FASB staff noted that stakeholders have identified two issues with respect to pre-CED activities: (1) how to recognize revenue from pre-CED activities and (2) how to account for certain fulfillment costs incurred before the CED.

Once the criteria in step 1 have been met, entities should recognize revenue for pre-CED activities that transfer a good or service to the customer on a cumulative catch-up basis (i.e., record revenue as of the CED for all satisfied or partially satisfied performance obligations) rather than prospectively because cumulative catch-up is more consistent with the revenue standard’s core principle.

Certain fulfillment costs incurred before the CED are capitalized as costs of fulfilling an anticipated contract. However, these costs would be expensed immediately as of the CED if they are related to progress made to date because the goods or services constituting a performance obligation have already been transferred to the customer. The remaining asset would be amortized over the period in which the related goods or services will be transferred to the customer.

Before evaluating the criteria in ASC 606-10-25-27, an entity will need to consider all relevant facts and circumstances to determine the nature of the promise to the customer in the contract. For example, the nature of a promise to deliver a commodity on demand may differ from that of a promise to deliver a specified quantity of a commodity into a customer’s storage. Implementation Q&A 50 states that the relevant facts and circumstances to be considered include “the inherent characteristics of the commodity, the contract terms, and information about infrastructure or other delivery mechanisms.”

Example 18 in ASC 606-10-55-184 through 55-186 illustrates a health club membership involving an entity’s stand-ready obligation to provide a customer with one year of access to any of the entity’s health clubs. In the example, the entity determines that the customer benefits from the stand-ready obligation evenly throughout the year. Therefore, a time-based measure of progress is appropriate.

Implementation Q&A 49 provides additional examples of stand-ready obligations and discusses considerations related to selecting an appropriate measure of progress as follows:

• Example A — An entity providing helpdesk support services does not know when a customer will call and require services. The customer benefits evenly throughout the period from the availability of the service. In addition, since the entity’s costs may be fixed throughout the term regardless of the level of activity from customers, a time-based input measure of progress may also result in the same pattern of recognition.
• Example B — An entity providing snow removal services does not know when it will snow, and the entity’s promise is to stand ready to provide services when and if it snows. However, the entity may conclude that because the likelihood of snow will fluctuate throughout the year, it should select a more reasonable measure of progress based on its expectation of increased efforts during winter months.
• Example C — An entity providing a cable television service does not know when the customer will access the content by using the entity’s service. The customer benefits evenly throughout the period from the availability of the service.

Implementation Q&A 49 notes that similarly, a software vendor may provide unspecified updates or upgrades over a defined term but may not know when or to what extent they will be made available. Because the customer benefits evenly throughout the period from the promise that any updates or upgrades developed will be made available to the customer, a time-based measure of progress is generally appropriate.

When a contract modification meets the conditions in ASC 606-10-25-13(a), contract assets that existed before the modification should be carried forward to the new contract and realized as receivables28 are recognized (i.e., revenue is not reversed, leading to prospective accounting for the effects of the contract assets).

This accounting reflects the objective of ASC 606-10-25-13. As noted in Implementation Q&A 81, ASC 606-10-25-13(a)(1) “explicitly states that the starting point for the determination [of the allocation in a modification] is the transaction price in the original contract less what had already been recognized as revenue.” Further, this accounting is consistent with paragraph BC78 of ASU 2014-09, which notes that the intent of ASC 606-10-25-13(a) is to avoid adjusting revenue for performance obligations that have been satisfied (i.e., such modifications would be accounted for prospectively).

In addition, the revenue standard requires an entity to allocate the total consideration in a contract with a customer to each of the entity’s performance obligations under the contract, including discounts. Stakeholders have questioned whether discounts should be allocated to all performance obligations and whether consideration should be allocated on a gross or net basis if the entity is a principal for certain performance obligations but an agent for others.

TRG members did not reach general agreement on the issues discussed and believed that clarifications to principal-versus-agent guidance in the revenue standard would be helpful.

In March 2016, the FASB issued ASU 2016-08 to address issues raised regarding how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. Specifically, the guidance in ASU 2016-08 requires an entity to determine:

• The nature of its promise to the customer. If the entity’s obligation is to provide the customer with a specified good or service, it is the principal. Otherwise, if the entity’s obligation is to arrange for the specified good or service to be provided to the customer by a third party, the entity is an agent.
• Who controls the specified good or service before it is transferred to the customer. ASC 606-10-55-37, as amended by ASU 2016-08, states, in part, that an “entity is a principal if it controls the specified good or service before that good or service is transferred to a customer.”

Further, ASU 2016-08 clarifies that the unit of account is a specified good or service (which is a distinct good or service or a bundle of distinct goods or services) and that an entity may be the principal with respect to certain specified goods or services in a contract but may be an agent with respect to others.

The ASU also adds clarifying guidance on the types of goods or services that a principal may control29 and reframes the principal-versus-agent indicators in the revenue standard to (1) illustrate when an entity may be acting as a principal instead of when an entity acts as an agent and (2) explain how each indicator is related to the control principle.

ASU 2016-08 does not amend the guidance in ASC 606 as originally issued to directly address the accounting for situations in which the originator has no knowledge of the amount an intermediary charges a customer for goods or services. However, paragraph BC38 of the ASU clarifies that the guidance in ASC 606 on variable consideration is helpful in the determination of what amounts should be included in the transaction price. Specifically, paragraph BC38(c) states, in part:

For additional information, see Chapter 10.

First, an entity should consider whether its arrangement involves a single customer or multiple customers. If the entity identifies two or more customers, it may not be appropriate to allocate a discount to all goods or services in the contract because the contract combination guidance does not apply to contracts with more than one customer. In this scenario, the discount would be allocated entirely to one contract (e.g., in which the entity is acting as a principal).

If there is a single customer in the arrangement (i.e., the entity is acting as both a principal and an agent in a contract with a customer), the entity will need to consider whether it can allocate the discount to one or more, but not all, performance obligations in the contract. If it does not meet the criteria to allocate the discount to one or more, but not all, performance obligations, the entity may conclude that it is appropriate to allocate the discount to all performance obligations in the contract.

For example, regarding certain offers, such as buy three and get one free, an entity would consider the fact that its customer has “earned” one-third of a free product, as well as whether the customer is likely to purchase the additional two products that would entitle it to the free product. Such an indicator may lead an entity to conclude that a customer option is a material right.

Similarly, an entity would consider loyalty programs that have an accumulation feature. Through the presence of an accumulation feature in a loyalty program, the entity may give its customers a material right. In its evaluation, the entity should consider that an element of the right granted to the customer in the current transaction is the customer’s ability to accumulate loyalty points that will entitle the customer to a free product.

TRG members debated the application of concepts in the framework the staff used to analyze the examples in TRG Agenda Paper 54 but did not reach general agreement on (1) how or when to consider past transactions in determining the class of customer and (2) how the class of customer should be evaluated in the determination of the stand-alone selling price of an optional good or service.

A few TRG members maintained that discounts or status achieved through past transactions is akin to accumulating features in loyalty programs (and that such features therefore represent material rights). However, others indicated that these programs represent marketing inducements (i.e., discounts) for future transactions that should be evaluated in relation to those offered to other similar customers or potential customers (e.g., other high-volume customers or potential high-volume customers). The TRG members who viewed the programs as marketing inducements believed that considering a customer’s past transactions, among other factors, is appropriate in the evaluation of whether a good or service being offered to the customer reflects the stand-alone selling price for that class of customer in accordance with ASC 606-10-55-42 (particularly for entities that have limited alternative sources of information available upon which to establish a customer’s class). Further, these TRG members focused on the facts that (1) similar discounts on future transactions (like those provided in the form of benefits and other offers in status programs for no additional fees) may be given to other customers who did not make or have the same level of prior purchases with the entity and (2) such discounts may be provided at the stand-alone selling price for that class of customer (i.e., the good or service is not priced at a discount that is incremental to the range of discounts typically offered to that class of customer and therefore does not represent a material right).

Because general agreement was not reached, certain Board members recommended that the staff perform additional outreach, particularly with preparers in the travel and entertainment industries and with procurement personnel in large organizations, to understand how discounts and tier status programs are negotiated and structured.

Implementation Q&A 14 includes three examples that illustrate the FASB staff’s view on how the class of customer is considered in the evaluation of whether a customer option gives rise to a material right. The examples outline the view that an option offered to a customer should be compared with offers made to similar customers (e.g., similar high-volume customers) at prices independent of a prior contract (i.e., offers made to customers who do not have a prior contractual relationship with the entity). Significant judgment will be required to determine whether customers are comparable.

The FASB staff adds that the entity’s chosen approach “should be applied consistently . . . to similar types of material rights with similar facts and circumstances.”

Although Implementation Q&A 15 does not discuss TRG members’ views, TRG Agenda Paper 34 notes that TRG members generally preferred that entities account for the exercise of a material right as a change in the contract’s transaction price but believed that it would be acceptable for an entity to account for the exercise of a material right as a contract modification.

TRG members did not reach general agreement on these topics and believed that clarifications to the guidance would be helpful.

In April 2016, as noted in Section C.4.1, the FASB issued ASU 2016-10, which amends certain aspects of the revenue standard, including the implementation guidance on licensing. The ASU revises the guidance in ASC 606 to distinguish between two types of licenses: (1) functional IP and (2) symbolic IP, which are classified according to whether the underlying IP has significant stand-alone functionality (e.g., the ability to process a transaction, perform a function or task, or be played or aired). For additional information, see Chapter 12.

TRG members generally agreed that:

• The evaluation of whether an entity has provided a single license of IP or multiple licenses to a customer (either in a single contract or through contract modifications) would depend on whether it has granted the customer additional rights (i.e., new or expanded rights).
• The modification of a license arrangement should be treated no differently from the modification of a contract for goods or services. Therefore, an entity should apply the contract modification guidance in the revenue standard.

However, the TRG did not reach general agreement about:

• Why a time-based restriction would be treated differently from a geographic or product-based restriction. That is, many TRG members viewed the extension of time (i.e., through the contract renewal) as granting a customer an additional right rather than the continued use of the same rights under a license that the entity already delivered to the customer and from which the customer is currently benefiting.
• Whether additional copies of software would be accounted for as a customer option or as a usage-based royalty.

ASU 2016-10 includes additional illustrative examples to clarify that restrictions of time, geographic region, or use affect the scope of the customer’s right to use or right to access the entity’s IP (i.e., they are attributes of a license) and do not define the nature of the license (i.e., functional vs. symbolic). However, restrictions should be distinguished from contractual provisions that, explicitly or implicitly, require the entity to transfer additional goods or services (including additional licenses) to the customer.

In addition, ASU 2016-10 clarifies that revenue should not be recognized for renewals or extensions of licenses to use IP until the renewal period begins.

For additional information on restrictions and renewals, see Chapter 12.

The application of one of the above methods is not a choice; rather, it is a determination that requires judgment based on a consideration of the relevant facts and circumstances. Entities should assess whether the additional consideration is due (1) as a result of additional usage of rights already transferred to the customer or (2) only once a customer exercises an option to acquire additional rights not already transferred.

The requirement to provide additional copies of software is not determinative. Entities will need to assess whether (1) the availability of additional copies of the software is provided as a convenience to the customer and therefore represents variable consideration for rights already delivered or (2) the facts and circumstances indicate that the additional use of the software (e.g., added users) represents additional rights that the customer can obtain, which should be accounted for as an option.

Views differ on whether the royalty constraint should apply to circumstances in which a royalty is related to (1) both a distinct license and nonlicense goods or services that are distinct from the license and (2) a license combined with other nonlicense goods or services in the contract (i.e., the license is not distinct).

TRG members did not reach general agreement and noted their belief that stakeholders would benefit from additional clarifications to the revenue standard.

ASU 2016-10 clarifies that the sales- or usage-based royalty exception applies whenever the royalty is predominantly related to a license of IP, regardless of whether the license is distinct. The ASU therefore indicates that an “entity should not split a sales-based or usage-based royalty into a portion subject to the recognition guidance on sales-based and usage-based royalties and a portion that is not subject to that guidance.”

The accounting for sales commissions is generally straightforward when (1) the commission is a fixed amount or a percentage of contract value and (2) the contract is not expected to be (or cannot be) renewed. However, if compensation plans are complex, it may be difficult to determine which costs are truly incremental and to estimate the period of amortization related to them. Examples of complex scenarios include:

• Plans with significant fringe benefits.
• Salaries based on the employee’s prior-year signed contracts.
• Commissions paid in different periods or to multiple employees for the sale of the same contract.
• Commissions based on the number of contracts the salesperson has obtained during a specific period.
• Legal and travel costs incurred in the process of obtaining a contract as well as anticipated contract renewals.

In these instances, stakeholders have questioned:

• Whether certain costs incurred to obtain a contract are incremental.
• How an entity should determine the amortization period for an asset recognized for the incremental costs of obtaining a contract with a customer, and more specifically:

  • How an entity should determine whether a sales commission is related to goods or services to be transferred under a specific anticipated contract.
  • If a sales commission is paid for an initial contract and also paid for contract renewals, how an entity should evaluate whether the sales commission paid on the contract renewal is commensurate with the sales commission paid on the initial contract.

TRG members generally agreed that when testing a contract asset for impairment, an entity would consider the economic benefits from anticipated contract extensions or renewals if the asset is related to the goods and services that would be transferred during those extension or renewal periods.

In December 2016, as noted in Section C.2.2, the FASB issued ASU 2016-20 on technical corrections to the revenue standard, which amends ASC 340-40 to clarify that for impairment testing, an entity should:

• Consider contract renewals and extensions when measuring the remaining amount of consideration the entity expects to receive.
• Include in the amount of consideration the entity expects to receive both (1) the amount of cash expected to be received and (2) the amount of cash already received but not yet recognized as revenue.
• Test for and recognize impairment in the following order: (1) assets outside the scope of ASC 340-40 (such as inventory under ASC 330), (2) assets accounted for under ASC 340-40, and (3) reporting units and asset groups under ASC 350 and ASC 360.

Refer to Chapter 13 for additional information.

Although materiality is not specifically contemplated in the accounting guidance, Implementation Q&A 64 also notes that in the FASB staff’s view, an entity may be able to conclude in many circumstances that the impact of out-of-pocket reimbursements is immaterial.