3.1 Objective
ASC 606-10
General
10-1 The
objective of the guidance in this Topic is to establish the
principles that an entity shall apply to report useful
information to users of financial statements about the
nature, amount, timing, and uncertainty of revenue and cash
flows arising from a contract with a customer.
In the revenue recognition project, the FASB, together with the IASB, set key
objectives to guide its development of the guidance. ASU 2014-09, which added ASC 606 to the
Codification, outlines those key objectives in its Summary as follows:
-
Remove inconsistencies and weaknesses in revenue requirements.
-
Provide a more robust framework for addressing revenue issues.
-
Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
-
Provide more useful information to users of financial statements through improved disclosure requirements.
-
Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
The objectives listed above could be further summarized as follows:
- Establish a comprehensive framework — Create a new comprehensive framework for assessing all revenue transactions (across entities, industries, jurisdictions, and capital markets) to eliminate inconsistencies and fill gaps in legacy U.S. GAAP.
- Enhance revenue disclosures — Improve disclosures by requiring entities to provide more information about revenue, a key financial metric.
The objective of the revenue standard as stated in ASC 606-10-10-1 — “to
establish the principles that an entity shall apply to report useful information to
users of financial statements about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from a contract with a customer” — lays the
groundwork for the overall framework and the detailed recognition, measurement,
presentation, and disclosure principles outlined in the remainder of the standard.
The Board believed that this comprehensive framework would eliminate the need to
address revenue topics in a piecemeal manner through the EITF’s projects or the
AICPA’s industry guides. While it would still be necessary for the EITF and AICPA to
work through new and emerging revenue issues, those groups would all be using the
same comprehensive framework when analyzing revenue questions.
3.1.1 Meeting the Objective
After establishing the objective of the revenue standard, the FASB and IASB
created a core principle that establishes this comprehensive framework and
governs the entire guidance. The core principle is expressed in ASC 606-10-10-2
as follows:
ASC 606-10
Meeting the Objective
10-2 To meet the objective in paragraph 606-10-10-1, the core principle of the guidance in this Topic is that
an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services.
Many do not focus on this core principle and rush directly into the detailed requirements of the
standard. However, the manner in which the boards developed the core principle and the specific words
they used to articulate it were intentional. At its core, this main principle outlines the answers to the
following key questions that always arise when a revenue transaction is evaluated:
- When (i.e., recognition) — When is it appropriate to recognize revenue?
- How much (i.e., measurement) — What specific amount of revenue should an entity recognize?
The core principle’s answers to these questions are discussed below.
3.1.1.1 When to Recognize Revenue
In accordance with the core principle of the revenue standard, revenue is
recognized when the entity transfers promised goods or services to the
customer.
Specifically, the boards intended to depict performance through the recognition
of revenue. That is, when the entity performs by delivering goods or
services, it should recognize revenue because doing so demonstrates to a
financial statement user that the performance has taken place.
In developing the revenue standard, the boards believed that
it is important to demonstrate to financial statement users when the entity
performs; accordingly, that depiction is the recognition of revenue.
Uncertainties about whether and, if so, how much revenue should be
recognized would be dealt with separately in the measurement of revenue.
3.1.1.2 How Much Revenue to Recognize
Under the core principle, revenue is recognized in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for the promised goods or services.
The measurement concept within the core principle was fiercely debated and
changed over time. In the end, the wording “expects to be entitled,” which
was introduced in the boards’ 2011 revised exposure draft (ED) and
represented a change from their 2010 ED, was deliberate and intended to
reflect a measure of revenue that did not include variability attributable
to customer credit risk. At the time the boards were developing the revenue
standard, they were also debating financial instruments and the impairment
model for those financial instruments. As a result, there were many debates
about whether the measurement of revenue should reflect the risk that the
customer cannot or will not pay the amounts as they become due. The final
decisions of the boards distinguished customer credit risk from other
sources of variability in a revenue contract. Accordingly, the phrase
“expects to be entitled” was intentional — specifically, the phrase “be
entitled” is intentionally different from the word “collect” or the word
“receive” since each of those words would imply that the amount estimated
encompasses all risks, including the risk that the customer cannot or will
not pay. Therefore, unlike a fair value measurement model, the allocated
transaction price approach under the revenue standard generally does not
reflect any adjustments for amounts that the entity might not be able to
collect from the customer (i.e., customer credit risk). However, the
transaction price is inclusive of all other uncertainties. The boards
outlined this allocated transaction price approach in paragraph BC181 of
ASU 2014-09.
In addition, the amount to which an entity expects to be entitled is not always
the price stated in the contract or the invoiced amount, either of which may
be expected on the basis of a common interpretation of the word “entitled.”
For purposes of ASC 606, the term “entitled” is aligned with the
determination of the “accounting” contract (as opposed to the “legal”
contract). Therefore, “entitlement” is influenced by the entity’s past
practices, which affect the enforceable rights and obligations in the
accounting contract. As a result, under ASC 606, the amount to which an
entity expects to be entitled is inclusive of any price concessions that the
entity explicitly or implicitly provides. That is, if the entity will accept
an amount of consideration that is less than the contractually stated or
invoiced price, that amount is a price concession and is treated as variable
consideration. See Chapter
6 for further discussion of the determination of the transaction
price and Chapter 12
for discussion of an exception to the general rule on estimating variable
consideration for sales- or usage-based royalties.
One exception to this “entitlement” notion within measurement is when a
significant financing component is identified in a contract because, for
example, a customer pays in arrears. In that case, customer credit risk will
be reflected in the amount of revenue recognized. This is because an entity
will take customer credit risk into account in determining the appropriate
discount rate (see Section
6.4.4).
In addition, as noted in paragraphs BC260 and BC261 of ASU 2014-09, the FASB and IASB decided that
revenue should be measured at the amount to which an entity expects to be entitled in response to
comments from users of financial statements that “they would prefer revenue to be measured at the
‘gross’ amount so that revenue growth and receivables management (or bad debts) could be analyzed
separately.”
3.1.2 Applying the Standard
After establishing the core principle, the FASB and IASB agreed on the following five steps (as outlined in
Chapter 1) to apply that principle:
The introduction to the standard describes the five steps to be applied. However, those five steps do not
appear sequentially in either the body of the standard or the implementation guidance.
In a manner consistent with the structure of the Codification,
the requirements of ASC 606 adhere to the framework of recognition, measurement,
presentation, and disclosure. As a result, the steps are presented as follows:
- Recognition — Step 1 (identify the contract), step 2 (identify the performance obligations), and step 5 (recognize revenue when [or as] the entity satisfies a performance obligation).
- Measurement — Step 3 (determine the transaction price) and step 4 (allocate the transaction price to the performance obligations in the contract).
An entity should consider all five steps for every contract with
a customer unless a step is clearly inapplicable. After considering the specific
facts and circumstances of a particular contract and understanding the framework
and the five steps, an entity may find that one of the steps is not relevant.
For example, when an entity determines in step 2 that a contract contains only a
single performance obligation, step 4 (allocation of the transaction price) will
often not be applicable. In such a case, the entity can, in effect, jump from
step 3 to step 5.
An entity would generally be expected to apply the five steps in
sequential order. However, the entity may sometimes need to consider a later
step before or concurrently with applying an earlier one.
Example 3-1
In applying step 1 to determine whether
a contract exists and reviewing the collectibility
threshold as required in ASC 606-10-25-1(e), an entity
will need to consider the “[amount] of the consideration
to which it will be entitled in exchange for the
[promised] goods or services.” The amount of
consideration “may be less than the price stated in the
contract if the consideration is variable because the
entity may offer the customer a price concession.” As a
result, the entity would need to apply step 3 (determine
the transaction price) and estimate the expected
discounts or price concessions before being able to
conclude that a valid contract exists under step 1.
Example 3-2
Under step 2 (identify the performance
obligations), ASC 606-10-25-14(b) requires entities to
identify as a performance obligation a “series of
distinct goods or services that are substantially the
same and that have the same pattern of transfer to the
customer.” In accordance with ASC 606-10- 25-15, that
series is a performance obligation only when the
following two criteria are met: (1) the performance
obligation satisfies the criteria in step 5 to be
recognized over time and (2) the same method to measure
progress is used. Therefore, the determination in step 2
about whether a series of distinct goods or services is
a single performance obligation relies on the
requirements in step 5 for determining how revenue is
recognized. As a result, an entity would need to
understand and make a determination about step 5 before
applying step 2.
Example 3-3
To determine the transaction price in
step 3, an entity is required to identify, estimate, and
potentially constrain variable consideration in
accordance with ASC 606-10-32-11 through 32-13. The
consideration in a contract may vary as a result of many
different factors, including when the price is a fixed
rate per increment of service (e.g., hours) but the
expected increments of service may vary throughout the
contract term. In this situation, step 3 would require
an entity to estimate the increments of service expected
to be provided over the contract term since such
increments would result in variable consideration that
the entity would need to estimate (and potentially
constrain) when determining the transaction price. Step
4 would require the transaction price to be allocated to
the distinct goods or services identified in the
contract on the basis of their relative stand-alone
selling prices, and the entity would need to determine
when (or how) the performance obligation is satisfied as
part of step 5, under which it would need to select a
single measure of progress to determine how control of
the promised services is transferred to the customer
over time. However, if the promise to provide services
qualifies as a series (which would be accounted for as a
single performance obligation), ASC 606-10-55-18
provides a practical expedient that allows an entity
that is recognizing revenue over time by using an output
method to recognize revenue equal to the amount that the
entity has the right to invoice if the invoiced amount
corresponds directly to the value transferred to the
customer.
If the amount that the entity is able to
invoice corresponds directly to the value transferred to
the customer (e.g., the invoiced amount is determined on
the basis of hours of service provided and a rate per
hour that corresponds to the value of the services), the
entity can recognize revenue in the amount that it is
entitled to bill. Thus, the entity effectively combines
steps 3, 4, and 5 when it determines that it can apply
the practical expedient in ASC 606-10-55-18.
3.1.2.1 Applying the Guidance Consistently to Contracts With Similar Characteristics and in Similar Circumstances
ASC 606-10
10-3 An entity shall consider the terms of the contract and all relevant facts and circumstances when applying
this guidance. An entity shall apply this guidance, including the use of any practical expedients, consistently to
contracts with similar characteristics and in similar circumstances.
When the FASB was developing the detailed recognition and measurement guidance,
it found many instances in which estimates and judgments would be required.
In each of those instances, the Board believed that entities should consider
all relevant facts and circumstances in applying those estimates and
judgments. As a result, in the “General” section of ASC 606, the Board
outlined requirements that should be applicable throughout the standard.
For example, the guidance on allocating the transaction price to performance
obligations in accordance with step 4 (see Chapter 7) provides that if the
stand-alone selling price of a good or service is not directly observable,
an entity is required to estimate the stand-alone selling price by choosing
an appropriate method (e.g., the adjusted market assessment approach, the
expected cost plus a margin approach, or, in limited circumstances, the
residual approach). Once an entity decides which method to use, it is
required to apply the same method consistently to similar contracts in
accordance with the general guidance in ASC 606-10-10-3 on consistency in
application. Rather than repeat this general requirement throughout the
detailed guidance on recognition and measurement, the Board decided to state
it once at the beginning of the standard to make it applicable to the
standard’s guidance overall.
3.1.2.2 Portfolio Approach
ASC 606-10
10-4
This guidance specifies the
accounting for an individual contract with a
customer. However, as a practical expedient, an
entity may apply this guidance to a portfolio of
contracts (or performance obligations) with similar
characteristics if the entity reasonably expects
that the effects on the financial statements of
applying this guidance to the portfolio would not
differ materially from applying this guidance to the
individual contracts (or performance obligations)
within that portfolio. When accounting for a
portfolio, an entity shall use estimates and
assumptions that reflect the size and composition of
the portfolio.
During the initial development of the new guidance, the FASB’s and IASB’s proposed concepts were
consistently discussed on the basis of an individual contract. However, feedback on the early drafts of
the guidance indicated that it would sometimes not be practical and cost-effective to apply the guidance
on an individual contract basis. In response to this feedback, discussions ensued regarding the use of a
portfolio approach.
The boards ultimately concluded that the revenue standard should generally be
applied on an individual contract basis. However, as a practical expedient,
a portfolio approach is permitted if it is reasonably expected that the
approach’s impact on the financial statements will not be materially
different from the impact of applying the revenue standard on an individual
contract basis.
Some stakeholders had requested additional guidance on when and how to establish
portfolios. However, the boards declined to list specific conditions that
must be met for an entity to apply the revenue standard to a portfolio of
contracts. Instead, the boards used a principle to establish that a
portfolio approach may be used depending on whether the effects of applying
the guidance to a portfolio of contracts would differ materially from the
effects of applying the guidance to contracts individually. Further, as
noted in paragraph BC69 of ASU 2014-09, the boards “indicated that they did
not intend for an entity to quantitatively evaluate each outcome and,
instead, the entity should be able to take a reasonable approach to
determine the portfolios that would be appropriate for its types of
contracts.”
3.1.2.2.1 Deciding Whether a Portfolio Approach May Be Used
Some entities manage a very large number of customer
contracts and offer an array of product combination options (e.g.,
entities in the telecommunications industry may offer a wide selection
of handsets and wireless usage plan options). For these entities, it
would take significant effort to apply some of the requirements of ASC
606, such as the requirement to allocate the stand-alone selling price
to the identified performance obligations, on an individual contract
basis, and the capability of IT systems to capture the relevant
information may be limited.
An entity in this situation may want to use a portfolio
approach as a practical expedient in accordance with ASC 606-10-10-4.
However, a portfolio approach would be appropriate only if (1) it is
applied to a group of contracts (or performance obligations) with
“similar characteristics” and (2) the entity “reasonably expects” that
the effects on the financial statements of applying ASC 606 to the
portfolio “would not differ materially” from the effects of applying
guidance to the individual contracts (or performance obligations) in
that portfolio.
ASC 606 does not provide explicit guidance on how to (1)
evaluate “similar characteristics” and (2) establish a reasonable
expectation that the effects of using a portfolio approach would not
differ materially from those of applying the guidance at a contract or
performance obligation level. Accordingly, an entity will need to
exercise significant judgment in determining that the contracts or
performance obligations it has segregated into portfolios have similar
characteristics at a sufficiently granular level to ensure that the
outcome of using a particular portfolio approach can reasonably be
expected not to differ materially from the results of applying the
guidance to each contract or performance obligation in the portfolio
individually.
In segregating contracts (or performance obligations)
with similar characteristics into portfolios, an entity should apply
objective criteria associated with the particular contracts or
performance obligations and their accounting consequences. When
determining whether particular contracts have similar characteristics,
the entity may find it helpful to focus particularly on those
characteristics that have the most significant accounting consequences
under ASC 606 in terms of their effect on the timing of revenue
recognition or the amount of revenue recognized. Accordingly, the
assessment of which characteristics are most important for determining
similarity will depend on the entity’s specific facts and circumstances.
However, there may be practical constraints on the entity’s ability to
use existing systems to analyze a portfolio of contracts, and these
constraints could affect its determination of how the portfolio should
be segregated.
The table below lists objective factors that entities
may consider when assessing whether particular contracts or performance
obligations have similar characteristics in accordance with ASC
606-10-10-4. Since any of the requirements in ASC 606 could have
significant consequences for a particular portfolio of contracts, the
list provided is not exhaustive.
|
Objective Factors
|
Examples
|
|---|---|
|
Contract deliverables
|
Mix of products and services;
options to acquire additional goods and services;
warranties; promotional programs
|
|
Contract duration
|
Short-term, long-term,
committed, or expected term of contract
|
|
Terms and conditions of the
contract
|
Rights of return, shipping
terms, bill and hold, consignment, cancellation
privileges, and other similar clauses
|
|
Amount, form, and timing of
consideration
|
Fixed, time and materials,
variable, up-front fees, noncash, significant
financing component
|
|
Characteristics of the
customers
|
Size, type, creditworthiness,
geographic location
|
|
Characteristics of the
entity
|
Volume of contracts that include
the various characteristics; historical
information available
|
|
Timing of transfer of goods or
services
|
Over time; at a point in
time
|
The example below illustrates how such factors may be
applied.
Example 3-4
Entity A, a telecommunications
company, offers various combinations of handsets
and usage plans to its customers under two-year
noncancelable contracts. It offers two handset
models: an older model that it offers free of
charge (stand-alone selling price is $250) and the
most recent model, which offers additional
features and functionalities and for which the
entity charges $200 (stand-alone selling price is
$500). The entity also offers two usage plans: a
400-minute plan and an 800-minute plan. The
400-minute plan sells for $40 per month, and the
800-minute plan sells for $60 per month (which
also corresponds to the stand-alone selling price
for each plan).
The table below illustrates the
possible product combinations and allocation of
consideration for each under ASC 606.
As the table indicates, the
effects of each product combination on the
financial statements differ from those of the
other product combinations. The four customer
contracts have different characteristics, and it
may be difficult to demonstrate that the entity
“reasonably expects” that the financial statement
effects of applying the guidance to the portfolio
(the four contracts together) “would not differ
materially” from those of applying the guidance to
each individual contract. The percentage of
contract consideration allocated to the handset
under the various product combinations ranges from
15 percent to 34 percent. The entity may consider
that this range might be too wide to apply a
portfolio approach; if so, some level of
segregation would be required. Alternatively, the
entity might determine that there are two
portfolios, one for old handsets and the other for
new handsets. Under this alternative approach, the
entity would need to perform additional analysis
to assess whether the accounting consequences of
using two rather than four portfolios would result
in financial statement effects that differ
materially.
The example above is relatively straightforward. In
practice, however, the contracts illustrated could involve additional
layers of complexity, such as (1) different contract durations; (2)
different call and text messaging plans; (3) different pricing schemes
(e.g., fixed or variable pricing based on usage); (4) different
promotional programs, options, and incentives; and (5) contract
modifications. Accounting for such contracts could be further
complicated by the high pace of change in product offerings.
In general, the more specific the factors an entity uses
to segregate its contracts or performance obligations into portfolios
(i.e., the “greater” the extent of disaggregation), the easier it should
be for the entity to conclude that the results of applying the guidance
to a particular portfolio are not expected to differ materially from the
results of applying the guidance to each individual contract (or
performance obligation) in the portfolio. However, further
disaggregation into separate sub-portfolios is likely to improve the
overall accuracy of estimates only if those sub-portfolios have some
different characteristics. For instance, segregating on the basis of
geographic location may not be beneficial if similar combinations of
products and services that have similar terms and conditions are sold to
a similar group of customers in different geographic areas. Likewise,
segregating on the basis of whether contract terms allow a right of
return may not be necessary if the returns are not expected to be
significant.
While there is no requirement in ASC 606 to
“quantitatively evaluate”1 whether using a portfolio approach would produce an outcome
materially different from that of applying the guidance at the contract
or performance obligation level, an entity should be able to demonstrate
why it reasonably expects the two outcomes not to differ materially. The
entity may do so by various means depending on its specific facts and
circumstances (subject to the constraints of a cost-benefit analysis).
Such means include, but are not limited to, the following:
-
Data analytics based on reliable assumptions and underlying data (internally or externally generated) related to the portfolio.
-
A sensitivity analysis that evaluates the characteristics of the contracts or performance obligations in the portfolio and the assumptions the entity used to determine a range of potential differences in applying the different approaches.
-
A limited quantitative analysis, supplemented by a more extensive qualitative assessment that may be performed when the portfolios are disaggregated.
Typically, some level of objective and verifiable
information would be necessary to demonstrate that using a portfolio
approach would not result in a materially different outcome. An entity
may also wish to (1) consider whether the costs of performing this type
of analysis potentially may outweigh the benefits of accounting on a
portfolio basis and (2) assess whether it is preferable to invest in
systems solutions that would allow accounting on an individual contract
basis.
3.1.2.2.2 Applying the Portfolio Approach to Some, but Not Other, Similar Contracts
The practical expedient in ASC 606-10-10-4 is available
only if it is reasonably expected that the financial statement
effects of applying ASC 606 to a portfolio of contracts would not differ
materially from the effects of applying ASC 606 to the individual
contracts within that portfolio. Accordingly, it is possible for
entities to prepare their consolidated financial statements by using a
mixture of approaches because the resulting accounting effects are not
reasonably expected to differ materially.
As discussed in Section 3.1.2.1, entities are required
to apply the revenue standard consistently to similar contracts. In
light of this, a company that uses the portfolio approach to account for
some of its contracts may wonder whether it is required to use the same
approach to account for all of its contracts. The example below
illustrates a situation in which it is acceptable for an entity to apply
the portfolio approach to some contracts and not apply it to others.
Example 3-5
Assume the following facts:
- Entity A consolidates Subsidiary B and Subsidiary C, both of which have a large number of contracts with customers with similar characteristics.
- Subsidiary B has elected to use a portfolio approach under ASC 606-10-10-4 when accounting for revenue from those contracts and does not have computer systems that would enable it to recognize revenue on a contract-by-contract basis.
- Subsidiary C does not elect to use a portfolio approach specified in ASC 606-10-10-4 when accounting for revenue from those contracts; instead, it has developed specialized computer systems that enable it to recognize revenue on a contract-by-contract basis.
In its consolidated financial statements, A may
apply a portfolio approach to contracts with B’s
customers without applying that approach to
contracts with C’s customers if it reasonably
expects that the use of that approach would not
differ materially from applying ASC 606 on a
contract-by-contract basis. In these
circumstances, B and C are materially applying the
same accounting policy to A’s revenue contracts
that have similar characteristics.
Connecting the Dots
A question was raised regarding the use of the
portfolio approach when an entity applies the guidance on
estimating and constraining variable consideration.
Specifically, the TRG discussed at its July 13, 2015, meeting
whether an entity is using the portfolio practical expedient
when it evaluates evidence from other similar contracts in
applying the expected value method of estimating variable
consideration. Q&A 39 of the FASB’s Revenue Recognition Implementation
Q&As (the “Implementation
Q&As”) specifies that an entity’s use of a portfolio of data
to establish an estimate is not the same process as using the
portfolio expedient in ASC 606-10-10-4. See Section 6.3.2
for the FASB staff’s conclusion.
3.1.3 Practical Expedients
An entity must make several policy elections and consider electing certain
practical expedients when accounting for revenue under ASC 606. The table below
provides a summary of practical expedients available to entities. Entities are
not required to adopt the practical expedients in ASC 606. An entity should
apply the use of any practical expedients consistently to contracts with similar
characteristics and in similar circumstances.
|
Codification Reference
|
Practical Expedient
|
Availability Under U.S. GAAP, IFRS Accounting Standards,
or Both
|
|---|---|---|
|
Policy Elections Affecting the Measurement and
Recognition of Revenue
| ||
|
ASC 606-10-32-18
|
Significant financing component — An entity does
not need to adjust the promised amount of consideration
for the effects of a significant financing component if
it expects, at contract inception, that the period
between the entity’s transfer of a promised good or
service to a customer and the customer’s payment for
that good or service will be one year or less.
|
U.S. GAAP and IFRS Accounting Standards
|
|
ASC 606-10-32-2A
|
Sales taxes — An entity may elect to exclude from
its transaction price any amounts collected from
customers for all sales (and other similar) taxes.
|
U.S. GAAP only
|
|
ASC 340-40-25-4
|
Costs of obtaining a contract — An entity “may
recognize the incremental costs of obtaining a contract
as an expense when incurred if the amortization period
of the asset that the entity otherwise would have
recognized is one year or less.”
|
U.S. GAAP and IFRS Accounting
Standards
|
|
ASC 606-10-25-18B
|
Shipping and handling — An entity may elect to
account for shipping and handling activities that occur
after control of the related good transfers as
fulfillment activities instead of assessing such
activities as performance obligations.
|
U.S. GAAP only
|
|
ASC 606-10-10-4
|
Portfolio approach — An entity may apply the
revenue standard to a portfolio of contracts (or
performance obligations) with similar characteristics if
it “reasonably expects that the effects on the financial
statements of applying this guidance to the portfolio
would not differ materially from applying this guidance
to the individual contracts (or performance obligations)
within that portfolio.”
|
U.S. GAAP and IFRS Accounting Standards
|
|
ASC 606-10-55-18
|
Right to invoice — For performance obligations
satisfied over time, “if an entity has a right to
consideration from a customer in an amount that
corresponds directly with the value to the customer of
the entity’s performance completed to date (for example,
a service contract in which an entity bills a fixed
amount for each hour of service provided), the entity
may recognize revenue in the amount to which the entity
has a right to invoice.”
|
U.S. GAAP and IFRS Accounting Standards
|
|
ASC 952-606
|
Private-company franchisor — A franchisor that is
not a PBE (a “private-company franchisor”) may 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.
|
U.S. GAAP only
|
|
Policy Elections Affecting Disclosures
| ||
|
ASC 606-10-50-14 and 50-14A
|
Disclosure:
|
The first exemption is available under U.S. GAAP and IFRS
Accounting Standards, and the second exemption is
available under U.S. GAAP only.
|
For many of the practical expedients outlined above, the revenue standard
requires disclosure that an entity has elected such policy. See Chapter 15 for disclosure requirements.
Footnotes
1
Paragraph BC69 of ASU 2014-09 states that the
FASB and the IASB “acknowledged that an entity would need to
apply judgment in selecting the size and composition of the
portfolio in such a way that the entity reasonably expects that
application of the revenue recognition model to the portfolio
would not differ materially from the application of the revenue
recognition model to the individual contracts or performance
obligations in that portfolio. In their discussions, the Boards
indicated that they did not intend for an entity to
quantitatively evaluate each outcome and, instead, the entity
should be able to take a reasonable approach to determine the
portfolios that would be appropriate for its types of
contracts.”