Chapter 5 — Step 2: Identify the Performance Obligations

5.2 Promises in Contracts With Customers

5.2.1 In General

Identification of all promises in a contract is important because promises are what comprise performance obligations and entities recognize revenue on the basis of the satisfaction of performance obligations. ASC 606-10-25-18 lists examples of what could constitute a promise in a contract:

ASC 606-10

25-18 Depending on the contract, promised goods or services may include, but are not limited to, the following:

Sale of goods produced by an entity (for example, inventory of a manufacturer)
Resale of goods purchased by an entity (for example, merchandise of a retailer)
Resale of rights to goods or services purchased by an entity (for example, a ticket resold by an entity acting as a principal, as described in paragraphs 606-10-55-36 through 55-40)
Performing a contractually agreed-upon task (or tasks) for a customer
Providing a service of standing ready to provide goods or services (for example, unspecified updates to software that are provided on a when-and-if-available basis) or of making goods or services available for a customer to use as and when the customer decides
Providing a service of arranging for another party to transfer goods or services to a customer (for example, acting as an agent of another party, as described in paragraphs 606-10-55-36 through 55-40)
Granting rights to goods or services to be provided in the future that a customer can resell or provide to its customer (for example, an entity selling a product to a retailer promises to transfer an additional good or service to an individual who purchases the product from the retailer)
Constructing, manufacturing, or developing an asset on behalf of a customer
Granting licenses (see paragraphs 606-10-55-54 through 55-60 and paragraphs 606-10-55-62 through 55-65B)
Granting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs 606-10-55-41 through 55-45).

5.2.2 Implied Promises

ASC 606-10

25-16 A contract with a customer generally explicitly states the goods or services that an entity promises to transfer to a customer. However, the promised goods and services identified in a contract with a customer may not be limited to the goods or services that are explicitly stated in that contract. This is because a contract with a customer also may include promises that are implied by an entity’s customary business practices, published policies, or specific statements if, at the time of entering into the contract, those promises create a reasonable expectation of the customer that the entity will transfer a good or service to the customer.

For some contracts, it will be easy to identify all promises because they are all specifically stated. However, the FASB and IASB decided to require entities to identify the implied promises as well. The reason for the boards’ decision, as discussed in paragraph BC87 of ASU 2014-09, was to ensure that all of the promises in a contract are appropriately identified so that when an entity allocates consideration to the performance obligations identified, it will recognize revenue when control of all of the promised goods and services in the contract is transferred to the customer. Paragraph BC87 goes on to state, “The Boards also noted that the implied promises in the contract do not need to be enforceable by law. If the customer has a valid[1] expectation, then the customer would view those promises as part of the negotiated exchange (that is, goods or services that the customer expects to receive and for which it has paid).” Therefore, promises that an entity’s customer reasonably expects the entity to fulfill even though they are not explicitly stated in the contract are implied promises that should be accounted for.

Connecting the Dots

Software companies may be familiar with identifying implied promises through software upgrades and updates that are not explicitly identified in the arrangement. In addition, a manufacturer of furniture may provide a written warranty to its customers to repair the products in the first year after purchase. However, if the manufacturer also has historically provided repairs free of charge beyond the first year in accordance with the manufacturer’s customary business practice, an implied promise may exist.

The concept of implied promises is important because if an entity does not identify an implied promise in a contract, it could recognize revenue at the wrong time. For example, the entity could recognize all revenue from the contract because it has satisfied all explicitly stated promises in the contract. However, because the entity still has an unidentified implied promise to satisfy for the customer, no consideration was allocated to that promise. As a result, the entity recognized more revenue from the contract than it should have at that point.

The guidance on implied promises will require an entity to use judgment to determine whether a customer has a reasonable expectation based on customary business practices or the entity’s previous transactions with the customer that the entity will provide a good or service not specifically stated in the contract.

5.2.2.1 Illustrative Examples in ASC 606 of Explicit and Implicit Promises (ASC 606-10-55-151 Through 55-157A)

Cases A, B, and C of Example 12 in ASC 606, which are reproduced below, further discuss explicit and implicit promises.

ASC 606-10

Example 12 — Explicit and Implicit Promises in a Contract

55-151 An entity, a manufacturer, sells a product to a distributor (that is, its customer), who will then resell it to an end customer.

Case A — Explicit Promise of Service

55-152 In the contract with the distributor, the entity promises to provide maintenance services for no additional consideration (that is, “free”) to any party (that is, the end customer) that purchases the product from the distributor. The entity outsources the performance of the maintenance services to the distributor and pays the distributor an agreed-upon amount for providing those services on the entity’s behalf. If the end customer does not use the maintenance services, the entity is not obliged to pay the distributor.

55-153 The contract with the customer includes two promised goods or services — (a) the product and (b) the maintenance services (because the promise of maintenance services is a promise to transfer goods or services in the future and is part of the negotiated exchange between the entity and the distributor). The entity assesses whether each good or service is distinct in accordance with paragraph 606-10-25-19. The entity determines that both the product and the maintenance services meet the criterion in paragraph 606-10-25-19(a). The entity regularly sells the product on a standalone basis, which indicates that the customer can benefit from the product on its own. The customer can benefit from the maintenance services together with a resource the customer already has obtained from the entity (that is, the product).

55-153A The entity further determines that its promises to transfer the product and to provide the maintenance services are separately identifiable (in accordance with paragraph 606-10-25-19(b)) on the basis of the principle and the factors in paragraph 606-10-25-21. The product and the maintenance services are not inputs to a combined item in this contract. The entity is not providing a significant integration service because the presence of the product and the services together in this contract do not result in any additional or combined functionality. In addition, neither the product nor the services modify or customize the other. Lastly, the product and the maintenance services are not highly interdependent or highly interrelated because the entity would be able to satisfy each of the promises in the contract independent of its efforts to satisfy the other (that is, the entity would be able to transfer the product even if the customer declined maintenance services and would be able to provide maintenance services in relation to products sold previously through other distributors). The entity also observes, in applying the principle in paragraph 606-10-25-21, that the entity’s promise to provide maintenance is not necessary for the product to continue to provide significant benefit to the customer. Consequently, the entity allocates a portion of the transaction price to each of the two performance obligations (that is, the product and the maintenance services) in the contract.

Case B — Implicit Promise of Service

55-154 The entity has historically provided maintenance services for no additional consideration (that is, “free”) to end customers that purchase the entity’s product from the distributor. The entity does not explicitly promise maintenance services during negotiations with the distributor, and the final contract between the entity and the distributor does not specify terms or conditions for those services.

55-155 However, on the basis of its customary business practice, the entity determines at contract inception that it has made an implicit promise to provide maintenance services as part of the negotiated exchange with the distributor. That is, the entity’s past practices of providing these services create reasonable expectations of the entity’s customers (that is, the distributor and end customers) in accordance with paragraph 606-10-25-16. Consequently, the entity assesses whether the promise of maintenance services is a performance obligation. For the same reasons as in Case A, the entity determines that the product and maintenance services are separate performance obligations.

Case C — Services Are Not a Promised Service

55-156 In the contract with the distributor, the entity does not promise to provide any maintenance services. In addition, the entity typically does not provide maintenance services, and, therefore, the entity’s customary business practices, published policies, and specific statements at the time of entering into the contract have not created an implicit promise to provide goods or services to its customers. The entity transfers control of the product to the distributor and, therefore, the contract is completed. However, before the sale to the end customer, the entity makes an offer to provide maintenance services to any party that purchases the product from the distributor for no additional promised consideration.

55-157 The promise of maintenance is not included in the contract between the entity and the distributor at contract inception. That is, in accordance with paragraph 606-10-25-16, the entity does not explicitly or implicitly promise to provide maintenance services to the distributor or the end customers. Consequently, the entity does not identify the promise to provide maintenance services as a performance obligation. Instead, the obligation to provide maintenance services is accounted for in accordance with Topic 450 on contingencies.

55-157A Although the maintenance services are not a promised service in the current contract, in future contracts with customers the entity would assess whether it has created a business practice resulting in an implied promise to provide maintenance services.

5.2.2.2 Accounting for Virtual Goods

Many developers of online games allow customers to access and play the games for no charge. Rather than licensing the software to their customers, the developers generally host the software for their customers to access. Arrangements that allow customers of online game developers to access and play online games are accounted for as a service (hosted software as a service [SaaS]) rather than as the transfer of a software license because the customers typically cannot take possession of the software associated with the online games.

To enhance the gaming experience of customers who can access and play online games for no charge, online game developers may give them the option to purchase virtual goods or services (i.e., virtual items). These virtual items are generally classified as either (1) consumables (i.e., items that are consumed by a specific action and are no longer available to a customer once consumed, such as virtual groceries) or (2) durables (i.e., items that are accessible to a customer for use throughout the entire game, such as a virtual house). In addition, customers may have the ability to purchase virtual currency, which enables them to purchase other virtual items.

In effect, customers are enhancing their gaming experience through optional purchases. Some of these purchases are “consumed” by a player immediately or shortly after he or she gains access to them, and others are consumed by the player over time. Nevertheless, even when an item is consumed immediately, it may still have an ongoing effect on the player’s gaming experience (e.g., if consumption of the item enables the player to reach another level that would otherwise have been inaccessible).

Generally, a developer is not contractually obligated to continue making an online game available to a customer. Further, a developer can terminate a customer’s account at any time for no cause, regardless of whether the customer has purchased virtual items. Nevertheless, many developers have a customary business practice of notifying customers when they are planning to shut down an online game, although such notification is not contractually required.

Generally, an implied promise would exist since the developer has implicitly promised to provide hosting services after the customer purchases a virtual item. Without the hosting services, the customer would not be able to use and benefit from the enhanced gaming experience that it receives through the game as a result of purchasing the virtual item. Although the developer is not contractually obligated (i.e., it has not explicitly promised) to continue hosting the online game for the customer, it has established a customary business practice of (1) continuing to host the online game and (2) notifying customers when it is planning to shut down the game. The developer’s customary business practice creates a reasonable expectation that the developer will continue to host the software so that the virtual item (or the enhanced gaming experience derived from the virtual item) will remain available to the customer.

A developer should carefully consider the nature of the implied promise to its customer in determining the appropriate recognition model. Customers often simultaneously receive and consume the benefits of the developer’s performance of making the hosted software available to the customer. Consequently, the developer may determine that it should recognize revenue for its implied promise either at a point in time (e.g., upon consumption) or over time by using a method that faithfully depicts its performance in transferring control of the promised services (i.e., the benefits of the enhanced gaming experience related to the purchase of virtual items promised to the customer). Immediate recognition of revenue at the point in time when a customer purchases a virtual item may not be appropriate if the benefits of the enhanced gaming experience are provided over time. Rather, the entity may need to consider the period over which the customer benefits from the enhanced gaming experience that it receives by purchasing the virtual item when determining the appropriate period and pattern of revenue recognition.

We believe that the following may be relevant factors for an entity to consider in making this assessment:

Whether the nature of the implied promise is to provide an enhanced gaming experience through the hosted service over time or to enable the player to consume virtual items.
The period over which the enhanced gaming experience is provided if the benefits are consumed throughout the hosting period (e.g., user life, gaming life).
The life span over which, or number of times, the virtual item may be accessed or used.
Whether the virtual item must be used immediately or may be stored for later use.
How and over what period the virtual item benefits the customer’s gaming experience (e.g., a consumable such as a virtual meal that is used immediately vs. a durable that allows a player to “level up” within the game in such a way that the increased performance continues to enhance the gaming experience).
Whether the benefit of purchasing the virtual item on the customer’s gaming experience is temporary or permanent.

For additional information about the timing of revenue recognition, see Chapter 8.

5.2.3 Immaterial Promises

ASC 606-10

25-16A 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. If the revenue related to a performance obligation that includes goods or services that are immaterial in the context of the contract is recognized before those immaterial goods or services are transferred to the customer, then the related costs to transfer those goods or services shall be accrued.

25-16B An entity shall not apply the guidance in paragraph 606-10-25-16A to a customer option to acquire additional goods or services that provides the customer with a material right, in accordance with paragraphs 606-10-55-41 through 55-45.

When the FASB and IASB were developing the revenue standard, they received feedback, as noted in paragraph BC88 of ASU 2014-09, that there can be situations in which promises in contracts could be considered “marketing expenses or incidental obligations.” The boards considered the feedback but decided that allowing management to determine whether promises are a marketing expense would result in too much subjectivity on the part of management and therefore could lead to inconsistent application of the concept. As a result, the boards determined that every promise, either on its own or jointly with other promises, should give rise to a performance obligation.

Paragraph BC90 of ASU 2014-09 notes that the boards “decided not to exempt an entity from accounting for performance obligations that the entity might regard as being perfunctory or inconsequential. Instead, an entity should assess whether those performance obligations are immaterial to its financial statements.”

However, questions arose about whether it was necessary for an entity to identify immaterial goods or services when identifying performance obligations.

In April 2016, the FASB issued ASU 2016-10,2 which 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). This change should not apply to an entity’s assessment of optional goods and services offered to a customer, which the entity must evaluate under ASC 606-10-55-42 and 55-43 to determine whether they give the customer a material right (i.e., an optional good offered for free or at a discount, such as that provided through loyalty point programs, may not be material for an individual contract but could be material for contracts in the aggregate and accounted for as a material right). Material rights are further discussed in Chapter 11.

ASU 2016-10 permits entities to choose not to evaluate whether immaterial items or activities represent performance obligations. Thus, the exclusion of such immaterial items or activities under the revenue standard would not be considered a departure from GAAP and need not be aggregated as a misstatement. If an entity identifies multiple immaterial promised goods or services in a contract with a customer, the entity should consider the materiality of those individually immaterial promises in the aggregate when identifying performance obligations.

5.2.3.1 Accounting for Perfunctory or Inconsequential Performance Obligations

Under ASC 606, perfunctory or inconsequential promises in a contract may be, but are not presumed to be, immaterial in the context of the contract.

Example 5-1

Entity X enters into a contract to transfer Product A and Item B to a customer. Product A and Item B meet the criteria in ASC 606-10-25-19 to be considered distinct and do not meet the criteria in ASC 606-10-25-14(b) (i.e., they do not constitute a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer). Item B may be either a substantive promise in the arrangement (e.g., free maintenance on Product A for two years) or inconsequential (e.g., certain promises to participate in a joint committee, delivery of an installation or training manual, a simple installation process that only requires unpacking and plugging in, a simple inspection service).

Even if Item B is considered perfunctory or inconsequential, X cannot ignore the guidance in ASC 606 when determining whether and, if so, how to account for it. Perfunctory or inconsequential promises in a contract may be, but are not presumed to be, immaterial in the context of the contract. As a result, X may need to reevaluate historical conclusions by using the framework outlined in ASC 606-10-25-16A and 25-16B.

5.2.3.2 Framework for Identifying Immaterial Promised Goods or Services

ASC 606-10-25-16A and 25-16B (reproduced in Section 5.2.3) provide guidance on immaterial goods and services. Stakeholders have asked about the framework an entity should use to identify a potential good or service that is immaterial in the context of the contract. We believe that the following considerations are relevant to the assessment of whether a good or service is immaterial in the context of the contract:

An entity may conclude that a potential good or service is immaterial in the context of the contract if the estimated stand-alone selling price of the potential good or service is immaterial (quantitatively) compared with the total consideration in the contract (i.e., the amount that would be allocated to such good or service is immaterial in the context of the contract).
An entity may conclude that a potential good or service is immaterial in the context of the contract if it determines that the customer does not consider the potential good or service material to the contract (i.e., the entity would evaluate qualitative factors, including the customer’s perspective, in determining whether a potential good or service is immaterial in the context of the contract).
An entity may conclude that a potential good or service is immaterial in the context of the contract if it determines that the customer would have entered into the contract and paid the same (or similar) consideration if the potential good or service was excluded from the contract.

In addition, we think that when an entity performs an assessment to identify immaterial promised goods or services, it should also consider the guidance in ASC 606-10-25-16B on customer options (i.e., potential material rights) as well as the SEC staff’s view of “material” as discussed in SAB Topic 1.M. For additional information about the accounting for material rights, see Chapter 11.

5.2.4 Consideration of Activities

ASC 606-10

25-17 Promised goods or services do not include activities that an entity must undertake to fulfill a contract unless those activities transfer a good or service to a customer. For example, a services provider may need to perform various administrative tasks to set up a contract. The performance of those tasks does not transfer a service to the customer as the tasks are performed. Therefore, those setup activities are not promised goods or services in the contract with the customer.

There is a difference between promises and activities in contracts. The FASB and IASB wanted this to be clear because the revenue standard is based on recognizing revenue as an entity transfers control of goods or services to customers. When an entity promises goods and services to customers, it is going to transfer those goods or services to the customers. In contrast, activities that an entity is required to undertake to fulfill promises in a contract do not necessarily transfer goods or services to the customer. Therefore, since the completion of an activity does not represent transfer of control, an entity would not recognize revenue on the basis of the completion of an activity.

5.2.4.1 Assessing Whether a Preproduction Activity Forms Part of the Delivery of a Promised Good or Service

In some long-term supply arrangements, before goods can be delivered to a customer, an entity may be required to undertake preproduction activities such as “up-front” engineering and design (e.g., to create new technology or adapt existing technology to the needs of the customer). Because of the nature of the underlying tasks, preproduction activities are often carried out over time.

If a preproduction activity transfers a good or service to a customer as the preproduction activity is carried out, it will be appropriate, subject to the other requirements of ASC 606, to recognize revenue as the preproduction activity is carried out.3

If a preproduction activity does not transfer a good or service to a customer as the preproduction activity is carried out, no revenue should be recognized as the preproduction activity is carried out. Instead, the associated costs should either be capitalized (e.g., if they meet the criteria in ASC 340-40-25-5) or expensed as incurred.

When performing an assessment of whether preproduction activities transfer a good or service to a customer, an entity should identify the nature of its promise(s) to the customer to determine whether the preproduction activity represents either of the following:

A promised good or service (or part of a promised good or service) that is transferred to the customer.
A fulfillment activity that does not transfer a good or service to the customer.

In making this determination, an entity will need to use judgment. In addition to the guidance in ASC 606-10-25-14 through 25-22 on identifying performance obligations, an entity might look to the guidance in ASC 606-10-25-27 through 25-29 on satisfying a performance obligation over time.

One scenario in which a performance obligation is satisfied over time is when the “customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs” (see ASC 606-10-25-27(a)). A determination that the customer simultaneously receives and consumes benefits as the entity carries out the preproduction activity would indicate that the preproduction activity is, or forms part of, a performance obligation. In the entity’s assessment of whether the customer simultaneously receives and consumes benefits, it may be helpful to consider, in accordance with ASC 606-10-55-6, whether another entity would need to substantially reperform the preproduction activities if that other entity were to fulfill the remaining performance obligation to the customer. When making this assessment, the reporting entity should assume that the other entity would not have the benefit of any asset that the reporting entity would continue to control if the contract were terminated.

Another scenario in which a performance obligation is satisfied over time is when the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. A determination that the preproduction activity creates or enhances an asset that the customer controls as the asset is created or enhanced would indicate that the preproduction activity is, or forms part of, a performance obligation.

Example 5-2

An entity enters into a contract with a customer to develop and produce a new product. As part of its development of that new product for the customer, the entity performs engineering and development activities. The entity determines that (1) the customer will own the intellectual property (patents) that results from those activities and (2) those activities are creating an asset that the customer controls as the asset is created.

Accordingly, the entity concludes that (1) the engineering and development activities are transferring a good or service to the customer over time and (2) those activities are, or form part of, the performance obligation(s) in the contract with the customer.

The above issue is addressed in Q&A 16 (compiled from previously issued TRG Agenda Papers 46 and 49) of the FASB staff’s Revenue Recognition Implementation Q&As (the “Implementation Q&As”). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

5.2.4.2 Promise to Stand Ready to Accept a Returned Product

Entities often offer customers the right to return a product within a certain period after its initial sale, provided that the product has not been used or damaged. ASC 606-10-55-24 states that an “entity’s promise to stand ready to accept a returned product during the return period should not be accounted for as a performance obligation in addition to the obligation to provide a refund” (emphasis added). Therefore, a right of return is not a separate performance obligation. However, a customer’s right to return a product may affect the amount of revenue recognized (the transaction price) because revenue may only be recognized for goods that are not expected to be returned.

For further discussion of sales with a right of return, see Section 6.3.5.3. For stand-ready obligations to provide goods or services, see Section 5.4.3.

5.2.4.3 Shipping and Handling Activities

ASC 606-10

25-18A An entity that promises a good to a customer also might perform shipping and handling activities related to that good. If the shipping and handling activities are performed before the customer obtains control of the good (see paragraphs 606-10-25-23 through 25-30 for guidance on satisfying performance obligations), then the shipping and handling activities are not a promised service to the customer. Rather, shipping and handling are activities to fulfill the entity’s promise to transfer the good.

25-18B If shipping and handling activities are performed after a customer obtains control of the good, then the entity may elect to account for shipping and handling as activities to fulfill the promise to transfer the good. The entity shall apply this accounting policy election consistently to similar types of transactions. An entity that makes this election would not evaluate whether shipping and handling activities are promised services to its customers. If revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities shall be accrued. An entity that applies this accounting policy election shall comply with the accounting policy disclosure requirements in paragraphs 235-10-50-1 through 50-6.

Stakeholders asked the FASB to clarify whether shipping and handling services that do not represent the predominant activity in the contract should be accounted for as a promised service (i.e., potentially a separate performance obligation to which a portion of the transaction price must be allocated) or as a fulfillment cost that should be accounted for under the new fulfillment cost guidance in ASC 340-40.

In April 2016, the FASB issued ASU 2016-10,4 which provides a practical expedient that permits an entity to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities (i.e., an expense) rather than as a promised service (i.e., a revenue element). An entity may also elect to account for shipping and handling activities that occur after control of the good is transferred to the customer as a promised service. When the practical expedient is elected and revenue for the related good is recognized before the shipping and handling activities occur, the entity should accrue the costs of the shipping and handling activities at the time control of the related good is transferred to the customer (i.e., at the time of sale).

ASU 2016-10 also explains that shipping and handling activities performed before control of a product is transferred do not constitute a promised service to the customer in the contract (i.e., they represent fulfillment costs).

Connecting the Dots

The election to account for shipping and handling services as a promised service (a revenue element) or a fulfillment activity (a cost element) typically should not apply to entities whose principal service offering is shipping or transportation. Further, we believe that such election (1) should be applied consistently and (2) is available to entities that recognize revenue for the sale of goods either at a point in time or over time.

In a speech at the 2017 AICPA Conference on Current SEC and PCAOB Developments, Barry Kanczuker, associate chief accountant in the SEC’s Office of the Chief Accountant (OCA), provided the following guidance on the classification of shipping and handling expenses:

The staff has received questions under Topic 606 regarding the classification of shipping and handling expenses. Under Topic 606, if the shipping and handling activities are performed before the customer obtains control of the good, a registrant would account for the shipping and handling as activities to fulfill the promise to transfer the good. If shipping and handling is performed after a customer obtains control of the good, an entity may either account for shipping and handling as a promised service to the customer or elect to account for shipping and handling as activities to fulfill the promise to transfer the good. The questions we received related specifically to those shipping and handling expenses that were accounted for as activities to fulfill the promise to transfer the good, and these questions arose because the prior guidance on classification of shipping and handling expenses, and the explicit policy election regarding classification of such costs, was superseded by the new revenue standard, which now does not include any guidance that addresses the classification of shipping and handling expenses.

Given the noted absence of any guidance, I believe an entity will need to apply reasonable judgment in determining the appropriate classification of shipping and handling expenses for those shipping and handling activities that are accounted for as activities to fulfill the promise to transfer the good. Hence, the staff noted it would not object to the following approaches. First, the staff noted that it would not object to classification of these expenses within cost of sales. Second, given that there is no explicit guidance within Topic 606 related to the classification of shipping and handling expenses, the staff noted that it also would not object to an entity continuing to apply its previous policy regarding classification of these expenses, which could potentially be outside of cost of sales. I believe that a registrant that classifies significant shipping and handling costs outside of cost of sales should consider whether it should disclose the amount of such costs and the line item or items on the income statement that include them, similar to the disclosures required under the previous guidance. [Footnotes omitted]

5.2.4.4 Mobilization Activities

In some industries, entities may perform “mobilization” activities at or near contract inception to fulfill their performance obligations under contracts within the scope of ASC 606 (e.g., transportation of equipment to the construction site). Questions have arisen about how an entity should account for such mobilization activities. Frequently, these activities do not result in the transfer of a good or service to the customer; rather, they represent set-up activities and are therefore not accounted for as part of the performance obligation(s) in the contract with the customer. Refer to Section 13.3.5 for a discussion about the accounting for incurred costs related to set-up activities and mobilization.

Footnotes

[1]

In April 2016, the FASB issued ASU 2016-10. As a result of ASU 2016-10, the customer’s “valid” expectation, as discussed in paragraph BC87 of ASU 2014-09, was changed to the customer’s “reasonable” expectation under ASC 606-10-25-16.

The IASB did not amend IFRS 15 to expressly address immaterial promises. Accordingly, IFRS 15 does not include similar guidance on determining the materiality of promised goods or services. Rather, an entity’s overall materiality considerations should be used in the evaluation of promised goods or services under IFRS 15. The boards do not expect a significant difference in application. For a summary of differences between U.S. GAAP and IFRS Accounting Standards on revenue-related topics, see Appendix A.

Such a preproduction activity could be a performance obligation in its own right or could form part of a larger performance obligation.

The IASB did not amend IFRS 15 to expressly address shipping and handling activities. Accordingly, IFRS 15 does not include similar elections. See Appendix A for a summary of differences between U.S. GAAP and IFRS Accounting Standards on revenue-related topics.

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