Deloitte’s Roadmap: Revenue Recognition

Preface

On the Radar

The core principle of the revenue standard is to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods and services. Significant judgments frequently need to be made when an entity evaluates the appropriate recognition of revenue from contracts with customers. These judgments are often required throughout the revenue standard’s five-step process that an entity applies to determine when, and how much, revenue should be recognized.

Application of the five steps illustrated above requires a critical assessment of the specific facts and circumstances of an entity’s arrangement with its customer. This Roadmap addresses each of these steps in detail and provides interpretive guidance on how to address the myriad complexities that may exist in revenue arrangements. Some of the more challenging and judgmental aspects of applying the revenue standard are highlighted below.

Entities often have difficulty determining the appropriate judgments to apply in the identification of performance obligations and the assessment of whether an entity is a principal or an agent, as described below. Not surprisingly, these are two topics of the revenue standard on which entities commonly seek the SEC staff’s views in prefiling submissions. In addition, these topics are frequently discussed in SEC staff speeches at the annual AICPA & CIMA Conference on Current SEC and PCAOB Developments.

Identifying Performance Obligations

A performance obligation is the unit of account for which revenue is recognized, and the identification of performance obligations affects the revenue recognition timing. A performance obligation is a promise that an entity makes to transfer to its customer a “distinct” good or service. Contracts with customers often include multiple promises, and it can be difficult for an entity to (1) identify the activities it is undertaking that qualify as promises to provide goods or services and (2) determine which promises are distinct. An entity should answer two questions to evaluate whether a promised good or service is distinct and, thus, a separate performance obligation:

Can the customer benefit from the good or service on its own or with other readily available resources (i.e., is the good or service capable of being distinct)?
Is the entity’s promise to transfer the good or service separately identifiable from other promises in the contract (i.e., is the good or service distinct within the context of the contract)?

Only when the answer to each question above is yes for a promised good or service (or bundle of goods or services) is the promised good or service (or bundle of goods or services) distinct and, therefore, a performance obligation. If the two revenue recognition criteria for identifying a distinct good or service are not met, an entity must combine goods or services until it identifies a bundle that is distinct.

Answering the first question can be straightforward but is not always so. If an entity typically sells a good or service on its own, or if the good or service can be used with another good or service that the entity (or another vendor) sells separately, the answer to the first question is likely to be yes. The key is whether a customer can generate some economic benefits from the good or service on its own or with other readily available resources.

Answering the second question is often more challenging. For an entity to assess whether its promise to transfer a good or service is separately identifiable from other goods or services in a contract, the entity should evaluate whether the nature of the promise is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs.

Broadly speaking, if multiple promised goods or services represent inputs to a combined output, the combined output would typically be greater than (or substantively different from) the sum of those inputs.

Assessing Whether an Entity Is a Principal or an Agent

It is not uncommon for more than one party to be involved in providing goods or services to a customer. Whenever another party is involved, an entity must evaluate whether its promise is to provide the goods or services itself as a principal or to arrange for another party to provide the goods or services to a customer. Such a determination significantly affects the amount of revenue an entity records. This is because a principal records as revenue the gross amount of consideration from the customer (with a corresponding cost for the amount paid to the other party involved in providing goods or services to the customer) while an agent records the net amount retained from the transaction.

The unit of account for performing the principal-versus-agent assessment is called the “specified” good or service, which is the good or service that an entity determines to be distinct by using the same criteria that apply to the identification of performance obligations. The underlying principle in determining whether an entity is a principal or an agent is to evaluate whether the entity controls the specified good or service (i.e., an asset) before transferring it to the customer. ASC 606-10-25-25 states, in part, that “[c]ontrol of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.” Determining whether the entity controls the specified good or service before transferring it to the customer — and, therefore, is the principal in the arrangement — may be clear in some circumstances but may require significant judgment in others.

These indicators are intended to support a conclusion that the entity does or does not control the specified good or service before transferring it to the customer and should not be used as a checklist that overrides the underlying principle of control.

The framework for evaluating whether an entity is a principal or an agent is also relevant to the determination of the party to which control of a specified good or service is transferred (i.e., which party is the entity’s customer). This evaluation is particularly relevant when an intermediary (e.g., a distributor or reseller) is involved in reselling the entity’s goods or services to an end customer. If an entity determines that control of a specified good or service is transferred to an intermediary, the intermediary is the entity’s customer, and the entity records revenue based on the amount that it expects the intermediary to pay. However, if the entity concludes that the intermediary does not obtain control of the specified good or service before the good or service is transferred to the end customer, the amount of revenue that the entity records is based on the consideration (if known) that the entity expects the end customer to pay.

Variable Consideration

Many revenue contracts include variable consideration, including price concessions, rebates, incentives, royalties, and performance-based bonuses or penalties. Generally, the revenue standard requires an entity to estimate variable consideration, with recognition subject to a constraint such that it is probable that a significant reversal of cumulative revenue recognized will not occur. There are a few exceptions to the requirement to estimate variable consideration, including sales- or usage-based royalties associated with a license of intellectual property (IP) that is the predominant item. In addition, entities must carefully evaluate whether variable consideration should be allocated to one or more, but not all, performance obligations in a contract (or one or more, but not all, distinct goods or services that are part of a series of distinct goods or services that represent a single performance obligation). For example, some usage-based fees may be allocated to a distinct day of service that is part of a series of services.

Consideration Payable to a Customer

From time to time, an entity may provide a cash payment or incentive to a customer, a customer’s customer, or another party in the distribution chain. An entity must carefully evaluate whether a payment or incentive provided to a customer’s customer should be accounted for in accordance with the guidance in ASC 606 on consideration payable to a customer. For example, when an entity arranges for goods or services to be provided by a vendor to a consumer, it may be difficult for the entity to determine whether it should apply the guidance on consideration payable to a customer to a payment or incentive provided to the consumer (i.e., the end customer) since both the vendor and the consumer could be viewed as customers of the entity.

Further, an entity should consider whether a payment or incentive provided to a customer or a customer’s customer is in exchange for a good or service that is distinct from the goods or services provided to the customer.

See Examples 6-20 through 6-22 for more information.

Licensing

The revenue standard includes specific guidance on the licensing of an entity’s IP. For example, revenue associated with the license of functional IP (e.g., software, film, music, drug compound/formula) is typically recognized at a point in time (unless combined as a single performance obligation with a service that is recognized over time) while revenue associated with a license of symbolic IP (e.g., franchise, trade or brand name, logo) is typically recognized over time. Accordingly, entities may need to apply different revenue recognition methods for different types of licenses. However, the general framework used to account for licensing of IP is essentially the same as the framework used to account for the sale of other goods or services (i.e., the five-step model described above). As noted above, one exception to the general framework is the accounting for sales- or usage-based royalties associated with licensing of IP that is the predominant item.

Licensing of IP can take many forms, and the economics and substance of such transactions can often be difficult to identify. This is because (1) a license is defined by the contractual rights conveyed to a customer and (2) the accounting for such rights is highly dependent on how those rights are defined and what, if any, additional promised goods or services are required to be provided along with such rights. Therefore, an entity may find that no two contracts are the same and that new judgments must be made with each arrangement. As more and more entities expand their product offerings to include technology-related products or services, assessing the appropriate revenue recognition for licensing of IP continues to be a topic of focus for many entities.

Financial Statement Disclosures

The revenue standard requires entities to disclose both quantitative and qualitative information that enables users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The illustration below gives an overview of the annual revenue disclosure requirements for public entities. Nonpublic entities can elect not to provide certain disclosures, and the disclosure requirements for interim periods are significantly reduced in scope from the illustration below.

Annual Disclosures

SEC Comment Letters

Revenue remains a hot topic of SEC comment letters. Key themes of SEC comment letters related to revenue recognition include the following:

Theme	Example(s)
Significant judgments	Identification of performance obligations. Principal-versus-agent assessment. Determination of the transaction price. Allocation of the transaction price. Identification of a measure of progress.
Disclosures of performance obligations	Timing of revenue recognition. Significant payment terms. Significant financing components. Nature of goods and services (e.g., principal-versus-agent considerations).
Contract costs	Method being used to amortize the capitalized costs. How the selected amortization period correlates with the period of benefit. Whether commissions paid upon renewal are commensurate with the initial commissions. How renewals are considered in the amortization period.
Disclosures of disaggregation of revenue	Consideration of information disclosed outside of the financial statements (e.g., earnings calls, investor presentations). An entity’s business model. Whether the categories disclosed depict how revenue and cash flows are affected by economic factors.
Disclosures of contract balances	How contract balances are derived.
Disclosures of remaining performance obligations	When an entity expects to recognize revenue.

The SEC also continues to focus on non-GAAP metrics, including adjustments that change the accounting policy or the method of recognition of an accounting measure that may be misleading and, therefore, impermissible. For example, a non-GAAP performance measure that reflects revenue recognized over the service period under GAAP on an accelerated basis as if the registrant earned revenue when it billed its customers is likely to be prohibited because it is an individually tailored accounting principle and does not reflect the registrant’s required GAAP recognition method. However, in certain circumstances, the SEC may not object when a registrant presents the amount of revenue billed to a customer — that is, “billings” or “bookings” (with appropriate characterization) as an operational metric — because such measures are not considered non-GAAP measures. For more information, see Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics.

Accounting Standards Update on Revenue Contracts Acquired in Business Combinations

In October 2021, the FASB issued ASU 2021-08, which amends the guidance in ASC 805 to address the recognition and measurement of revenue contracts with customers acquired in a business combination. The ASU requires an entity to apply the revenue standard when recognizing and measuring contract assets and contract liabilities arising from those contracts. By contrast, fair value is the measurement model that is applied to most assets and liabilities (e.g., customer relationship intangibles) acquired in a business combination.

Postimplementation Review

After the FASB issues a major new accounting standard, it performs a postimplementation review (PIR) process to evaluate whether the standard is achieving its objective by providing users of financial statements with relevant information that justifies the costs of providing it. This process enables the Board to solicit and consider stakeholder input and FASB staff research. At its July 28, 2021, and September 21, 2022, meetings, the FASB discussed feedback received to date on the revenue standard as well as the results of research performed on certain revenue topics, including disclosures, short-cycle manufacturing, principal-versus-agent considerations, licensing, and variable consideration. In the handouts prepared for the Board’s July 2021 and September 2022 meetings, the FASB staff noted that stakeholder feedback on the revenue standard was positive overall, particularly from users of financial statements since the standard results in more useful and transparent information, improved disclosures, and comparability across entities and industries. The staff further observed that while many preparers noted significant one-time costs associated with implementation of the standard, they also highlighted that the standard has been beneficial in the long run.

On November 10, 2023, the FASB hosted a public roundtable on the PIR of ASC 606. During this meeting, participants discussed the benefits and costs of the revenue standard, implementation challenges, improvements to the standard-setting process, and assessment of the PIR process.

The PIR of ASC 606 was further discussed at the FASB’s May 8, 2024, meeting, whose agenda was facilitated by a handout prepared by the FASB staff in advance. At the meeting, the FASB staff updated Board members and other participants on feedback received from stakeholders about benefits, costs, and implementation challenges associated with the adoption of the revenue standard. In addition to giving an overview of topics discussed at prior meetings, the staff observed that stakeholders appreciated the revenue standard’s (1) elimination of industry-specific guidance, (2) provision of comprehensive principles-based guidance, and (3) convergence with IFRS® Accounting Standards. However, the staff acknowledged stakeholders’ observation that in addition to the one-time implementation costs, application of the revenue standard has resulted in higher ongoing costs, primarily because ASC 606 requires entities to exercise greater judgment than they did when applying legacy revenue guidance. Also at the meeting, Board members discussed the revenue standard’s impacts on comparability, including challenges faced by specific industries upon the elimination of industry specific guidance. The staff observed that stakeholders generally agreed that the benefits of eliminating this guidance have outweighed the costs of doing so. In addition, the following implementation challenges were discussed:

Licensing.
Identification of performance obligations.
Stand-alone selling price.
Constraint on variable consideration.
Sales-based or usage-based royalties.
Principal-versus-agent considerations.
Consideration payable to a customer.
Incremental costs of obtaining a contract.
Short-cycle manufacturing.
Disclosures.
Accounting for loss contracts (also referred to as onerous contracts).
The interaction between ASC 606 and ASC 815 in the accounting by a seller (grantee) for warrants granted by a customer when those warrants vest upon the seller’s satisfaction of the performance obligation.

At the FASB’s October 2, 2024, meeting, the Board resumed its discussion of the PIR but made no additional tentative decisions related to it. As indicated in the FASB staff’s handout for the meeting, the staff is drafting a PIR report that will be posted on the FASB’s Web site pending input from the Board members and final approval from the board of trustees of the Financial Accounting Foundation, the FASB's parent organization.

Other Ongoing FASB Projects

The FASB continues to develop accounting standards with revenue implications. Recent standard-setting developments as of October 15, 2024, include those related to the following topics:

Derivative scope refinements and share-based consideration received from a customer — On July 23, 2024, the FASB issued a proposed ASU that would (1) refine the scope of the guidance on derivatives in ASC 815 and (2) clarify the scope of the guidance on share-based payments from a customer in ASC 606. The proposed ASU is intended to address concerns about the application of derivative accounting to contracts that have features based on the operations or activities of one of the parties to the contract and to reduce diversity in the accounting for share-based payments in revenue contracts. For more information, see Deloitte’s August 2, 2024, Heads Up.
Share-based consideration payable to a customer — On September 30, 2024, the FASB issued a proposed ASU that would clarify the guidance in both ASC 606 and ASC 718 on the accounting for share-based payment awards that are granted by an entity as consideration payable to its customer. The proposed ASU’s purpose is to reduce diversity in practice and improve existing guidance, primarily by revising the definition of a “performance condition” and eliminating a forfeiture policy election specifically for service conditions associated with share-based consideration payable to a customer. In addition, the proposed ASU would clarify that the variable consideration constraint guidance in ASC 606 does not apply to share-based consideration payable to a customer regardless of whether an award’s grant date has occurred. For more information, see Deloitte’s October 1, 2024, Heads Up.
Accounting for government grants — On November 1, 2023, the FASB added to its technical agenda a project on the recognition, measurement, and presentation of government grants received by business entities. The Board’s tentative decisions related to the project include the following:
- A government grant should be recognized when it is probable that the entity will comply with the conditions of the grant and the grant will be received.
- The accounting framework of IAS 20 for government should be leveraged. However, targeted improvements to the guidance, including refinements to its scope and the recognition threshold, should be made.
- The disclosure requirements of ASC 832 should apply to government grants within the scope of the project.
- Specific guidance should be provided on whether and, if so, how to recognize and measure grant-related liabilities in a business combination.
The Board is expected to include its tentative decisions in a forthcoming proposed ASU.

Stakeholders should monitor the FASB’s Web site for further developments.

This Roadmap comprehensively discusses the key accounting and financial reporting considerations related to the recognition of revenue from contracts with customers under ASC 606.

Contacts

Chapter 1 — Overview

1.3 Scope (Chapter 3 of the Roadmap)

The standard’s revenue guidance applies to all contracts with customers as defined by the standard (see Chapter 2 for definitions of terms included in the standard’s glossary) except those that are within the scope of other topics in the Codification. The guidance does not apply to contracts within the scope of ASC 842 (leases) and ASC 944 (financial services — insurance); contractual rights or obligations within the scope of ASC 310, ASC 320, ASC 321, ASC 323, ASC 325, ASC 405, ASC 470, ASC 815, ASC 825, and ASC 860 (primarily various types of financial instruments); contracts within the scope of ASC 460 (guarantees other than product or service warranties); and ASC 845 (nonmonetary exchanges between entities in the same line of business to facilitate a sale to another party).

Certain provisions of the standard’s revenue guidance also apply to transfers of nonfinancial assets, including in-substance nonfinancial assets that are not an output of an entity’s ordinary activities (e.g., sales to noncustomers of (1) property, plant, and equipment; (2) real estate; or (3) intangible assets). Such provisions include guidance on recognition (including determining the existence of a contract and control principles) and measurement. See Chapter 17.

1.6 Step 3: Determine the Transaction Price (Chapter 6 of the Roadmap)

Step 3 requires an entity to determine the transaction price for the contract, which is the amount of consideration to which the entity expects to be entitled in exchange for the promised goods or services in the contract. The transaction price can be a fixed amount or, as stated in ASC 606-10-32-6, can vary because of “discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items.” An entity must consider the following when determining the transaction price:

Variable consideration (see Section 6.3) — When the transaction price includes a variable amount, an entity is generally required to estimate the variable consideration by using either an “expected value” (probability-weighted) approach or a “most likely amount” approach, whichever is more predictive of the amount to which the entity will be entitled (subject to the “constraint” discussed below). However, estimation may not be required in all circumstances. For example, variable consideration may not require estimation if it could be allocated entirely to a distinct good or service when certain criteria are met (see Section 1.7).
Significant financing components (see Section 6.4) — Adjustments for the time value of money are required if the contract includes a “significant financing component” (as defined by the guidance).
Noncash consideration (see Section 6.5) — To the extent that a contract includes noncash consideration, an entity is required to measure that consideration at fair value at contract inception.
Consideration payable to a customer (see Section 6.6) — The revenue standard requires consideration payable to the customer to be reflected as an adjustment to the transaction price unless the consideration is payment for a distinct good or service (as defined by the standard).

Under ASC 606-10-32-11, some or all of an estimate of variable consideration is only included in the transaction price to the “extent that it is probable[5] that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved” (this concept is commonly referred to as the “constraint”). The guidance requires entities to perform a qualitative assessment that takes into account both the likelihood and the magnitude of a potential revenue reversal and provides factors that could indicate that an estimate of variable consideration is subject to significant reversal (e.g., susceptibility to factors outside the entity’s influence, a long period before uncertainty is resolved, limited experience with similar types of contracts, practices of providing concessions, or a broad range of possible consideration amounts). This estimate would be updated in each reporting period to reflect changes in facts and circumstances. In addition, the constraint does not apply to sales- or usage-based royalties derived from the licensing of intellectual property (IP); rather, consideration from such royalties is only recognized as revenue at the later of when the performance obligation is satisfied or when the uncertainty is resolved (e.g., when subsequent sales or usage occurs). See Section 12.7 for further discussion of the sales- or usage-based royalty exception for licenses of IP.

Entities will need to exercise significant judgment when determining the amount of variable consideration to include in the transaction price. Consequently, they could find it challenging to consistently apply the standard’s requirements throughout their organizations.

Footnotes

[5]

In IFRS 15, the IASB uses the term “highly probable,” which has the same meaning as the FASB’s “probable” as defined in the ASC master glossary.

1.7 Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract (Chapter 7 of the Roadmap)

Step 4 requires an entity to allocate the transaction price determined in step 3 to the performance obligations identified in step 2 by using the following approaches:

Allocating the transaction price to the performance obligations on the basis of the stand-alone selling price (see Section 7.2).
Allocating a discount to one or more, but not all, of the performance obligations in the contract (see Section 7.4).
Allocating variable consideration to one or more, but not all, of the distinct goods or services in the contract (see Section 7.5).
Allocating changes in the transaction price to the performance obligations in the contract (see Section 7.6).

Under ASC 606-10-32-32, when a contract contains more than one performance obligation, an entity would generally allocate the transaction price to each performance obligation on a relative stand-alone selling price basis. The guidance states that the “best evidence of a standalone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers.” If the good or service is not sold separately, an entity must estimate the stand-alone selling price by using an approach that maximizes the use of observable inputs. Acceptable estimation methods include, but are not limited to, (1) adjusted market assessment, (2) expected cost plus a margin, and (3) a residual approach (when the stand-alone selling price is not directly observable and is either highly variable or uncertain). An entity would determine the stand-alone selling price for a good or service at contract inception and would not reassess or update its determination of the stand-alone selling price thereafter unless the contract is modified.

The guidance indicates that if certain conditions are met, there are limited exceptions to this general allocation requirement. When those conditions are met, a discount or variable consideration must be allocated to one or more, but not all, of the performance obligations in a contract.

Changes in the transaction price (e.g., changes in an estimate of variable consideration) after contract inception would be allocated to all performance obligations in the contract on the same basis (unless the terms of the contract meet certain criteria that allow for allocation of variable consideration to one or more, but not all, of the performance obligations).

The guidance allows entities to use a residual approach in allocating contract consideration, but only when the stand-alone selling price of a good or service is not directly observable and is either “highly variable or uncertain.” An entity will need to use judgment in determining whether these criteria are met.

1.9 Beyond the Core Model

The revenue standard also affects other related accounting topics and contains disclosure requirements, as discussed in Sections 1.9.1 and 1.9.2.

1.9.1 Other Related Accounting Topics

Additional accounting topics affected by the revenue standard are summarized in the table below.

Topic	Roadmap Chapter
Combination of contracts There are certain circumstances in which multiple legal-form contracts would be accounted for as though they were one contract for accounting purposes. The revenue standard provides guidance on when contracts should be combined.	Chapter 4
Rights of return The obligation of a seller to “stand ready” to accept a return is not a performance obligation. However, when a seller stands ready to accept a return, it does not recognize revenue for goods expected to be returned. Rather, it recognizes a refund liability for consideration paid by a buyer to which the seller does not expect to be entitled, together with a corresponding asset to recover the product from the buyer.	Chapter 6
Customers’ unexercised rights An entity recognizes “breakage” (i.e., a customer’s unexercised rights) in a manner consistent with the pattern of rights exercised by the customer if the entity expects to be entitled to a breakage amount; otherwise, the entity defers recognition until the probability that the customer will exercise its rights is remote.	Chapter 8
Contract modifications The revenue standard provides a general framework of accounting for contract modifications, including guidance on when modifications are accounted for as a separate contract and how changes should be recorded.	Chapter 9
Principal-versus-agent considerations The revenue standard includes control-based guidance on determining whether the promise an entity has made to a customer is to provide the good or service or to arrange for another party to fulfill the promise.	Chapter 10
Licensing The revenue standard’s guidance on licensing distinguishes between two types of licenses (right to use and right to access). The timing of revenue recognition is different for each.	Chapter 12
Costs of obtaining or fulfilling a contract The revenue standard includes guidance on how to account for costs related to a contract, distinguishing between costs of obtaining a contract and costs of fulfilling a contract. For situations in which the application of this guidance results in the capitalization of costs, the revenue standard provides additional guidance on (1) determining an appropriate amortization period and (2) impairment considerations.	Chapter 13
Presentation The revenue standard includes guidance on the presentation of contract assets, contract liabilities, and receivables arising from contracts with customers.	Chapter 14
Nonpublic-entity requirements The revenue standard provides nonpublic entities with disclosure practical expedients.	Chapter 16
Nonfinancial assets ASU 2014-09 (as amended by ASU 2017-05) provides guidance on the recognition and measurement of transfers of nonfinancial assets to parties that are not customers (codified in ASC 610-20).	Chapter 17

1.9.2 Required Disclosures (Chapter 15 of the Roadmap)

ASC 606-10-50-1 requires entities to disclose both quantitative and qualitative information that enables “users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.” ASC 606’s disclosure requirements include the following (there are certain exceptions for nonpublic entities; see Chapter 16 for a summary of these exceptions):

Presentation or disclosure of revenue from contracts with customers and any impairment losses recognized separately from other sources of revenue or impairment losses from other contracts (e.g., leases).
A disaggregation of revenue to “depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors” (the standard also provides implementation guidance).
Information about (1) contract assets and contract liabilities (including changes in those balances), (2) the amount of revenue recognized in the current period that was previously recognized as a contract liability, and (3) the amount of revenue recognized in the current period that is related to performance obligations satisfied in prior periods.
Information about performance obligations (e.g., types of goods or services, significant payment terms, typical timing of satisfying obligations, and other provisions).
Information about an entity’s transaction price allocated to the remaining performance obligations, including (in certain circumstances) a quantitative disclosure of the “aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied)” and when the entity expects to recognize that amount as revenue.
A description of the significant judgments, and changes in those judgments, that affect the amount and timing of revenue recognition (including information about the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the transaction price to performance obligations).
Information about an entity’s accounting for costs to obtain or fulfill a contract (including account balances and amortization methods).
Information about policy decisions (i.e., whether the entity used the practical expedients for significant financing components and contract costs allowed by the guidance).

The guidance requires entities, on an interim basis, to disclose information required under ASC 270 as well as to provide the disclosures (described above) about (1) the disaggregation of revenue, (2) contract asset and contract liability balances and significant changes in those balances since the previous period-end, and (3) the transaction price allocated to the remaining performance obligations.

IFRS 15 only requires entities to disclose the disaggregation of revenue in addition to the information required under IAS 34 for interim periods. For a summary of differences between U.S. GAAP and IFRS Accounting Standards, refer to Appendix A.

Chapter 2 — Symbols and Defined Terms

Chapter 3 — Objective and Scope

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: “An entity need not disclose the information [about its remaining performance obligations] in paragraph 606-10-50-13 for a performance obligation if either of the following conditions is met: The performance obligation is part of a contract that has an original expected duration of one year or less. The entity recognizes revenue from the satisfaction of the performance obligation in accordance with paragraph 606-10-55-18.” “An entity need not disclose the information [about its remaining performance obligations] in paragraph 606-10-50-13 for variable consideration for which either of the following conditions is met: The variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property accounted for in accordance with paragraphs 606-10-55-65 through 55-65B. The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with paragraph 606-10-25-14(b), for which the criteria in paragraph 606-10-32-40 have been met.” If these optional exemptions are elected, they should be applied entity-wide to all contracts.	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

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.”

Chapter 4 — Step 1: Identify the Contract

4.1 Overview

For contracts within the scope of ASC 606, the first step of the revenue standard is to determine whether a contract exists, for accounting purposes, between an entity and its customer. The criteria that need to be in place to establish that a contract exists are intended to demonstrate that there is a valid and genuine transaction between an entity and its customer and that the parties to the contract have enforceable rights and obligations that will have true economic consequences. If, at contract inception, the criteria in ASC 606-10-25-1 are met, the contract would be accounted for under the remaining provisions of the standard. Because the rest of the provisions of the standard rely on a careful analysis of the enforceable rights and obligations under the contract, if any of the five criteria required to establish a contract for accounting purposes are not met, the rest of the revenue recognition model cannot be applied. In these circumstances, any consideration received from the customer would be recognized as a liability (see Section 4.6), and revenue can only be recognized once (1) the contract existence criteria are met (under the assumption that the rest of the revenue recognition model supports the recognition of revenue) or (2) the consideration received is nonrefundable and one or more of the following have occurred:

All of the performance obligations in the contract have been satisfied and substantially all of the promised consideration has been received.
The contract has been terminated or canceled.
The entity has transferred control of the goods or services to which the consideration received is related and has stopped transferring (and has no obligation to transfer) additional goods or services to the customer.

The revenue standard also provides guidance on when two or more contracts should be combined and evaluated as a single contract for determining revenue recognition (see Section 4.7) as well as the accounting for contract modifications (see Chapter 9).

4.2 Identifying a Contract With a Customer

An important step in the revenue standard is determining when an agreement with a customer represents a contract for accounting purposes. A contract creates enforceable rights and obligations between two or more parties. Enforceability of the rights and obligations is a matter of law. An agreement does not need to be in writing to constitute a contract. A contract may exist if parties orally agree to an arrangement’s terms. Alternatively, a contract could be implied through customary business practices if those practices create enforceable rights and obligations.

ASC 606-10

25-2 A contract is an agreement between two or more parties that creates enforceable rights and obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral, or implied by an entity’s customary business practices. The practices and processes for establishing contracts with customers vary across legal jurisdictions, industries, and entities. In addition, they may vary within an entity (for example, they may depend on the class of customer or the nature of the promised goods or services). An entity shall consider those practices and processes in determining whether and when an agreement with a customer creates enforceable rights and obligations.

Because the rest of the revenue model cannot be applied until a valid contract is in place, it is important to determine when enforceable rights and obligations are created between two or more parties. Varying contracting practices can sometimes make this determination difficult. Even if two parties are in basic agreement about the main terms of a contract, no contract would exist if the parties’ rights and obligations under the contract are not legally enforceable.

Determining whether a contractual right or obligation is enforceable is a question of law, and the factors that determine enforceability may differ between jurisdictions. The best evidence of an enforceable agreement is a written contract, especially if the seller’s standard practice is to use written contracts.

Although ASC 606 does not require a written contract as evidence of an agreement, a contract that is being prepared but has not yet been signed may be evidence that an agreement has not yet been reached. Entities should use caution before recognizing revenue in such circumstances because the apparent absence of a contractual understanding between the parties may make it unlikely that the conditions in ASC 606-10-25-1 have been met.

Chapter 5 — Step 2: Identify the Performance Obligations

5.1 Introduction to Step 2

Step 2 is one of the most critical steps in the standard’s revenue framework since it establishes the unit of account for revenue recognition. A material miscalculation in this step will often lead to an error in the recognition of revenue. This step requires an entity to identify what it has promised to the customer. In many arrangements, this will be obvious and therefore simple; in other arrangements, however, there are critical judgments that an entity must make in determining the correct unit of account (i.e., performance obligation).

The decision tree below illustrates the revenue standard’s process for identifying performance obligations in a contract.

This chapter also addresses topics such as stand-ready obligations, options for additional goods and services, warranties, and nonrefundable up-front fees because these topics are integral to the proper identification of performance obligations.

When identifying a performance obligation, an entity should determine whether it is a principal or an agent in the transaction because that determination will affect how (and sometimes when) the entity reports the revenue earned. While step 2 is probably the best stage of the revenue recognition process for determining whether an entity is a principal or an agent, there are many considerations that go into that determination. Accordingly, principal-versus-agent considerations are discussed separately in Chapter 10.

In addition, an entity’s contract with a customer may give the customer a choice of whether to purchase additional goods or services. In some cases, options for additional goods or services are marketing or promotional efforts to gain future contracts with customers. However, in other cases, such options may be considered performance obligations, which are referred to as material rights. While the determination of whether a customer option for additional goods or services gives rise to a material right should be performed as part of step 2, there are many considerations related to material rights that affect the other steps of the revenue recognition model. Accordingly, material right considerations are discussed separately in Chapter 11.

Chapter 6 — Step 3: Determine the Transaction Price

6.2 Fixed Consideration

Cash flows in a contract with a customer that are known as of contract inception and do not vary during the contract are the simplest inputs in the determination of the transaction price. Sometimes, both price and quantity in an arrangement are fixed in such a way that the total transaction price, calculated as price multiplied by quantity (P × Q), is also fixed.

For example, assume that an entity enters into a contract with a customer to sell 10 widgets every month for 24 months at a price of $100 per widget. Both P ($100 per widget) and Q (10 widgets per month for 24 months) are known and do not vary during the term of the contract. Accordingly, the total transaction price is quantitatively fixed and known and can be calculated as $100 × (10 × 24) = $24,000.

Under the revenue standard, nonrefundable up-front fees are included in the transaction price in step 3 as if they were any other type of fixed consideration. That is, if consideration is fixed, it is included in the transaction price regardless of when it is paid (ignoring any potential significant financing component, which is discussed in Section 6.4). For example, nonrefundable up-front fees received in exchange for the future delivery of a good or service may reflect fixed consideration in a contract with a customer. The consideration may be allocated in step 4 across performance obligations, but at the contract level, the fee received by the entity up front is fixed consideration.

As discussed in Section 6.3, the boards established variable consideration as a very broad concept in the revenue standard. More specifically, the concept includes any variability in the ultimate amount of consideration to which the entity will be entitled. As a result, there are many arrangements that will include variable consideration. While there may be guaranteed minimums in arrangements, or up-front nonrefundable fixed amounts received in advance of work that may contribute to a fixed portion of consideration in an arrangement, those circumstances are often coupled with forms of variable consideration. Unless the amount to which an entity will be entitled will not vary in the future for any reason, the total consideration in the arrangement is not fixed.

For example, an arrangement would include variable consideration if the contract (implicitly or explicitly) allows for the customer to return the product (e.g., a right of return), past practice indicates that the seller will accept a lower amount of consideration as a price concession or discount, or there are any other adjustments to the ultimate amount to which an entity will be entitled in exchange for its goods or services. Further, an arrangement may include a fixed amount as a bonus payment if certain conditions are met. Although that amount may be quantitatively fixed, it nonetheless is not considered fixed consideration because the ultimate resolution of whether the entity will be entitled to that amount is subject to the occurrence or nonoccurrence of the event outlined in the contract. Accordingly, while known or quantitatively fixed amounts of consideration may sometimes be easier to identify and may even require less challenging estimation techniques, they will not be considered fixed consideration under the revenue standard if they can vary in the future for any reason.

Therefore, many arrangements will include some or many different forms of variable consideration.

6.7 Sales Taxes and Similar Taxes Collected From Customers

ASC 606-10

32-2A An entity may make an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes). Taxes assessed on an entity’s total gross receipts or imposed during the inventory procurement process shall be excluded from the scope of the election. An entity that makes this election shall exclude from the transaction price all taxes in the scope of the election and shall comply with the applicable accounting policy guidance, including the disclosure requirements in paragraphs 235-10-50-1 through 50-6.

Stakeholders have questioned whether sales taxes and similar taxes (“sales taxes”) should be excluded from the transaction price when such taxes are collected on behalf of tax authorities.

Further, the revenue standard’s guidance on assessing whether an entity is a principal or an agent in a transaction is relevant to the assessment of whether sales taxes should be presented on a gross or net basis within revenue (see Chapter 10 for further discussion of the assessment of whether an entity is a principal or an agent). The analysis is further complicated by the sales tax in each tax jurisdiction (which would include all taxation levels in both domestic and foreign governmental jurisdictions), especially for entities that operate in a significant number of jurisdictions.

The FASB decided to provide in ASU 2016-12 a practical expedient (codified in ASC 606-10-32-2A) that permits entities to exclude from the transaction price all sales taxes that are assessed by a governmental authority and that are “imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes).” However, such an accounting policy election does not apply to taxes assessed on “an entity’s total gross receipts or imposed during the inventory procurement process.” An entity that elects to exclude sales taxes is required to provide the accounting policy disclosures in ASC 235-10-50-1 through 50-6.

An entity that does not elect to present all sales taxes on a net basis would be required to determine, for every tax jurisdiction, whether it is a principal or an agent in the sales tax transaction and would present sales taxes on a gross basis if it is a principal in the jurisdiction and on a net basis if it is an agent. Making this determination requires an understanding of which entity (the customer or the vendor) has incurred the tax obligation (i.e., identification of the party on which the taxes are assessed). In some jurisdictions, it may be clear that the taxes are assessed on the customer. Therefore, the vendor might be acting as an agent and collecting and remitting taxes on behalf of the customer or the government. The vendor might have the obligation to remit taxes (i.e., have a sales tax liability for amounts collected, or for amounts whose collection was required); however, a remittance obligation by itself does not mean that the vendor is primarily responsible for the taxes. By contrast, in other jurisdictions, sales taxes (or similar taxes) may be assessed on and payable by the vendor regardless of whether the taxes are included in the amounts collected from customers. In these instances, the vendor may be the entity that legally incurred the taxes and is obligated to pay the government (i.e., the vendor may be primarily responsible for paying the taxes). Therefore, the vendor would be the principal in the tax transaction and would present the taxes on a gross basis as revenue.

Chapter 7 — Step 4: Allocate the Transaction Price to the Performance Obligations

7.7 Allocation Considerations for Significant Financing Components

Under step 3 of ASC 606’s revenue recognition model, an entity may need to adjust its transaction price for the existence of a significant financing component (see Section 6.4). ASC 606-10-32-15 requires an entity to adjust the transaction price for the effects of the time value of money if the timing of payments agreed to by the parties to the contract provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer (see Section 6.3). In those circumstances, the contract contains a significant financing component.

In situations involving a contract with a customer that includes multiple performance obligations, questions have arisen about whether an adjustment to the transaction price resulting from a significant financing arrangement could be allocated to one or more, but not all, performance obligations.

Generally, a significant financing component in a contract is related to the contract as a whole rather than to the individual performance obligations in the contract. However, it may be reasonable in some circumstances to allocate a significant financing component to one or more, but not all, of the performance obligations in the contract. As a practical matter, when an entity considers the basis for such allocation, it may be appropriate for the entity to analogize to (1) the guidance in ASC 606-10-32-36 through 32-38 on allocating a discount or (2) the guidance in ASC 606-10-32-39 through 32-41 on allocating variable consideration.

An entity that is considering the possibility of allocating a significant financing component to one or more, but not all, of the performance obligations in a contract will need to use judgment in determining whether such an approach is reasonable in the particular circumstances of that contract.

The above issue is addressed in Implementation Q&A 37 (compiled from previously issued TRG Agenda Papers 30 and 34). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

Chapter 8 — Step 5: Determine When to Recognize Revenue

Chapter 9 — Contract Modifications

9.2 Types of Contract Modifications

If a change in a contract qualifies as a contract modification under ASC 606-10-25-10 and 25-11, the entity must assess the goods and services and their selling prices. Depending on whether those goods and services are distinct or sold at their stand-alone selling prices, a modification can be accounted for as:

A separate contract (see ASC 606-10-25-12).
One of the following (if the modification is not accounted for as a separate contract):
- A termination of the old contract and the creation of a new contract (see ASC 606-10-25-13(a)).
- A cumulative catch-up adjustment to the original contract (see ASC 606-10-25-13(b)).
- A combination of the items described in ASC 606-10-25-13(a) and (b), in a way that faithfully reflects the economics of the transaction (see ASC 606-10-25-13(c)).

The flowchart below explains the decisions needed to (1) identify modifications made to a contract and (2) determine how an entity should account for each type of contract modification.

If the answer is “Yes” for some goods or services and “No” for others, it may be appropriate to apply both models to a single contract, in the manner described in ASC 606-10-25-13(c), on the basis of an assessment at the performance obligation level. See Section 9.2.2.

For illustrative examples, see Example 9-3; ASC 606-10, Examples 8 and 9; and Example 9-7.

For illustrative examples, see Example 9-2; ASC 606-10, Example 5, Case B; ASC 606-10, Example 7; Example 9-6; Example 9-8; and ASC 606-10, Example 6

For an illustrative example, see ASC 606-10, Example 5, Case A.

9.2.1 Contract Modification Accounted for as a Separate Contract

ASC 606-10

25-12 An entity shall account for a contract modification as a separate contract if both of the following conditions are present:

The scope of the contract increases because of the addition of promised goods or services that are distinct (in accordance with paragraphs 606-10-25-18 through 25-22).
The price of the contract increases by an amount of consideration that reflects the entity’s standalone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract. For example, an entity may adjust the standalone selling price of an additional good or service for a discount that the customer receives, because it is not necessary for the entity to incur the selling-related costs that it would incur when selling a similar good or service to a new customer.

When an entity accounts for a contract modification as a separate contract in accordance with ASC 606-10-25-12, the entity’s accounting for the original contract is not affected by the modification. Any revenue recognized through the date of the modification is not adjusted, and remaining performance obligations will continue to be accounted for under the original contract. The new contract is accounted for separately from the original contract and on a prospective basis.

There is no economic difference between (1) a modification of an existing contract with a customer that includes additional distinct goods or services at their representative stand-alone selling prices and (2) a completely new contract entered into by the two parties for goods or services at their representative stand-alone selling prices. Therefore, a modification of an existing contract should be accounted for as a new contract that is separate and apart from the existing contract when (1) there are additional distinct goods or services promised to a customer and (2) those goods or services are in exchange for consideration that represents the stand-alone selling prices of the additional distinct promised goods or services. The change in scope must be an increase rather than a decrease in the quantity of promised goods or services because by its very nature, a new contract that decreases the quantity of goods or services promised in the original contract is inherently modifying the original contract (i.e., the new contract is not separate).

When considering whether the price charged to the customer represents the stand-alone selling prices of additional distinct promised goods or services, entities are allowed to adjust the stand-alone selling prices to reflect a discount for costs they do not incur because they have modified a contract with an existing customer. For example, the renewal price that an entity charges a customer is sometimes lower than the initial price because the entity recognizes that the expenses associated with obtaining a new customer can be excluded from the renewal price to provide a discount to the existing customer. This lower renewal price may reflect the stand-alone selling prices of additional distinct goods or services provided in the renewed contract. See Section 7.3 for a discussion of the guidance on determining stand-alone selling prices and Section 7.6 for a discussion of the guidance on changes in the transaction price.

Connecting the Dots

If a modification is accounted for as a separate contract in accordance with ASC 606-10-25-12, the original contract is treated as unmodified for the purposes of ASC 606. However, if a contract modification does not qualify for the accounting under ASC 606-10-25-12, determining how to account for the modification can be more challenging.

For example, assume that Company X has entered into a contract to provide a customer with 100 units of Product A over 10 years. Five years into the term of the original contract, the contract is modified by agreement of the parties to provide the customer with an additional 25 units of Product B at Product B’s stand-alone selling price. In addition, both products are capable of being distinct and are distinct within the context of the contract. Therefore, on the basis of these two factors, the modification would be treated as a separate contract.

In contrast, assume that X agrees to provide the customer with 25 more units of Product A instead of Product B. The additional units are the same as the previous Product A provided to the customer. Company X would have to determine as of the date of the modification whether it is selling the additional units of Product A at their stand-alone selling price at the time of the modification. As previously mentioned, five years have passed between the original contract and the modification. Assuming that the price of Product A has changed over this time, X has to determine the stand-alone selling price of the additional goods to be delivered at the date of the modification to determine how to account for the modification. Specifically, if the additional goods are being sold at their then-current stand-alone selling price, the modification would represent a separate contract to be accounted for in accordance with ASC 606-10-25-12; but if the additional goods are not being sold at their then-current stand-alone selling price, the modification would be accounted for as a termination of the existing contract and the creation of a new contract in accordance with ASC 606-10-25-13(a).

The following example in ASC 606 illustrates an entity’s assessment of whether a contract modification represents a separate contract:

ASC 606-10

Example 5 — Modification of a Contract for Goods

55-111 An entity promises to sell 120 products to a customer for $12,000 ($100 per product). The products are transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products were not included in the initial contract.

Case A — Additional Products for a Price That Reflects the Standalone Selling Price

55-112 When the contract is modified, the price of the contract modification for the additional 30 products is an additional $2,850 or $95 per product. The pricing for the additional products reflects the standalone selling price of the products at the time of the contract modification, and the additional products are distinct (in accordance with paragraph 606-10-25-19) from the original products.

55-113 In accordance with paragraph 606-10-25-12, the contract modification for the additional 30 products is, in effect, a new and separate contract for future products that does not affect the accounting for the existing contract. The entity recognizes revenue of $100 per product for the 120 products in the original contract and $95 per product for the 30 products in the new contract.

9.2.2 Contract Modification Not Accounted for as a Separate Contract

ASC 606-10

25-13 If a contract modification is not accounted for as a separate contract in accordance with paragraph 606-10-25-12, an entity shall account for the promised goods or services not yet transferred at the date of the contract modification (that is, the remaining promised goods or services) in whichever of the following ways is applicable:

An entity shall account for the contract modification as if it were a termination of the existing contract, and the creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification. The amount of consideration to be allocated to the remaining performance obligations (or to the remaining distinct goods or services in a single performance obligation identified in accordance with paragraph 606-10-25-14(b)) is the sum of:
1. The consideration promised by the customer (including amounts already received from the customer) that was included in the estimate of the transaction price and that had not been recognized as revenue and
2. The consideration promised as part of the contract modification.
An entity shall account for the contract modification as if it were a part of the existing contract if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification. The effect that the contract modification has on the transaction price, and on the entity’s measure of progress toward complete satisfaction of the performance obligation, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification (that is, the adjustment to revenue is made on a cumulative catch-up basis).
If the remaining goods or services are a combination of items (a) and (b), then the entity shall account for the effects of the modification on the unsatisfied (including partially unsatisfied) performance obligations in the modified contract in a manner that is consistent with the objectives of this paragraph.

A contract modification that does not meet the requirements outlined in Section 9.2.1 is not accounted for as a separate contract. Therefore, an entity would have to determine how to account for a blended contract that now includes one or both of the following:

An original agreement plus or minus other goods or services.
A change in the amount of consideration due under the modified arrangement.

The determination of which model to use depends on whether the remaining goods or services (the originally promised items and the newly promised items) are distinct from the goods and services already provided under the contract.

In accordance with ASC 606-10-25-13(a), if the remaining goods or services are distinct from the goods or services already provided under the original arrangement, the entity would in effect establish a “new” contract that includes only those remaining goods and services. In this situation, the entity would allocate to the remaining performance obligations (or distinct goods or services) in the contract (1) consideration from the original contract that has not yet been recognized as revenue and (2) any additional consideration from the modification. Such a situation would arise when there is a modification to a contract that contains (1) remaining distinct performance obligations or (2) a single performance obligation accounted for as a series of distinct goods or services under ASC 606-10-25-14(b) (see Section 5.3.3).

In contrast, in accordance with ASC 606-10-25-13(b), if the contract modification results in remaining goods and services that are not distinct, the entity should account for the modification as though the additional goods and services were an addition to an incomplete performance obligation. This may be the case in a situation involving a construction-type contract to build a single complex when the original contract includes certain specifications and, as the construction progresses, the parties modify the terms to change certain requested features of the complex. In this instance, a measure of progress would typically be used to recognize revenue over time. For example, suppose that just before the modification, the entity’s performance was 30 percent complete. After the modification, the entity may determine that its performance is only 25 percent complete because the scope of the single performance obligation increased (or is 35 percent complete because the scope of the single performance obligation decreased). As a result, an updated revenue figure is calculated on the basis of the revised percentage, and the entity would record a cumulative catch-up adjustment.

The FASB and IASB recognized that there may be contracts in which some performance obligations include remaining goods or services that are distinct from the goods or services already provided under the original arrangement, while other performance obligations include remaining goods and services that are not (i.e., a change in scope of a partially satisfied performance obligation). The boards decided that in those circumstances, it may be appropriate for an entity to apply both models to a single contract, in the manner described in ASC 606-10-25-13(c), on the basis of an assessment at the performance obligation level. An entity would do so by considering whether, for the performance obligations that are not yet fully satisfied (including those that are partially satisfied), the remaining goods or services to be transferred in accordance with the promise are distinct from the goods or services previously transferred. No change would be made to revenue recognized for fully satisfied performance obligations.

9.2.2.1 Repetitive Versus Accumulating Performance Obligations

Contract modifications will have different accounting implications for different types of performance obligations (i.e., repetitive or accumulating). An example of a repetitive performance obligation would be an entity’s promise to deliver the same good or service to a customer numerous times over an agreed-upon period, such as a performance obligation that meets the definition of a series in ASC 606-10-25-14(b). An example of an accumulating performance obligation would be a promise to perform many different procedures or activities over time to produce the final good or service to be provided to a customer, such as a performance obligation treated under ASC 606-10-25-14(a) as a bundle of goods or services that is distinct.

The example below illustrates how an entity would account for a modification of a repetitive performance obligation that meets the requirements of ASC 606-10-25-13(a).

Example 9-2

Modification of a Repetitive Performance Obligation

Company A has a contract with Customer B to provide 10 widgets at $10 per widget. The $10 represents the stand-alone selling price of the widget. Customer B pays A the full consideration amount of $100 up front. These widgets will be delivered to B over five years. Company A concludes that the performance obligation to deliver 10 widgets over five years qualifies for revenue recognition over time and meets the definition of a series in ASC 606-10-25-14(b). Assume that the contract does not have a significant financing component.

After three years, 5 widgets have been delivered to B (and revenue of $50 has been recognized), but B decides that it wants an additional 15 widgets (a total of 25 widgets). Company A agrees to sell the additional 15 widgets to B for $4 per widget. This price does not represent the stand-alone selling price of the widgets, and it is adjusted by more than the normal expenses that A would incur to obtain a new customer. In addition, the widgets are produced sequentially, and B’s request for additional widgets occurs immediately after delivery of the 5th widget but before production of the remaining widgets begins.

If each of the widgets in the original contract were determined to be distinct (see Chapter 5 for further analysis), A would apply the guidance in ASC 606-10-25-13(a) to this fact pattern because the remaining widgets are also distinct goods but are not sold at their stand-alone selling price. Therefore, A would reallocate the remaining consideration of both the original contract ($50) and the modification ($60) to the remaining performance obligations. In this example, A would allocate $110 across the remaining 20 widgets. As each widget is delivered, $5.50 would be recognized as revenue for A.

In contrast to the example above, the example below illustrates how an entity would account for a modification of an accumulating performance obligation accounted for under ASC 606-10-25-13(b).

Example 9-3

Modification of an Accumulating Performance Obligation

Assume that the original contract in the example above was determined to contain a single performance obligation that included an extensive and highly customized integration service that in effect reworked each widget as additional widgets were developed. Therefore, Company A identified a single performance obligation to deliver to Customer B a complete solution (that includes the original 10 widgets). Also assume that (1) revenue in the fact pattern is being recognized over time in accordance with ASC 606-10-25-27 and (2) as of the date of modification, but before the contract is actually modified, A has concluded that the contract is 40 percent complete. Company A has determined that the additional 15 widgets are not distinct from the original 10 widgets and that together, both sets of widgets still form a complete solution (a single project) that is being delivered to the customer.

Under these new facts, A would combine the goods and services from the original contract and the modification to the contract. No allocation is necessary since there is only a single performance obligation. However, A would need to determine the extent to which it has completed its modified performance obligation.

Assume that A determines that the modified performance obligation is now 20 percent complete. Further assume that before the modification, A recorded $40 of revenue ($100 × 40%). Upon modification, A would record an entry to reduce revenue by $8 ($160 × 20%, or $32, less $40) to catch up on previously recognized revenue to represent A’s performance to date on the basis of the modified contract terms and in accordance with ASC 606-10-25-13(b). Subsequently, A would recognize the remaining $128 ($160 − $32) as it completely satisfies the remaining performance obligation.

The table below lays out the facts of these two examples side by side for comparison.

	Fact Pattern 1 (Repetitive)	Fact Pattern 2 (Accumulating)
Contract length	January 1, 2015, through December 31, 2020	January 1, 2015, through December 31, 2020
Original obligation	Deliver 10 distinct widgets	Integrate 10 widgets into one complete solution (i.e., one performance obligation)
Consideration	$10 per widget	$100 for integration
Modification date	January 1, 2018	January 1, 2018
Performance completed to date	5 widgets delivered	40% integrated
Total remaining consideration	$50	$60
Additional goods and services	Deliver 15 additional distinct widgets	Integrate 15 additional widgets into one complete solution (i.e., one performance obligation)
Price for additional goods and services	$4 per widget	$4 per widget
Total additional consideration	$60	$60
Are the additional goods and services both capable of being distinct and distinct in the context of the contract?	Yes	No
Additional goods and services at stand-alone selling price?	No	No
Applicable modification guidance	ASC 606-10-25-13(a)	ASC 606-10-25-13(b)
Cumulative catch-up?	No	Yes
Cumulative catch-up amount	N/A	($100 + $60) × 20% = $32 $100 × 40% = $40 Cumulative catch-up = –$8
Consideration to recognize prospectively	(5 × $10) + (15 × $4) = $110 10 – 5 + 15 = 20 Revenue per widget = $5.50	$128 recognized as remaining performance obligation is satisfied

These two examples, which each involve a single performance obligation, demonstrate the difference in accounting for a contract modification when that single performance obligation either (1) represents a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer or (2) represents a combined performance obligation because the bundle of goods or services either (a) is not capable of being distinct or (b) is not distinct within the context of the contract. When the remaining goods or services to be transferred are distinct, the entity will, in effect, terminate the original contract and establish a “new” contract (i.e., prospectively). When the remaining goods or services to be transferred are not distinct, the subsequent accounting for an identified contract modification will be, in effect, an adjustment (through a cumulative catch-up) to the original contract.

Contract modification accounting is heavily dependent on whether the remaining goods or services to be transferred are distinct from goods or services transferred before the modification. This further highlights the importance of appropriately identifying all distinct performance obligations in a contract, including an assessment of whether one or more performance obligations in a contract are required to be accounted for as a series in accordance with ASC 606-10-25-14(b). Contract modifications are evaluated at the performance obligation level unless the performance obligation is accounted for as a series, in which case contract modifications are evaluated at the level of the distinct goods or services that make up the series, as illustrated above. See Chapter 5 for a detailed discussion of the identification of performance obligations in a contract, including the requirement to identify as a performance obligation each promise to transfer to a customer a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

The following examples in ASC 606 further illustrate a modification of a contract that contains a repetitive performance obligation (Example 7) and a modification of a contract that contains an accumulating performance obligation (Example 8):

ASC 606-10

Example 7 — Modification of a Services Contract

55-125 An entity enters into a three-year contract to clean a customer’s offices on a weekly basis. The customer promises to pay $100,000 per year. The standalone selling price of the services at contract inception is $100,000 per year. The entity recognizes revenue of $100,000 per year during the first 2 years of providing services. At the end of the second year, the contract is modified and the fee for the third year is reduced to $80,000. In addition, the customer agrees to extend the contract for 3 additional years for consideration of $200,000 payable in 3 equal annual installments of $66,667 at the beginning of years 4, 5, and 6. The standalone selling price of the services for years 4 through 6 at the beginning of the third year is $80,000 per year. The entity’s standalone selling price at the beginning of the third year, multiplied by the additional 3 years of services, is $240,000, which is deemed to be an appropriate estimate of the standalone selling price of the multiyear contract.

55-126 At contract inception, the entity assesses that each week of cleaning service is distinct in accordance with paragraph 606-10-25-19. Notwithstanding that each week of cleaning service is distinct, the entity accounts for the cleaning contract as a single performance obligation in accordance with paragraph 606-10- 25-14(b). This is because the weekly cleaning services are a series of distinct services that are substantially the same and have the same pattern of transfer to the customer (the services transfer to the customer over time and use the same method to measure progress — that is, a time-based measure of progress).

55-127 At the date of the modification, the entity assesses the additional services to be provided and concludes that they are distinct. However, the price change does not reflect the standalone selling price.

55-128 Consequently, the entity accounts for the modification in accordance with paragraph 606-10-25-13(a) as if it were a termination of the original contract and the creation of a new contract with consideration of $280,000 for 4 years of cleaning service. The entity recognizes revenue of $70,000 per year ($280,000 ÷ 4 years) as the services are provided over the remaining 4 years.

Example 8 — Modification Resulting in a Cumulative Catch-Up Adjustment to Revenue

55-129 An entity, a construction company, enters into a contract to construct a commercial building for a customer on customer-owned land for promised consideration of $1 million and a bonus of $200,000 if the building is completed within 24 months. The entity accounts for the promised bundle of goods and services as a single performance obligation satisfied over time in accordance with paragraph 606-10-25-27(b) because the customer controls the building during construction. At the inception of the contract, the entity expects the following:

55-130 At contract inception, the entity excludes the $200,000 bonus from the transaction price because it cannot conclude that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Completion of the building is highly susceptible to factors outside the entity’s influence, including weather and regulatory approvals. In addition, the entity has limited experience with similar types of contracts.

55-131 The entity determines that the input measure, on the basis of costs incurred, provides an appropriate measure of progress toward complete satisfaction of the performance obligation. By the end of the first year, the entity has satisfied 60 percent of its performance obligation on the basis of costs incurred to date ($420,000) relative to total expected costs ($700,000). The entity reassesses the variable consideration and concludes that the amount is still constrained in accordance with paragraphs 606-10-32-11 through 32-13. Consequently, the cumulative revenue and costs recognized for the first year are as follows:

55-132 In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor plan of the building. As a result, the fixed consideration and expected costs increase by $150,000 and $120,000, respectively. Total potential consideration after the modification is $1,350,000 ($1,150,000 fixed consideration + $200,000 completion bonus). In addition, the allowable time for achieving the $200,000 bonus is extended by 6 months to 30 months from the original contract inception date. At the date of the modification, on the basis of its experience and the remaining work to be performed, which is primarily inside the building and not subject to weather conditions, the entity concludes that it is probable that including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative revenue recognized in accordance with paragraph 606-10-32-11 and includes the $200,000 in the transaction price. In assessing the contract modification, the entity evaluates paragraph 606-10-25-19(b) and concludes (on the basis of the factors in paragraph 606-10-25-21) that the remaining goods and services to be provided using the modified contract are not distinct from the goods and services transferred on or before the date of contract modification; that is, the contract remains a single performance obligation.

55-133 Consequently, the entity accounts for the contract modification as if it were part of the original contract (in accordance with paragraph 606-10-25-13(b)). The entity updates its measure of progress and estimates that it has satisfied 51.2 percent of its performance obligation ($420,000 actual costs incurred ÷ $820,000 total expected costs). The entity recognizes additional revenue of $91,200 [(51.2 percent complete × $1,350,000 modified transaction price) – $600,000 revenue recognized to date] at the date of the modification as a cumulative catch-up adjustment.

9.2.2.2 Blend-and-Extend Contract Modifications

9.2.2.2.1 Blend-and-Extend Contract Modifications in the Power and Utilities Industry

A common transaction in the power and utilities (P&U) industry, a blend-and-extend (B&E) contract modification refers to an agreement between an entity and a customer that are already in a contract to change the amount of consideration to be paid and extend the length of the contract term.

For B&E contract modifications, stakeholders have questioned how the payment terms affect the evaluation of the contract modification (i.e., whether the modification should be accounted for as a separate contract or a termination of the existing contract and the creation of a new contract). In a typical B&E modification, the supplier and customer may renegotiate the contract to allow the customer to take advantage of lower commodity pricing while the supplier increases its future delivery portfolio. Under such circumstances, the customer and supplier agree to extend the contract term and “blend” the remaining original, higher contract rate with the lower market rate of the extension period for the remainder of the combined term. The supplier therefore defers the cash realization of some of the contract fair value that it would have received under the original contract terms until the extension period, at which time it will receive an amount that is greater than the market price for the extension- period deliveries as of the date of the modification.

For example, a supplier and a customer enter into a fixed-volume, five-year forward sale of electricity at a fixed price of $50 per unit. Years 1 through 3 have passed, and both parties have met all of their performance and payment obligations for those years.

At the beginning of year 4, the customer approaches the supplier and asks for a two-year contract extension, stretching the remaining term to four years. Electricity prices have gone down since the original agreement was executed; as a result, a fixed price for the two-year extension period is $40 per unit based on forward market price curves that exist at the beginning of year 4. The customer would like to negotiate a lower rate now while agreeing to extend the term of the original deal.

The supplier and customer agree to a B&E contract modification. Under the modification, the $50-per-unit fixed price from the original contract with two years remaining is blended with the $40-per-unit fixed price for the two-year extension period. The resulting blended rate for the four remaining delivery years is $45 per unit.

There has been uncertainty about whether the supplier should compare (1) the net increase in the contract consideration (i.e., the total increase in consideration that the entity expects to be entitled to under the modified contract, including any changes to the prices of the remaining goods or services in the original contract) with the total stand-alone selling price of the goods or services added during the extension period or (2) the revised blended price the customer will pay for the additional goods or services (i.e., the $45-per-unit blended price paid for the goods or services delivered during the extension period) with the stand-alone selling price of those goods or services. In addition, the total transaction price may need to be reevaluated because the blending of the prices may create a significant financing component under the view that some of the consideration for the current goods or services is paid later as a result of the blending of the price for the remainder of the combined term.

The AICPA’s P&U industry task force originally added this item to its agenda. However, it was unable to reach a consensus on whether a B&E contract modification should be accounted for as (1) a separate contract for the additional goods or services in accordance with ASC 606-10- 25-12 (“View A”) or (2) the termination of an existing contract and the creation of a new contract in accordance with ASC 606-10-25-13(a) (“View B”). The issue was discussed with the AICPA’s revenue recognition working group but was ultimately elevated to a discussion with the FASB staff through the staff’s technical inquiry process.

During that process, the FASB staff indicated that both views are acceptable but noted that View B is more consistent with the staff’s interpretation of the contract modification guidance in the revenue standard. The staff also indicated that entities will still need to assess whether B&E transactions include significant financing components; however, the staff noted that it did not think that every B&E contract modification inherently involves a financing component.

Under View A, the supplier in the example above would treat the additional services (two years of electricity) as a separate contract. Therefore, the transaction price per unit during the remaining term of the existing contract would be unchanged at $50 per unit. When the existing contract term ends and the extension period begins, the supplier would recognize revenue of $40 per unit for the next two years. This approach would generate a contract asset in the two-year period remaining from the existing contract. That is because the supplier would receive less consideration ($45 per unit) than the amount of revenue recognized ($50 per unit).

Under View B, the supplier in the example above would treat the two-year extension period as a termination of an existing contract and the creation of a new contract. Therefore, the supplier would account for the modification prospectively by combining the transaction prices of the existing contract and the extension period for an average price of $45 per unit for the remaining four-year period. This approach would not generate a contract asset or liability since the amount received as consideration ($45 per unit) would be the same as the amount of revenue recognized.

The application of View A or View B focuses on whether the goods or services added during the extension period are priced at their stand-alone selling price. However, we believe that it is also acceptable for an entity to conclude that a B&E contract modification is always a termination of an existing contract and the creation of a new contract (i.e., an entity is not required to perform an analysis of the stand-alone selling price of the additional goods or services). The B&E contract modification is not just an increase in a contract’s scope (e.g., an extension of the arrangement) in exchange for an incremental fee because the pricing of the remaining goods or services in the original contract is also adjusted. That is, if the modification does not solely add goods or services for an incremental fee as described in ASC 606-10-25-12 (i.e., the modification also adjusts the pricing of the original goods or services), it would not be accounted for as a separate contract.

9.2.2.2.2 Blend-and-Extend Contract Modifications Related to a SaaS Arrangement

An entity that sells a SaaS solution may modify its arrangements before the end of the initial contract term by renewing the initial contract and revising the pricing on a “blended” basis for the remaining term, particularly if prices have decreased (i.e., a B&E contract modification). In such circumstances, the entity and its customer agree to extend the contract term and “blend” the remaining original, higher contract rate with the lower rate of the extension period for the remainder of the combined term. Consequently, when navigating the contract modification guidance, the entity may find it difficult to determine the appropriate accounting treatment. In a typical B&E contract modification in the SaaS industry, the entity would account for such a modification as either (1) a separate contract for the added services under ASC 606-10-25-12 or (2) a termination of the existing contract and the creation of a new contract under ASC 606-10-25-13(a).5 The determination of which model to apply may be based on whether the additional services are priced at their stand-alone selling prices (i.e., whether the conditions in ASC 606-10-25-12 are met).

We believe there are three alternatives for an entity to consider in determining how to account for a B&E contract modification.

In accordance with ASC 606-10-25-12(b), to determine whether a modification results in a separate contract, an entity must assess whether the price of the contract increases by an amount that reflects the stand-alone selling prices of the additional promised goods or services. We believe that if a modification is not just an increase in a contract’s scope (e.g., an extension of the SaaS arrangement) in exchange for an incremental fee because the pricing of the remaining goods or services in the original contract is also adjusted, it would be appropriate for the entity to account for the modification as a termination of an existing contract and the creation of a new contract. This is because the modification does not solely add goods or services for an incremental fee as described in ASC 606-10-25-12 (i.e., the modification also adjusts the pricing of the original goods or services). Under this view (hereafter referred to as “View A”), the entity does not need to perform an analysis of the stand-alone selling prices of the additional promised goods or services.

However, an entity may also apply one of the two views below to B&E contract modifications. Under these views, an entity must carefully analyze whether the additional goods or services are actually priced at their stand-alone selling prices to determine whether they should be accounted for as a separate contract:

View B — This view focuses on the net increase in the contract consideration (i.e., the total increase in consideration that the entity expects to be entitled to under the modified contract, including any changes to the prices of the remaining goods or services in the original contract), compared with the stand-alone selling prices of the additional promised goods or services. In determining how to account for the modification, the entity should compare the net increase in consideration with the stand-alone selling price of the services added during the extension period.
View C — This view focuses on the revised blended prices of the contract compared with the stand-alone selling prices of the additional promised goods or services. Therefore, the analysis focuses solely on whether the stated blended price is consistent with the stand-alone selling price of the additional services during the extension period.

An entity should consistently apply its elected method to similar contracts.

Example 9-4

On January 1, 20X8, Company S enters into a noncancelable contract with Customer T for a two-year term to provide a SaaS solution for a variable fee of $50 per usage. The stand-alone selling price of the SaaS ranges from $45 to $55 per usage. There are no other performance obligations in the contract. Company S determines that (1) it is providing a series of distinct services and (2) it is appropriate to recognize revenue by using a time-based measure of progress (i.e., ratably). In considering how much revenue to recognize in a distinct time period, S concludes that the contract meets the variable consideration allocation exception guidance in ASC 606-10-32-40, and therefore it recognizes revenue as usage occurs. In 20X8, T incurs usage-based fees for 1,000 transactions.

By January 1, 20X9, the stand-alone selling price range of the SaaS has decreased to $30 to $40 per usage. During negotiations, T renews the contract for an additional year but requests a decrease in pricing. As a result of negotiations, S and T agree to apply a blended rate of $43 per usage for the remaining two years of the modified contract. Customer T is expected to incur usage-based fees for 1,000 transactions per year for the remaining years.

The following three views could be applied:

View A — Company S accounts for the modification as a termination of the existing contract and the creation of a new contract. Therefore, it recognizes revenue at the blended transaction price of $43 per usage in both 20X9 and 20Y0.
View B — Company S computes the total increase in the contract consideration, which is $36,000 or $36 per usage, as follows:

Company S would then compare the increase in the transaction price to the stand-alone selling price range for the SaaS that will be provided during the extension period (i.e., 20Y0). Because $36 per usage is within the stand-alone selling price range of $30 to $40 per usage, S concludes that the extension period should be accounted for as a separate contract. Therefore, S will continue to recognize revenue in 20X9 at $50 per usage, but it will recognize revenue in 20Y0 at $36 per usage. In subsequent periods, S will need to (1) monitor actual usage and the remaining estimated usage and (2) accordingly update the transaction price and associated revenue recognized.
View C — Company S compares the revised blended rate of $43 per usage to the stand-alone selling price range for the SaaS that will be provided during the extension period. Because $43 per usage is outside the stand-alone selling price range of $30 to $40 per usage, S concludes that the modification should be accounted for as a termination of the existing contract and the creation of a new contract. The accounting outcome would be similar to that under View A.

9.2.2.3 Modification and Discount for Low-Quality Products

ASC 606-10

Example 5 — Modification of a Contract for Goods

[Case A omitted6]

Case B — Additional Products for a Price That Does Not Reflect the Standalone Selling Price

55-114 During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of $80 per product. However, the customer discovers that the initial 60 products transferred to the customer contained minor defects that were unique to those delivered products. The entity promises a partial credit of $15 per product to compensate the customer for the poor quality of those products. The entity and the customer agree to incorporate the credit of $900 ($15 credit × 60 products) into the price that the entity charges for the additional 30 products. Consequently, the contract modification specifies that the price of the additional 30 products is $1,500 or $50 per product. That price comprises the agreed-upon price for the additional 30 products of $2,400, or $80 per product, less the credit of $900.

55-115 At the time of modification, the entity recognizes the $900 as a reduction of the transaction price and, therefore, as a reduction of revenue for the initial 60 products transferred. In accounting for the sale of the additional 30 products, the entity determines that the negotiated price of $80 per product does not reflect the standalone selling price of the additional products. Consequently, the contract modification does not meet the conditions in paragraph 606-10-25-12 to be accounted for as a separate contract. Because the remaining products to be delivered are distinct from those already transferred, the entity applies the guidance in paragraph 606-10-25-13(a) and accounts for the modification as a termination of the original contract and the creation of a new contract.

55-116 Consequently, the amount recognized as revenue for each of the remaining products is a blended price of $93.33 {[($100 × 60 products not yet transferred under the original contract) + ($80 × 30 products to be transferred under the contract modification)] ÷ 90 remaining products}.

Stakeholders have raised questions about Example 5, Case B, in ASC 606 (reproduced above). The example’s facts describe a contract modification in which an entity gives a customer a discount because goods and services previously delivered to the customer were determined to be of lower quality than that to which the parties had agreed. The example is designed to illustrate how an entity would apply the guidance in ASC 606-10-25-13(a), which describes a modification that would terminate the original contract and create a new one. In the absence of this example, a literal interpretation of the guidance in ASC 606-10-25-13(a) would require all of the consideration, inclusive of the discount negotiated in the modification for the 60 flawed products already delivered, to be recognized only when the undelivered products are delivered to the customer in the future (i.e., the modification is solely accounted for prospectively). That is, the allocation of the remaining consideration of $7,500 (which is the sum of (1) the original 60 remaining products × $100 per product and (2) the additional 30 products × $50 per product) would result in the recognition of $83.33 for each of the remaining 90 products delivered. This is because as of the date of the modification, the 90 products (60 in the original contract and 30 in the modification) are distinct from the 60 products already delivered.

Specifically, stakeholders have questioned how to determine the appropriate accounting approach when a contract is modified and the selling price reflects both (1) compensation for poor-quality goods or services that have already been supplied to the customer and (2) a selling price for the additional goods or services that does not represent the stand-alone selling price as of the date of the contract modification. Generally, we believe that entities should carefully consider the facts and circumstances in a modification and appropriately consider whether there is a price concession or discount attributable to past performance that is similar to the price concession in the example above.

For additional discussion related to differentiating changes in the transaction price from contract modifications, see Section 7.6.2.

9.2.2.4 Accounting for Contract Assets as Part of a Contract Modification

The revenue standard provides an overall framework for modification accounting. For example, when a contract modification meets the conditions in ASC 606-10-25-13(a), the modification is accounted for prospectively as a termination of the existing contract and the creation of a new one. The revenue standard also requires entities to record contract assets in certain circumstances, such as when an entity has a contract with a customer for which revenue has been recognized (i.e., goods or services have been transferred to the customer), but customer payment is contingent on a future event, such as the satisfaction of additional performance obligations (see Chapter 14). These contract assets may still be recorded at the time of a contract modification.

Stakeholders have expressed two views on how to subsequently account for contract assets that exist before a contract is modified when a contract modification meets the conditions in ASC 606-10-25-13(a):

View A — The terminated contract no longer exists. Accordingly, contract assets associated with the terminated contract should be written off to revenue (i.e., revenue should be reversed).
View B — Existing contract assets should be carried forward to the new contract and realized as receivables are recognized (i.e., revenue is not reversed, leading to prospective accounting for the effects of the contract assets).

View B is generally appropriate for three reasons. First, it better reflects the objective of ASC 606-10-25-13. Second, as noted in Q&A 81 of the FASB staff’s Revenue Recognition Implementation Q&As (the “Implementation Q&As”), “[p]aragraph 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.” Third, it 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).

The above issue is addressed in Implementation Q&A 81 (compiled from previously issued TRG Agenda Papers 51 and 55). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

The example below illustrates the accounting for a contract asset as part of a contract modification.

Example 9-5

Entity M enters into a contract with Customer R to sell a product and one year of service. The product and service are separate performance obligations. The one year of service is considered to be a series of distinct services that meet the criteria in ASC 606-10-25-14(b) to be accounted for as a single performance obligation satisfied over time. Entity M’s performance obligation related to the product is satisfied at the point in time that the product is shipped to R, which occurs at the beginning of the first month.

The transaction price of the contract is $7,500, which is paid by R in 12 equal installments of $625 at the end of each month. Under these payment terms, the customer does not make an up-front payment when the product is shipped. The stand-alone selling price of the product is $2,700, and the stand-alone selling price of the services is $4,800 ($400 per month). Because the sum of the stand-alone selling prices equals the transaction price, the amount allocated to each performance obligation is the stand-alone selling price of that performance obligation.

At the end of six months, the contract is modified to include one additional year of service beyond the initial one-year service term. Customer R is current with all payments, and the modification does not affect the amounts due for the remaining six months of service under the initial one-year service term (i.e., R continues to pay $625 each month for the remaining six months of the initial one-year service term). The price for the additional one year of services is $100 per month, which does not represent the stand-alone selling price of the services. Because the remaining services to be provided are distinct from the product and services already delivered to R, the modification is accounted for prospectively under ASC 606-10-25-13(a).

The journal entries below illustrate how M should recognize revenue at contract inception and in the months leading up to the contract modification. For simplicity, the journal entries ignore any effect of a significant financing component.

At contract inception, to recognize revenue for the product shipped to R:

At the end of each of months 1 through 6, to recognize revenue for the monthly services:

After six months, immediately before the modification, M has recognized revenue of $5,100 ($2,700 for the product and $2,400 for the services) and has a cumulative contract asset balance of $1,350.

Entity M would retain the original contract asset of $1,350 on the modification date. The remaining consideration to be allocated consists of two components:

$2,400 for the transaction price not yet recognized as revenue under the initial contract ($625 per month × 6 months remaining, less $1,350 contract asset balance).
$1,200 for the additional one year of services ($100 per month × 12 months).

The total transaction price for the modified contract of $3,600 ($2,400 + $1,200) is allocated to the remaining months of service under the modified contract term; as a result, M recognizes revenue of $200 per month for the remaining 18-month contract term. The contract asset that existed on the modification date will be reduced as amounts received or receivable exceed revenue recognized; once the contract asset is recovered, amounts received or receivable in excess of revenue recognized will be reflected as a contract liability. This is reflected in the journal entries below.

At the end of each of months 7 through 9:

At the end of month 10:

Before revenue is recognized at the end of month 10, the cumulative contract asset balance is only $75, or $1,350 – ($425 × 3). When a contract asset is fully recovered (i.e., is reduced to zero), consideration received in excess of revenue recognized is reflected as a contract liability. Consequently, a contract liability is recorded for the remaining amounts that are received or receivable in excess of revenue recognized.

For each of months 11 and 12, the contract liability will be recorded in the manner shown in the journal entry below.

At the end of each of months 11 and 12:

As of the end of month 12, the cumulative contract liability balance is $1,200; and beginning with month 13, amounts due under the modified contract are reduced to $100 per month. Revenue recognized for each month of service continues to be $200. This is reflected in the journal entry below for each of months 13 through 24.

At the end of each of months 13 through 24:

The results of this model are summarized in the table below.

9.2.2.5 Accounting for Capitalized Costs of Obtaining a Contract When a Contract Is Modified

ASC 340-40-25-1 requires entities to capitalize incremental costs incurred to obtain a contract with a customer when such costs are expected to be recovered. ASC 340-40-35-1 requires entities to amortize such capitalized costs “on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates.” The asset may be related to goods or services to be transferred under specific anticipated contracts. See Section 13.4.1.3 for a discussion of how to account for capitalized costs incurred to obtain a contract that are still recorded at the time of a contract modification.

9.2.2.6 Customer’s Exercise of a Material Right

As noted in Section 11.7, the TRG discussed questions raised by stakeholders about the accounting for a customer’s exercise of a material right. Specifically, stakeholders questioned whether an entity should account for a customer’s exercise of a material right in one of the following ways:

Alternative A — As a change in the contract’s transaction price such that the additional consideration, along with the consideration from the original contract that was allocated to the material right, would be allocated to the performance obligation underlying the material right and would be recognized when or as the performance obligation underlying the material right is satisfied.
Alternative B — As a contract modification, which may require reallocation of consideration between existing and future performance obligations.

Although most TRG members thought that both Alternatives A and B could be supported by the revenue standard, most TRG members leaned toward Alternative A. Accordingly, we believe that while the guidance in ASC 606 supports the two alternatives outlined above, it is generally preferable to account for a customer’s subsequent exercise of a material right as if it were a separate contract (Alternative A) rather than as if it were the modification of an existing contract (Alternative B). See Section 11.7 for further discussion.

Connecting the Dots

A customer’s exercise of an option to purchase additional goods or services that was accounted for as a “marketing offer” is different from a customer’s exercise of a material right contained within the original contract. We generally would not consider it appropriate for an entity to analogize to the alternatives outlined above on the basis of the TRG discussion when accounting for a marketing offer. Example 50 in ASC 606 (reproduced in Section 11.2) illustrates a contract with an option for additional services that is akin to a marketing offer rather than a material right because the prices of the additional services under the option represent the stand-alone selling prices of those services. Because a marketing offer in an original contract is not accounted for as a material right and therefore is not treated as part of the original contract, the exercise of the marketing offer at a subsequent date should be accounted for as a new contract (i.e., the exercise of the marketing offer is a separate contract because the additional goods or services are distinct and priced at their stand-alone selling prices).

9.2.2.7 Contract Modifications That Reduce the Scope of a Contract

The revenue standard specifically states that a contract modification is a change in the scope or price of a contract. Therefore, a contract modification can be one that adds or removes promised goods or services or changes the contract price. There can be situations in which part of a contract is terminated and the change would be a contract modification.

Depending on whether the remaining goods or services in the existing contract are distinct from those transferred before the modification, ASC 606-10-25-13 requires an entity to account for a contract modification that results in a decrease in scope (i.e., the removal from the contract of promised goods or services) as either (1) the termination of the existing contract and the creation of a new contract or (2) a cumulative catch-up adjustment to the existing contract. The modification cannot be accounted for as a separate contract because the criterion in ASC 606-10-25-12(a) specifying an increase in the scope of the contract is not met (i.e., by its very nature, a new contract that decreases the quantity of goods or services promised in the original contract is inherently modifying the original contract and is not separate).

Example 9-6

Application of ASC 606-10-25-13(a) to a Modification Resulting in a Reduction in the Scope of a Contract That Provides for a Series of Distinct Goods or Services Accounted for Under ASC 606-10-25-14(b)

Entity Y enters into a contract with a customer to provide Product X and 12 months of services to be used in conjunction with Product X in return for consideration of $140; the services portion of the contract qualifies as a series in accordance with ASC 606-10-25-14(b). Product X and the services are each determined to be distinct, with consideration of $40 allocated to Product X (recognized on transfer of control of Product X) and consideration of $100 allocated to the services portion of the contract (recognized over the 12-month service period).

Six months after the start of the contract, the customer modifies the contract to reduce the level of service required. By the time of this modification, Y has already (1) recognized revenue of $40 for delivery of Product X, (2) recognized revenue of $50 for services provided to date, and (3) received payment from the customer of $110, creating a contract liability of $20. Entity Y agrees to a reduction in price such that the customer will pay only $10 in addition to the payments already made.

Given that the remaining six months of service are distinct from both the delivery of Product X and those services provided in the first six months of the contract, this decrease in scope (and price) should be accounted for as a termination of the existing contract and the creation of a new contract as required by ASC 606-10-25-13(a), with $30 allocated to the services still to be provided (i.e., the $20 previously collected from the customer but not recognized as revenue plus the remaining $10 due under the modified contract).

Entity Y could alternatively calculate the $30 allocated to the services still to be provided by considering the $50 of the original transaction price yet to be recognized ($140 transaction price, less the $40 recognized as revenue for delivery of Product X and the $50 recognized as revenue for services provided to date), less the $20 reduction of the total transaction price since the customer agrees to pay only an additional $10. As a result, Y would allocate $30 ($50 in remaining revenue to be recognized under the original contract less the $20 reduction of the transaction price) to the services still to be provided.

Example 9-7

Application of ASC 606-10-25-13(b) to a Modification Resulting in a Reduction in the Scope of a Contract That Contains a Single Combined Performance Obligation Accounted for Under ASC 606-10-25-14(a)

Entity X enters into a contract to produce a single large item of specialized machinery for a customer. Multiple components are used in the production of the specialized machinery, but they are significantly integrated so that X is using the goods as inputs to produce the combined output of the specialized machinery. Therefore, X concludes that the contract contains a single combined performance obligation in accordance with ASC 606-10-25-14(a). In addition, X concludes that the performance obligation should be recognized over time in accordance with ASC 606-10-25-27. Four months into the contract term, the customer decides to purchase a component of the project from an alternative source; X agrees to this contract modification, which reduces the contract scope.

Since the remaining goods or services to be provided are not distinct from those already provided, ASC 606-10-25-13(b) requires X to (1) account for the contract modification as part of the existing contract and (2) recognize a cumulative catch-up adjustment to revenue at the time the modification occurs.

Refer to Example 8 in ASC 606-10-55-129 through 55-133 for an example of the calculation of a cumulative catch-up adjustment under ASC 606-10-25-13(b).

Example 9-8

Application of ASC 606-10-25-13(a) to a Partial Termination of a Contract That Provides for a Series of Distinct Goods or Services Accounted for Under ASC 606-10-25-14(b)

Provider P has entered into an enforceable contract to deliver 25 hours of routine and recurring cleaning services every month to Customer C for five years at a fixed price of $1,000 per month (total transaction price of $60,000), which represents the stand-alone selling price for cleaning services at contract inception.

At the end of year 1 (i.e., year 1 has passed and both parties have met all of their performance and payment obligations during that period), the market for cleaning services has declined and the customer’s need for cleaning services has changed. Customer C and P agree to reduce the remaining term of the contract to two years (i.e., terminate years 4 and 5 of the contract) but do not change the fixed price of $1,000 per month. The stand-alone selling price of the cleaning services is $750 per month on the date of the contract modification.

To compensate P for its lost value on years 4 and 5 of the contract when C would have to pay P at above-market rates, C agrees to pay a $6,000 penalty (i.e., 24 months in years 4 and 5 × $250 per month, the excess of the contract rate of $1,000 over the stand-alone selling price of $750 on the date of modification).

Provider P accounts for the contract as a series of distinct services with the same pattern of transfer to C in accordance with ASC 606-10-25-15 and, therefore, as a single performance obligation satisfied over time in accordance with ASC 606-10-25-27(a) (and ASC 606-10-55-5 and 55-6). Provider P uses an output method based on time elapsed to measure its progress toward complete satisfaction of its performance obligation.

Provider P should account for the partial termination as a contract modification in accordance with ASC 606-10-25-10 through 25-13. The criteria for accounting for a contract modification as a separate contract in ASC 606-10-25-12 are not met because the scope of the contract does not increase. Consequently, P should account for the modification in accordance with the guidance in ASC 606-10-25-13(a), the application of which would result in accounting for the modification as a termination of the old agreement and the creation of a new agreement.

Provider P should therefore account for the modification prospectively and recognize $30,000 (i.e., $12,000 per year under the original terms for years 2 and 3 plus the $6,000 compensation payment) over the remaining revised contract period of two years.

Footnotes

For illustrative examples, see Example 9-3; ASC 606-10, Examples 8 and 9; and Example 9-7.

For illustrative examples, see Example 9-2; ASC 606-10, Example 5, Case B; ASC 606-10, Example 7; Example 9-6; Example 9-8; and ASC 606-10, Example 6

For an illustrative example, see ASC 606-10, Example 5, Case A.

Cumulative adjustments to revenue under ASC 606-10-25-13(b) are not common for these types of modifications of SaaS arrangements because the services provided after the modification are typically distinct from those transferred before the modification. Therefore, this discussion does not focus on modifications that would result in an adjustment to revenue.

Case A of Example 5 is reproduced in Section 9.2.1.

Chapter 10 — Principal-Versus-Agent Considerations

Chapter 11 — Customer Options for Additional Goods or Services (Material Rights)

11.2 Determining Whether an Option for Additional Goods or Services Represents a Material Right

The example below, which is reproduced from ASC 606, illustrates a contract with an option for additional goods or services that is akin to a marketing offer and thus does not represent a material right.

ASC 606-10

Example 50 — Option That Does Not Provide the Customer With a Material Right (Additional Goods or Services)

55-340 An entity in the telecommunications industry enters into a contract with a customer to provide a handset and monthly network service for two years. The network service includes up to 1,000 call minutes and 1,500 text messages each month for a fixed monthly fee. The contract specifies the price for any additional call minutes or texts that the customer may choose to purchase in any month. The prices for those services are equal to their standalone selling prices.

55-341 The entity determines that the promises to provide the handset and network service are each separate performance obligations. This is because the customer can benefit from the handset and network service either on their own or together with other resources that are readily available to the customer in accordance with the criterion in paragraph 606-10-25-19(a). In addition, the handset and network service are separately identifiable in accordance with the criterion in paragraph 606-10-25-19(b) (on the basis of the factors in paragraph 606-10-25-21).

55-342 The entity determines that the option to purchase the additional call minutes and texts does not provide a material right that the customer would not receive without entering into the contract (see paragraph 606-10-55-43). This is because the prices of the additional call minutes and texts reflect the standalone selling prices for those services. Because the option for additional call minutes and texts does not grant the customer a material right, the entity concludes it is not a performance obligation in the contract. Consequently, the entity does not allocate any of the transaction price to the option for additional call minutes or texts. The entity will recognize revenue for the additional call minutes or texts if and when the entity provides those services.

Once a material right is identified, it must be accounted for as a performance obligation. However, the identification of material rights has been the focus of many questions from stakeholders.

In determining whether an option for future goods or services is a material right, an entity should (1) consider factors outside the current transaction (e.g., the current class of customer1) and (2) assess both quantitative and qualitative factors. Further, an entity should also evaluate incentives and programs to understand whether they are customer options designed to influence customer behavior (i.e., an entity should consider incentives and programs from the customer’s perspective) because this could be an indicator that an option is a material right.

For example, regarding certain offers, such as “Buy three, get one free,” the quantities involved are less important than the fact that an entity would be “giving away” future sales in such cases. While not determinative, such an indicator may lead an entity to conclude that a customer option is a material right.

When determining whether a contract option provides a material right, entities should consider not only the quantitative significance of the option (i.e., the quantitative value of the benefit) but also previous and future transactions with the customer as well as qualitative factors. Specifically, qualitative features such as whether the rights accumulate (e.g., loyalty points) are likely to provide a qualitative benefit that may give rise to a material right. In accordance with ASC 606-10-25-16B, entities should not apply the guidance in ASC 606-10-25-16A on assessing whether promises for immaterial goods or services are performance obligations to the assessment of whether a contract option provides 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 in the aggregate and accounted for as a material right).

An entity should consider its customer’s reasonable expectations when identifying promised goods or services. A customer’s perspective on what constitutes a material right might consider qualitative factors (e.g., whether the right accumulates). Therefore, a numeric threshold alone might not determine whether a material right is provided by a customer option in a contract.

Refer to Examples 49 (Section 11.8), 50 (Section 11.2), 51 (Section 11.9), and 52 (Section 11.2.2) in ASC 606-10-55-336 through 55-356 for illustrations of how an entity would determine whether an option provides a customer with a material right. In addition, some industries, such as the software industry, more commonly provide customers with options to purchase additional goods or services. Refer to Sections 12.3.3.1 and 12.6.3.2 for examples of how an entity would assess whether options to purchase additional copies of software or options to renew postcontract customer support (PCS) provide a customer with a material right.

The above issue is addressed in Q&As 12 through 14 (compiled from previously issued TRG Agenda Papers 6, 11, 54, and 55) 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.

11.2.1 Need for Assessing Whether a Material Right Exists When the Residual Approach Was Used to Establish the Stand-Alone Selling Price of the Additional Goods or Services

Determining the stand-alone selling price of goods or services offered to a customer under a contract option is a necessary step in the assessment of whether a material right exists. The ability to sell certain goods or services for a wide range of prices may make it difficult to establish the stand-alone selling price of goods or services offered to a customer under a contract option (e.g., a renewal option). This is especially true in the software industry, in which the incremental costs incurred to sell additional software licenses are often minimal and therefore allow software entities to sell their software at prices spanning a wide range of discounts or even premiums. Consequently, the FASB included the residual approach in ASC 606 as a “suitable” method for establishing the stand-alone selling price.

If an entity applied the residual approach to establish the stand-alone selling price of goods or services because the stand-alone selling price of those goods or services is highly variable or uncertain, the entity is required to assess whether an option (e.g., a renewal option) to acquire more of those goods or services conveys a material right to the customer. Under ASC 606-10-55-41 through 55-45, a customer option to purchase additional goods or services gives rise to a material right if the option provides the entity’s customer with a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer (e.g., a customer in a particular geographic area or market). It would not be appropriate for the entity to conclude that no material right was conveyed to the customer simply because the stand-alone selling price of the goods or services that are subject to the option is highly variable or uncertain and the residual approach was therefore applied.

When the residual approach is used to determine the stand-alone selling price of a good or service because pricing is highly variable or uncertain, assessing whether option pricing for that good or service provides a material right may require significant judgment because of the lack of a point estimate or sufficiently consistent range representing the stand-alone selling price. While we believe that entities are likely to identify fewer material rights in such cases, they are nonetheless required to base their determination of whether a material right was provided on all reasonably available information. Although the presence of highly variable or uncertain pricing complicates the identification of material rights, we believe that when doing so, an entity should consider (1) the definition of a material right2 and (2) the allocation objective in ASC 606-10-32-28. In other words, an entity must determine whether the pricing of the optional good or service (1) indicates that preferential pricing would not have been received “but for” the initial contract or (2) reflects the amount to which the entity expects to be entitled in exchange for transferring that good or service to the customer. If the pricing does not meet the allocation objective (i.e., it is a discount that is incremental to what other similar customers would receive), a material right should be identified. We believe that an entity might find the following factors useful in determining whether a material right is present when the pricing of optional future purchases is highly variable or uncertain:

How the pricing of the optional future purchase aligns with current pricing policies and practices — For example, if a good or service is not typically sold below a certain amount because it is a premium offering, an option to buy the good or service at an amount below that floor would be at odds with standard pricing practices and may therefore convey a material right to the customer.
How the pricing of the optional future purchase compares to historical amounts allocated to the good or service in similar situations — Such a comparison is likely to require an entity to look to historical data and stand-alone selling prices that were derived by using the residual approach. Accordingly, while there will not be an established point estimate or narrow range of stand-alone selling prices against which to compare the pricing of the optional future purchase, ASC 606-10-32-34(c) indicates that the residual approach is a method of establishing a stand-alone selling price. Therefore, the amounts determined under that approach represent the stand-alone selling price for that good or service. Consequently, we believe that in assessing whether a customer has been given a material right, an entity may obtain useful information by comparing the pricing of an optional future purchase with historical stand-alone selling prices that were determined as a result of applying the residual approach. In addition, to determine which range of historical stand-alone selling prices to compare with the pricing of the optional future purchase, entities should consider only those transactions that are similar to the transaction in question. For example, an entity might disaggregate historical stand-alone selling price data by one or more of the following characteristics: class of customer, geography, distribution channel, or contract value.
How the pricing of the optional future purchase compares to historical contractually stated pricing (if any) of the good or service in similar situations — While the contractually stated pricing may not necessarily represent the stand-alone selling price (see ASC 606-10-32-32), the historical price across a range of different contracts may nevertheless be relevant evidence of an entity’s pricing practices and discounts it may offer on future purchases.
Whether the pricing of the optional future purchase is intended to incorporate a discount — If the intent during negotiations was to give the customer a discount on future purchases, a material right may exist since the allocation objective is less likely to be met in such cases. For example, a customer may only have agreed to enter into an initial contract if the vendor offered discounted pricing on future purchases.
Whether the pricing of the optional future purchase is discounted relative to (1) the price of similar goods or services sold under the initial contract or (2) the list price when compared with the discounted list prices of all goods or services (whether similar or not) sold under the initial contract — We acknowledge that this factor conflicts with the FASB’s reasons for departing from its definition of a significant incremental discount in legacy GAAP under ASC 985-605. In paragraph BC387 of ASU 2014-09, the Board indicates its rationale for defining “incremental” solely by reference to other comparable transactions:
[T]he Boards observed that even if the offered discount is not incremental to other discounts in the contract, it nonetheless could, in some cases, give rise to a material right to the customer. Consequently, the Boards decided not to carry forward that part of the previous revenue recognition guidance from U.S. GAAP into Topic 606.

However, we believe that when evaluated in conjunction with all other available evidence, a comparison of the pricing of the optional future purchase with any discounts offered in the initial contract may provide insight into an entity’s pricing practices and discounting intentions. Pricing of the optional future purchase at an amount that is lower than the price under the original contract may indicate the presence of a material right. Conversely, pricing of the optional future purchase at an amount that is lower than the list price but is nevertheless consistent with the discounted price charged under the original contract may be evidence to support a conclusion that the discounted price represents the stand-alone selling price.
How the pricing of the optional future purchase aligns with any intended future pricing for similar goods or services — For example, an option to buy add-on software at a set price may not give the customer a material right if that price approximates the amount at which management intends to sell that software on a stand-alone basis in the near future.
The relative negotiating power of the entity and the customer — In certain situations, customers may have a greater ability to demand discounted pricing on optional future purchases if the customers represent significantly larger, well-known brands that are dominant in their markets, are more mature, or are otherwise better positioned than the entity selling the goods or services.

The above factors are not intended to be all-inclusive or prescriptive, and each factor on its own may not be determinative. Entities may need to use significant judgment when determining whether a material right has been granted. Entities with highly variable or uncertain pricing should establish a policy for evaluating material rights and apply that policy consistently in similar situations.

The examples below demonstrate the application of some of the concepts described above.

Example 11-1

Entity J, an early-stage software developer, enters into an arrangement with Customer T, a large U.S.-based company, to license its software on a term basis and provide PCS for one year. The arrangement also includes hardware and professional services. The total transaction price is $2 million, and J has established that the license, PCS, hardware, and professional services each represent a distinct performance obligation.

Entity J has concluded that the pricing of software licenses is highly variable and uses the residual approach to determine the stand-alone selling price. The observable stand-alone selling prices of the other performance obligations are as follows:

PCS — $200,000.
Professional services — $500,000.
Hardware — $300,000.

Under the residual approach, $1 million is allocated to the software license, which J determines is consistent with the allocation objective. The contract also indicates that the customer may renew the software license for $250,000 per additional year and that the pricing for other products and services will be at their stand-alone selling prices.

Entity J reviews historical transaction data for sales of software licenses to large customers in the United States to determine the amounts that have been allocated to the software license under the residual approach. Over the past year, a range of $500,000 to $3 million has been allocated to the software license, which is consistent with J’s pricing policies. While J did not initially intend to give T a discount, it was willing to negotiate on renewal pricing because it wanted to secure the large contract and is able to enhance the marketability of its products by obtaining T as a customer (T is a well-known brand and dominant in its market). Therefore, J concludes that the pricing of the optional future purchase has given T a material right.

We believe that the following factors indicate that T has received a material right:

A comparison of (1) the price T must pay if it exercises its option to renew the license in the future ($250,000) and (2) the range of stand-alone selling prices determined under the residual approach in similar historical transactions ($500,000 to $3 million) indicates that the pricing offered to T does not meet the allocation objective because T is receiving a significant discount that is incremental to the range of discounts offered to other similar customers.
Although J did not initially intend to give T a discount on future purchases, other facts and circumstances indicate that J nonetheless offered T preferential pricing.

Example 11-2

Entity A enters into an arrangement with Customer C, a midsized company based in Europe, to license its software on a term basis and provide PCS for one year. The arrangement also includes hardware and professional services. The total transaction price is $20,000, and A has established that the license, PCS, hardware, and professional services each represent a distinct performance obligation.

Entity A has concluded that the pricing of software licenses is highly variable and uses the residual approach to determine the stand-alone selling price. It has observable stand-alone selling prices for its other products and services. The list price, contractually stated price, discount from list price, and stand-alone selling price of each performance obligation are as follows:

The contract also indicates that the customer may renew the software license for $3,000 per additional year, which represents a 60 percent discount from the list price, and that the pricing for other products and services remains at the same contractually stated prices.

Entity A reviews historical transaction data for sales of software licenses to midsized customers in Europe to determine the contractually stated prices and related discounts from list price for the software license. Over the past year, the software license has been priced between $1,000 to $20,000, thus ranging from a discount of 87 percent to a premium of 167 percent relative to the list price. Entity A’s internal pricing policies require that discounts of over 50 percent must undergo an extensive approval process. Further, A intended to give C a discount on renewals of the software license because A is in a highly competitive market in which customer retention is difficult. In addition, C indicated that it would purchase large additional amounts of hardware. Therefore, A concludes that the pricing of the optional future purchase(s) gives C a material right.

We believe that the following factors indicate that C has received a material right:

It is not especially meaningful to compare (1) the discount to the list price C receives if it exercises its option to renew the license in the future (60 percent) with (2) the range of discounts and premiums in similar historical transactions (87 percent discount to 167 percent premium) given the significant pricing variation observed in the data. However, A’s internal pricing policies require any discounts of over 50 percent undergo an extensive approval process.
On the basis of a comparison of (1) the discount from list price for the renewal pricing (60 percent) with (2) the other discounts offered in the same contract (0 percent to 38 percent for other goods and services and 40 percent for the same software license), A determines that the optional future purchase pricing conveys an incremental discount to C that it did not receive under the initial contract.
Entity A’s intention to give C a discount to secure its future business in a competitive market supports a conclusion that “but for the initial contract,” C would not have received favorable pricing on future software license renewals.
Customer C’s indication that it would make many additional purchases of hardware supports A’s decision to provide preferential pricing.

11.2.2 Loyalty Programs and Accumulation Features

ASC 606-10

Example 52 — Customer Loyalty Program

55-353 An entity has a customer loyalty program that rewards a customer with 1 customer loyalty point for every $10 of purchases. Each point is redeemable for a $1 discount on any future purchases of the entity’s products. During a reporting period, customers purchase products for $100,000 and earn 10,000 points that are redeemable for future purchases. The consideration is fixed, and the standalone selling price of the purchased products is $100,000. The entity expects 9,500 points to be redeemed. The entity estimates a standalone selling price of $0.95 per point (totalling $9,500) on the basis of the likelihood of redemption in accordance with paragraph 606-10-55-44.

55-354 The points provide a material right to customers that they would not receive without entering into a contract. Consequently, the entity concludes that the promise to provide points to the customer is a performance obligation. The entity allocates the transaction price ($100,000) to the product and the points on a relative standalone selling price basis as follows:

Product $91,324 [$100,000 × ($100,000 standalone selling price ÷ $109,500)]

Points $8,676 [$100,000 × ($9,500 standalone selling price ÷ $109,500)]

55-355 At the end of the first reporting period, 4,500 points have been redeemed, and the entity continues to expect 9,500 points to be redeemed in total. The entity recognizes revenue for the loyalty points of $4,110 [(4,500 points ÷ 9,500 points) × $8,676] and recognizes a contract liability of $4,566 ($8,676 – $ 4,110) for the unredeemed points at the end of the first reporting period.

55-356 At the end of the second reporting period, 8,500 points have been redeemed cumulatively. The entity updates its estimate of the points that will be redeemed and now expects that 9,700 points will be redeemed. The entity recognizes revenue for the loyalty points of $3,493 {[(8,500 total points redeemed ÷ 9,700 total points expected to be redeemed) × $8,676 initial allocation] – $4,110 recognized in the first reporting period}. The contract liability balance is $1,073 ($8,676 initial allocation – $7,603 of cumulative revenue recognized).

Loyalty programs allow customers to accumulate points upon each purchase of goods or services; the points accumulated may then be redeemed to obtain future goods or services from the same vendor. That is, the customer is granted an option to purchase additional goods or services by redeeming the points. Accordingly, ASC 606-10-25-18(j) requires the option to be recognized as a distinct performance obligation when the option provides the customer with a material right as defined in ASC 606-10-55-41 through 55-45.

We believe that the existence of an accumulation feature in a loyalty program is a strong indicator of a material right, to which an entity would need to allocate a portion of the current contract’s transaction price. We expect it to be a rare conclusion that loyalty programs with accumulation features are not material rights.

In circumstances in which a customer’s loyalty points accumulate with each transaction, the entity should evaluate the current, past, and future transactions made by the customer in evaluating whether the loyalty program provides the customer with a material right. In addition, the entity should consider both qualitative and quantitative factors and, in particular, should consider whether the material right accumulates over time (after multiple transactions). That is, the entity should consider factors related to both the current transaction and the loyalty program in its entirety when analyzing whether an option provides a material right (and should therefore be accounted for as a distinct performance obligation in accordance with ASC 606-10-25-18(j) and ASC 606-10-55-41 through 55-45).

For example, in any given transaction, the number of loyalty points awarded may not be quantitatively material; however, the structure of the loyalty program could be designed to influence customer behavior and therefore be a qualitative indicator that the option provides a material right.

The above issue is addressed in Implementation Q&A 12 (compiled from previously issued TRG Agenda Papers 6 and 11). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

Note that the above discussion focuses on loyalty programs in which points that a customer has earned by purchasing goods or services from a vendor are redeemed for future goods or services from the same vendor. For loyalty programs in which accumulated points can be redeemed for goods or services from a third party or for goods or services from the original vendor that meet the requirement to be a separate performance obligation, the original vendor should evaluate upon redemption whether it is acting as a principal or as an agent in the transaction associated with the deferred recognition of revenue. (See Chapter 10 for additional considerations related to the assessment of whether an entity is a principal or an agent.) For example, suppose that Company X, an airline, offers one point for every $100 a customer spends. The accumulated points can be redeemed for either future flights provided by X or future hotel stays with Hotel Y, a vendor with which X has partnered. Since X has determined that its loyalty programs offer a material right that is a performance obligation, X defers a portion of revenue for the redemption of the loyalty points. Upon a customer’s redemption of points for either a flight or a hotel stay, X evaluates whether it is acting as a principal or as an agent in that transaction.

Further, any changes to an entity’s incentives (e.g., loyalty programs, rebates, method of redeeming points, amounts for which points are earned) should be evaluated under the contract modification guidance discussed in Chapter 9.

11.2.3 Considering the Class of Customer in the Evaluation of Whether a Customer Option Gives Rise to a Material Right

As noted in Section 11.2.2, when determining whether a material right exists, an entity should take into account past, current, and future transactions as well as both qualitative and quantitative factors (including whether the right accumulates).

ASC 606-10-55-42 states, in part, that an “option gives rise to a performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into that contract (for example, a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer in that geographic area or market).”

Stakeholder views have differed regarding how the class of customer should be considered in an entity’s evaluation of whether a customer option gives rise to a material right. Implementation Q&A 14 (compiled from previously issued TRG Agenda Papers 54 and 55) and TRG Agenda Paper 54 provide the following examples of the FASB staff’s views on this topic:

Example	Facts	FASB Staff Analysis and Views
Volume discounts	Company A manufactures component parts that are interchangeable, are not customized, and have various uses to multiple customers. Company A enters into long-term master service agreements with many of its customers to provide parts. Under the agreements, the future prices of the parts depend on past volume. For example, A offers B a decrease in price from $1.00 per part in year 1 to $0.90 per part in year 2 if B purchases more than 100,000 parts in year 1. Early in year 1, B enters into a contract with A to purchase 8,000 parts. Customer B is required to pay $1.00 for each of those 8,000 parts. Customer C (an existing customer) places a single order for 105,000 units at a price per part of $0.90.	Company A will need to consider all relevant facts and circumstances (including the price charged to other high-volume customers) to determine whether the price offered in year 2 represents the stand-alone selling price for the part. Said differently, A would need to determine whether the discount (1) is incremental to the discount that would be offered to other similar customers (such as that offered to C) and (2) would be offered to a similar customer independently of any prior contract the customer had with A. Company A would not consider pricing offered to other customers that is contingent on prior-year volume purchases. Pricing offered to B that is comparable to pricing offered to other similar customers (and is offered independently of prior contracts with A) may be an indication that there is no incremental discount and therefore no material right. However, pricing that is not comparable may be an indication that a material right has been given to B because B has prepaid for parts in year 2.
Tier status	An airline offers a “tier status” program with Bronze, Silver, and Platinum categories that are based on historical travel volume. Benefits are offered to each tier and increase as customers reach the next tier. Benefits may include the ability to check bags, access the airline’s airport lounge, or upgrade to business-class seating. Customers without tier status would be charged fees incremental to the ticket purchase for such benefits. Status tiers must be achieved by the end of the year and reset each year. Customers who have a larger volume of ticket purchases earn a higher status for the remainder of the current year and all of the next year. The airline may also offer to match the level of status achieved by customers of a competitor’s airline or who are identified as high-volume customers by other means (e.g., status at a hotel chain), even if they have not previously traveled with the airline.	The airline needs to evaluate whether the ticket purchase (the contract) includes a material right by determining whether the customer’s option to receive discounted goods (e.g., a free checked bag) is independent of the current contract with the customer. In other words, the airline would need to consider whether the benefits (e.g., discounts) given under a tier status program are incremental to discounts given to a similar class of customer who did not enter into a prior contract with the airline. In performing the evaluation, the company could: Compare the price it charges a certain tier of customer for the flight and the other status benefits associated with the price charged to a similar customer who does not have a prior contract. Consider whether it would continue to offer customers status benefits for the subsequent year even if they failed to travel enough in the current year to maintain their tier status. Assess whether, and how frequently, it would offer status benefits to a customer who demonstrates that he or she is a frequent traveler through other means (e.g., other airlines or hotels). The airline would not consider the price charged to other customers who received status benefits through prior contracts with the airline since doing so would not help it determine whether such discounted pricing is offered independently of the current contract.

The FASB staff noted that an entity will be required to use significant judgment to determine whether a material right is provided to the entity’s customers. Further, the staff noted that it “is not in a position to reach broad conclusions about these types of fact patterns because there are many variations of contracts and variations in facts and circumstances that can affect the conclusion in each fact pattern.”3 However, the staff emphasized the following:

The relative importance placed on the considerations discussed in the examples (or other considerations) will vary on the basis of an entity’s facts and circumstances.
The objective of the guidance in ASC 606-10-55-42 and 55-43 is to determine whether a customer option to receive discounted goods is independent of an existing contract with a customer.

TRG members debated the application of concepts in the framework the staff used to analyze the examples in Implementation Q&A 14 and 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 do not represent a material right).

Following its stakeholder outreach, the FASB staff indicated that an entity should evaluate whether tier status programs contain material rights or represent a marketing incentive. In making this evaluation, the FASB staff indicated that entities should consider whether discounts offered on future goods or services to customers within a given tier of a status program are incremental to the range of discounts typically given to that class of customer. If an entity never provides customers with tier status other than through past purchases, the discounts provided to customers under the program are likely to be material rights. However, if an entity sometimes provides tier status to customers for reasons other than past purchases, the discounts may be marketing incentives provided to a particular class of customer. The determination of whether discounts under a tier status program are material rights or marketing incentives will require judgment based on an evaluation of the specific facts and circumstances of the specific program.

Footnotes

ASC 606-10-25-2 and ASC 606-10-55-42.

A material right arises from pricing on an option to acquire additional goods or services in the future that would not have been received if the initial contract had not been entered into. In such cases, the customer with the option has essentially prepaid for the future purchase.

Quoted from Implementation Q&A 14.

11.4 Likelihood That an Option for Additional Goods or Services Will Be Exercised

Stakeholders have raised various issues related to whether an entity should assess optional purchases provided to customers to determine whether the customer is economically compelled — or highly likely — to exercise its option(s).

Some business models include arrangements under which a vendor will sell an up-front good or service and also provide the customer with an option to purchase other distinct goods or services in the future that are related to the up-front good or service (e.g., a specialized piece of equipment and an option to buy specialized consumables that will be needed for its operation). Such arrangements may include features that result in a degree of economic compulsion such that there is a very high level of confidence that the customer will exercise its option.

In such circumstances, when it is highly probable, or even virtually certain, that the customer will exercise its option, the additional goods or services should not be treated as performance obligations under the contract. The treatment of customer options is explained in paragraph BC186 of ASU 2014-09, in which the FASB and IASB clarified that “the transaction price does not include estimates of consideration from the future exercise of options for additional goods or services,” making no reference to the probability that those options will be exercised.

Accordingly, irrespective of how likely it is that a customer will choose to purchase additional goods or services, the entity should not treat those goods or services as performance obligations under the initial contract. Instead, the entity should evaluate the customer option (in accordance with ASC 606-10-55-41 through 55-45) to determine whether it gives rise to a material right.

The above issue is addressed in Implementation Q&A 21 (compiled from previously issued TRG Agenda Papers 48 and 49). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

11.5 Allocation of Consideration to Material Rights

ASC 606-10

55-44 Paragraph 606-10-32-29 requires an entity to allocate the transaction price to performance obligations on a relative standalone selling price basis. If the standalone selling price for a customer’s option to acquire additional goods or services is not directly observable, an entity should estimate it. That estimate should reflect the discount that the customer would obtain when exercising the option, adjusted for both of the following:

Any discount that the customer could receive without exercising the option
The likelihood that the option will be exercised.

55-45 If a customer has a material right to acquire future goods or services and those goods or services are similar to the original goods or services in the contract and are provided in accordance with the terms of the original contract, then an entity may, as a practical alternative to estimating the standalone selling price of the option, allocate the transaction price to the optional goods or services by reference to the goods or services expected to be provided and the corresponding expected consideration. Typically, those types of options are for contract renewals.

If an entity’s contract with a customer includes a material right in the form of an option to acquire additional goods or services, ASC 606-10-55-41 through 55-45 require the entity to allocate part of the transaction price to that right and recognize the associated revenue when those future goods or services are transferred or when the option expires. The allocation of consideration to all of the performance obligations in a contract as required in step 4 is performed on the basis of stand-alone selling prices. As explained in paragraph BC390 of ASU 2014-09, option pricing models can be used to estimate an option’s stand-alone selling price. In addition, ASC 606-10-55-45 provides an alternative to estimating the stand-alone selling price of a customer option when certain criteria are met (discussed in Section 11.9). Allocation of the transaction price in step 4 is discussed comprehensively in Chapter 7.

11.12 Expiration of a Material Right

ASC 606 does not directly address how to account for the expiration of an option to acquire goods or services when the option constitutes a material right (i.e., how to account for an option granting a customer the right to purchase additional goods or services before a fixed expiration date when the option expires unexercised before the end of the contract term).

Implementation Q&A 15 (compiled from previously issued TRG Agenda Paper 34) provides guidance on the timing of recognition of the expiration of a material right by stating that the consideration allocated to the option should be deferred until the underlying performance obligation is transferred to the customer or when “the option expires.” Accordingly, an entity should account for the expiration of a material right by recognizing the consideration allocated to the material right upon expiration (i.e., at the point in time at which the option expires) immediately as revenue (i.e., as breakage).

We believe that in situations involving the expiration of a material right, amounts previously allocated to other goods or services in the original contract should not be revised unless the contract is also concurrently modified. In addition, the consideration originally allocated at contract inception to the material right should not be reallocated to other performance obligations in the contract. If the option expires unexercised, the consideration allocated to the option should be recognized as revenue attributed to the underlying goods or services that would have been promised and transferred had the option been exercised. That is, if a customer had an option to purchase services from an entity as a result of entering into a contract to purchase goods, any consideration allocated to the material right should be considered service revenue irrespective of whether the option to purchase such services expired unexercised and the corresponding allocated consideration was recognized as breakage revenue.

If a material right is removed as the result of a modification to the original contract, the removal of the material right should be viewed as a contract modification that reduces the scope of the contract (see Section 9.2.2.7).

Connecting the Dots

ASC 606-10-55-44 states that the consideration allocated to a material right should be adjusted for the likelihood that the option will be exercised. Entities should carefully measure the consideration allocated to a material right and should monitor the frequency with which material rights are exercised. Changes in the frequency of unexercised material rights most likely indicate a need to reevaluate the measure of likelihood used when an entity determines the material rights’ stand-alone selling prices for new or modified contracts. If an entity grants a customer the option to purchase goods or services at a discount without a reasonable expectation that the customer will exercise the option, the consideration allocated to the material right would be expected to be minimal.

Chapter 12 — Licensing

12.7 Sales- or Usage-Based Royalties

An entity may license its IP to a customer and in exchange receive consideration that may include fixed and variable amounts. Certain licensing arrangements require the customer to pay the entity a variable amount based on the underlying sales or usage of the IP (a “sales- or usage-based royalty”). As discussed in Chapter 6, the revenue standard requires an entity to estimate and constrain variable consideration in a contract with a customer. The FASB and IASB decided to create an exception to the general model for consideration in the form of a sales- or usage-based royalty related to licenses of IP.

ASC 606-10

55-65 Notwithstanding the guidance in paragraphs 606-10-32-11 through 32-14, an entity should recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property only when (or as) the later of the following events occurs:

The subsequent sale or usage occurs.
The performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).

Under the sales- or usage-based royalty exception to the revenue standard’s general rule requiring an entity to include variable consideration in the transaction price, if an entity is entitled to consideration in the form of a sales- or usage-based royalty, revenue is not recognized until (1) the underlying sales or usage has occurred and (2) the related performance obligation has been satisfied (or partially satisfied). That is, an entity is generally not required to estimate the amount of a sales- or usage-based royalty at contract inception; rather, revenue would be recognized as the subsequent sales or usage occurs (under the assumption that the associated performance obligation has been satisfied or partially satisfied).

ASC 606-10

55-65A The guidance for a sales-based or usage-based royalty in paragraph 606-10-55-65 applies when the royalty relates only to a license of intellectual property or when a license of intellectual property is the predominant item to which the royalty relates (for example, the license of intellectual property may be the predominant item to which the royalty relates when the entity has a reasonable expectation that the customer would ascribe significantly more value to the license than to the other goods or services to which the royalty relates).

55-65B When the guidance in paragraph 606-10-55-65A is met, revenue from a sales-based or usage-based royalty should be recognized wholly in accordance with the guidance in paragraph 606-10-55-65. When the guidance in paragraph 606-10-55-65A is not met, the guidance on variable consideration in paragraphs 606-10- 32-5 through 32-14 applies to the sales-based or usage-based royalty.

The sales- or usage-based royalty exception only applies if the royalty is associated with a license of IP that, as described in ASC 606-10-55-65A, is “the predominant item to which the royalty relates.” For example, if the royalty is associated with a franchise license and other services provided to a franchisee, the exception would apply if the customer can reasonably expect the franchise license to have significantly more value than the services. Example 60 in ASC 606, which is reproduced below, illustrates a situation in which a license of IP would be considered the predominant item to which a contract’s sales-based royalty is related.

ASC 606-10

Example 60 — Sales-Based Royalty Promised in Exchange for a License of Intellectual Property and Other Goods and Services

55-393 An entity, a movie distribution company, licenses Movie XYZ to a customer. The customer, an operator of cinemas, has the right to show the movie in its cinemas for six weeks. Additionally, the entity has agreed to provide memorabilia from the filming to the customer for display at the customer’s cinemas before the beginning of the six-week airing period and to sponsor radio advertisements for Movie XYZ on popular radio stations in the customer’s geographical area throughout the six-week airing period. In exchange for providing the license and the additional promotional goods and services, the entity will receive a portion of the operator’s ticket sales for Movie XYZ (that is, variable consideration in the form of a sales-based royalty).

55-394 The entity concludes that the license to show Movie XYZ is the predominant item to which the sales-based royalty relates because the entity has a reasonable expectation that the customer would ascribe significantly more value to the license than to the related promotional goods or services. The entity will recognize revenue from the sales-based royalty, the only fees to which the entity is entitled under the contract, wholly in accordance with paragraph 606-10-55-65. If the license, the memorabilia, and the advertising activities were separate performance obligations, the entity would allocate the sales-based royalties to each performance obligation.

12.7.1 Whether to Apply the Sales- or Usage-Based Royalty Exception to Only Part of the Royalties

In some contracts, a single sales- or usage-based royalty may be related to both a license of IP and another good or service (i.e., not a license). After the revenue standard was issued, stakeholders communicated that it is unclear whether a sales- or usage-based royalty should ever be split into a portion to which the sales- or usage-based royalty exception would apply and a portion to which the general constraint on variable consideration in step 3 would apply.

The FASB clarified in ASU 2016-10 that an entity should not split a royalty into a portion that is subject to the sales- or usage-based royalty exception and a portion that is subject to the general constraint on variable consideration in step 3. However, as explained in paragraph BC75(a) of the ASU, “this amendment does not affect the requirement to allocate fees due from a sales-based or usage-based royalty to the performance obligations (or distinct goods or services) in the contract to which the royalty relates, regardless of the constraint model the entity is required to apply.” For an illustration of how an entity would comply with the allocation requirement, see Example 35, Case B, in ASC 606-10-55-275 through 55-279, which is reproduced in Section 7.5.1.

In ASU 2016-10, the FASB also clarified that the sales- or usage-based royalty exception applies when the license is the predominant item (regardless of whether the license is distinct or combined with other goods or services as a single performance obligation) in relation to other nonlicense goods or services. That is, an entity either applies the sales- or usage-based royalty exception in its entirety (if the license to IP is predominant) or applies the general variable consideration guidance (if the license to IP is not predominant). Further, the FASB clarified in paragraph BC75(b) of the ASU that the sales- or usage-based royalty exception would also apply in “situations in which no single license is the predominant item to which the royalty relates but the royalty predominantly relates to two or more licenses promised in the contract.” However, ASC 606 does not define the term “predominant.” As a result, an entity will need to exercise judgment when determining whether the license to IP is predominant.

12.7.2 Interaction of Sales- or Usage-Based Royalty Exception With Measuring Progress Toward Satisfaction of a Performance Obligation

When applying the sales- or usage-based royalty exception, an entity typically would recognize revenue when (or as) the customer’s subsequent sales or usage occurs. However, if the sales- or usage-based royalties accelerate revenue recognition as compared with the entity’s satisfaction (or partial satisfaction) of the associated performance obligation, the entity may be precluded from recognizing some or all of the revenue as the subsequent sales or usage occurs.

ASC 606-10-55-65 specifies that revenue from a sales- or usage-based royalty promised in exchange for a license of IP is recognized only when (or as) the later of the following events occurs:

The subsequent sale or usage occurs.
The performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).

Accordingly, revenue should be deferred if, and to the extent that, recognition based on subsequent sales or usage (i.e., criterion (a)) is judged to be in advance of satisfaction of a performance obligation (i.e., criterion (b)). Royalty arrangements can differ greatly between entities and between contracts. Further, the timing of the recognition of royalties can depend on the nature of the underlying IP (i.e., right to access or right to use) as well as the structure of the royalty payments. Therefore, the determination of whether revenue from royalties should be deferred will depend on an analysis of the specific facts and circumstances. For example, if the performance obligation to which the royalties are related is a right-to-access license of IP, it will often be helpful to consider whether the structure of the royalty payments appropriately depicts progress toward satisfying the performance obligation of providing access to the entity’s IP throughout the license period. If the structure of the royalty payments does appropriately depict such progress, the criteria in ASC 606-10-55-65(a) and (b) will coincide, and no deferral of revenue will be necessary.

Whereas the amount determined under criterion (a) will be essentially a matter of fact (actual sales or usage multiplied by the applicable royalty rate), an entity will typically need to use judgment to determine the amount under criterion (b). In particular, it will be important for an entity to identify an appropriate measure of progress toward complete satisfaction of its obligation (e.g., providing access to the entity’s IP) in accordance with ASC 606-10-25-31. The entity should then apply the guidance in ASC 606-10-55-65 to determine whether any revenue from royalties that have become payable on the basis of sales or usage exceeds the amount of revenue that the entity determined by applying the identified measure of progress. If so, the entity should defer that excess and recognize it as a contract liability.

Note that ASC 606-10-55-65 requires an entity to recognize revenue upon the occurrence of the later of the events described in ASC 606-10-55-65(a) and (b). Consequently, it is never possible to recognize revenue in advance of the amount payable under criterion (a) (actual sales or usage multiplied by the applicable royalty rate), even if royalty rates have been back-end loaded in such a way that royalties lag behind the measure of progress identified.

The example below illustrates the accounting for royalties related to a right-to-access license under various scenarios.

Example 12-28

Entity S, a sports team, enters into a noncancelable license agreement with Entity C, a clothing manufacturer, under which C can use the sports team’s logo on the shirts it manufactures and sells. The license is a right to access S’s IP and is transferred to C over time.

Consider the following scenarios:

Scenario 1 — The license is for a five-year period in exchange for a flat-rate royalty payable to S for every shirt sold. During the first year of the contract, a sporting competition is held. As a result of the sporting competition, the clothing manufacturer sells a much larger than normal number of shirts.
Scenario 2 — The license arrangement is such that the first shirt sold triggers a royalty payment of $1 million to S and the next 999,999 units sold do not trigger any further royalty payments. Each sale in excess of 1 million items triggers a $1 royalty.

Scenario 1

In Scenario 1, S concludes that it is reasonable for the higher royalty payments in the first year of the license to reflect a higher proportion of the total license value being transferred to C in that year because C has sold a disproportionately large number of shirts. Accordingly, the structure of the royalty payments appropriately depicts progress toward satisfying S’s performance obligation of providing access to its IP throughout the license period. It is unnecessary for S to defer any of the royalty payments received in year 1 over the remainder of the license term.

In this example, although the royalties payable are higher in the first year of the royalty arrangement, the magnitude of the royalty payments corresponds to greater value received by the customer in that year and, consequently, is still consistent with progress toward satisfaction of the performance obligation over time.

Scenario 2

In Scenario 2, S would be likely to conclude that the first royalty payment of $1 million corresponds to the benefit of the license being transferred for the first 1 million sales made by C. Accordingly, S could recognize the first royalty payment of $1 million over the period in which the first 1 million shirts are sold. For any sales made in excess of the first 1 million items, S would recognize the royalty payments of $1 per shirt sold upon the sale of each item because the structure of those subsequent royalty payments aligns with the transfer of the benefit of the license to C.

In this scenario, it would not be appropriate for S to recognize as revenue the entire $1 million royalty payment received when the first shirt is sold because that would not be a reasonable reflection of the progress toward satisfaction of S’s performance obligation. Because the royalties have been front-end loaded in a way that does not reflect the value to the customer, the royalties that have become payable on the basis of sales or usage exceed the amount of revenue that S determined by applying an appropriate measure of progress. Therefore, revenue recognized is restricted to the latter.

The example below illustrates the accounting for variable royalty rates over the term of a right-to-access license.

Example 12-29

Entity S, a sports team, enters into a noncancelable license agreement with Entity M, a manufacturer, under which M can use the sports team’s logo on a product that it manufactures and sells. The license is a right to access S’s IP and is transferred to the customer over time. The license is for a five-year period in exchange for a royalty for every product sold.

The royalty rate decreases during the term of the license: in years 1 through 3, M is required to pay 10 percent of the sales price of the product to S, whereas in years 4 and 5, M is required to pay 8 percent of the sales price of the product to S. The volume of product sales on which the royalty is based is expected to be approximately equal for each of the five years of the license.

To apply the guidance in ASC 606-10-55-65, S will need to determine an appropriate measure of progress toward satisfying the performance obligation over time. Entity S could consider whether the structure of the royalty payments appropriately depicts progress toward satisfying its performance obligation to provide access to its IP throughout the license period.

Although the royalty rate decreases for the last two years of the license period, S might conclude that the structure of the royalty payments appropriately depicts progress toward satisfying its performance obligation if the change in rate reflects the decreased value of the license to M in those years. For example, this might be the case if M’s product was expected to have a higher selling price in years 1 through 3 than in years 4 and 5; the reduction in royalty rate might have been intended to reflect the lower gross margins that M could expect in years 4 and 5 and, consequently, the lower value of the license to M in those years.

However, if the structure of the royalty payments does not appropriately depict progress toward satisfying S’s performance obligation, S will need to determine an appropriate measure of progress and use this to apply the guidance in ASC 606-10-55-65. For example, because the volume of product sales is expected to be broadly flat, S may conclude that it is reasonable to regard the benefit of the license as being transferred to M on a straight-line basis over time. If so, S will need to develop an appropriate method for determining what amount of royalties received should be deferred to meet the requirements of ASC 606-10-55-65. For example, if S is able to reasonably estimate the royalties, it could apply a blended rate to recognize revenue if doing so would result in an appropriate measure of progress and would not result in recognizing revenue before the underlying sales or usage occurs.

The example below illustrates the accounting for variable royalty rates paid in exchange for a right-to-use license.

Example 12-30

An entity enters into a contract to provide a customer with a noncancelable license to the entity’s IP. There are no other promised goods or services in the contract. The entity determines that the license is a right-to-use license (i.e., a license for which revenue is recognized at a point in time) for a three-year period. The customer’s estimated sales are expected to be approximately equal for each of the three years under license. For the use of the IP, the agreement requires the customer to pay the entity a royalty of 10 percent of the customer’s sales in year 1, 8 percent of the customer’s sales in year 2, and 6 percent of the customer’s sales in year 3.

The entity should account for the royalty payments in a manner consistent with the legal form of the arrangement and in accordance with the exception to the variable consideration guidance for licenses of IP that include a sales- or usage-based royalty. Consequently, the entity would include the royalties in the transaction price on the basis of the applicable contractual rate and the customer’s sales in each year and then, in accordance with ASC 606-10-55-65, recognize revenue at the later of when (1) the “subsequent sale or usage occurs” or (2) the “performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).” Because the license is a right-to-use license for which control is transferred at the inception of the contract, the “later” of the two conditions is met when the subsequent sales occur.

12.7.3 Scope of the Sales- or Usage-Based Royalty Exception

12.7.3.1 Sale of IP Versus License of IP in Exchange for a Sales- or Usage-Based Royalty

The sales- or usage-based royalty exception is limited to narrow circumstances in which the entity licenses its IP. Stakeholders have questioned the scope of the sales- or usage-based royalty recognition constraint in arrangements that are economically similar but legally different.

The sales- or usage-based royalty exception in ASC 606-10-55-65 should be applied by the licensor when accounting for the transfer of a license of IP promised in exchange for a sales- or usage-based royalty; a sale of IP does not qualify for the exception and, accordingly, would be accounted for under the general revenue measurement and recognition guidance in ASC 606.

The FASB and IASB decided against applying the exception for sales- or usage-based royalties to IP more broadly. As indicated in paragraph BC421 of ASU 2014-09, the boards believed that although the exception “might not be consistent with the principle of recognizing some or all of the estimate of variable consideration,” the disadvantage of such an inconsistency in these limited circumstances is “outweighed by the simplicity of [the exception’s requirements], as well as by the relevance of the resulting information for this type of transaction.” Further, the boards concluded that the exception should not be applied “by analogy to other types of promised goods or services or other types of variable consideration.” The boards’ full rationale for their decision is set out in paragraphs BC415 through BC421 of ASU 2014-09. In addition, the sales- or usage-based royalty exception should be applied to a contract that is a licensing arrangement in form even if the arrangement is an in-substance sale of IP. That is, the legal form of the transaction will determine which revenue accounting guidance is applied (see Section 12.2.2).

Example 12-31

Entity X provides its customer with a license to broadcast one of X’s movies on the customer’s networks in exchange for a royalty of $10,000, which is payable each time the movie is broadcasted over the five-year license period. Entity X considers the guidance in ASC 606-10-55-59 through 55-64A and concludes that X has promised to its customer a right to use X’s IP (i.e., X has satisfied its performance obligation at the point in time at which the customer is able to use and benefit from the license).

Entity X applies the requirements of ASC 606-10-55-65 and does not recognize any revenue when the license is transferred to the customer. Instead, X recognizes revenue of $10,000 each time the customer uses the licensed IP and broadcasts X’s movie.

Example 12-32

Entity X sells the copyright to one of its music albums (i.e., all rights related to the IP) to a customer in exchange for a promise of future payments equal to $1 for each album sold by the customer in the future and $0.01 for each time a song on the album is played on the radio. Entity X considers the guidance in ASC 606-10-25-23 through 25-30 and determines that its performance obligation is satisfied at the point in time at which it transfers the copyright to the customer.

Entity X should not apply the sales- or usage-based royalty exception in ASC 606-10-55-65. Rather, in accordance with ASC 606-10-32-2 and 32-3, upon transferring control of the IP to the customer, X recognizes revenue equal to its estimate of the amount to which it will be entitled, subject to the constraint on variable consideration specified by ASC 606-10-32-11 and 32-12. Entity X then updates its estimate and records a cumulative catch-up adjustment at each subsequent reporting period as required by ASC 606-10-32-14.

12.7.3.2 Whether Application of the Sales- or Usage-Based Royalty Exception Is Optional

The guidance in ASC 606-10-55-65 must be applied whenever a license to IP that is the predominant item is subject to a sales- or usage-based royalty. That is, applying the exception is not optional when the consideration due in a licensing arrangement is in the form of a sales- or usage-based royalty. Consider the examples below.

Example 12-33

Entity LN, a professional basketball team, licenses its logo to a manufacturer of sports apparel and receives a royalty payment for each item of sports apparel sold. Entity LN has historical experience that is highly predictive of the amount of royalties that it expects to receive.

The sales- or usage-based royalty exception in ASC 606-10-55-65 states that revenue should be recognized at the later of when (1) the “subsequent sale or usage occurs” or (2) the “performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).” The application of the sales- or usage-based royalty exception is not optional, and LN would be precluded from recognizing the royalty revenue until the later of (1) the actual sale of the sports apparel or (2) LN’s satisfaction of the performance obligation to which the sales- or usage-based royalty is related.

Example 12-34

Entity S licenses its software (i.e., functional IP) to an OEM, which then integrates S’s software with its own software for inclusion in hardware devices (e.g., computers, tablets, and smart devices) to be sold to end users. Entity S sells 5,000 licenses to the OEM for $10 per license (i.e., $50,000 in total consideration) that is paid at contract inception. In addition, S provides the OEM with 5,000 activation keys, each of which allows the OEM to download S’s software for integration with the OEM’s software to be included in one hardware device. The license agreement allows the OEM to acquire additional software licenses for $10 per license by requesting additional activation keys, which S readily provides to the OEM. Entity S has concluded that providing additional license keys to the OEM does not transfer any additional rights not already controlled by the OEM (see Section 12.3.3).

The OEM can return any activation keys that are paid for but not used to download and integrate the software for inclusion in the OEM’s devices. The OEM will receive a refund of $10 per license for any activation keys returned.

Because S’s consideration for the transfer of the licensed software (i.e., functional IP) is contingent on the OEM’s subsequent usage, S must apply the sales- or usage-based royalty exception described in ASC 606-10-55-65. It would not be appropriate for S to recognize revenue on the sale of the license with the right of return before the OEM’s subsequent usage.

Although the OEM has paid for the activation keys at contract inception, because the amounts are refundable to the extent that the OEM does not use the IP by integrating it with the OEM’s software to be included in hardware devices, the consideration is in the form of a sales- or usage-based royalty. Entity S would therefore be prohibited from recognizing revenue until the subsequent sale or usage of the IP occurs (in accordance with 606-10-55-65(a)). That is, it would not be appropriate for S to estimate and constrain the amount of consideration to which it expects to be entitled and recognize such at the time the initial 5,000 licenses are transferred to the OEM.

12.7.3.3 Fixed Payments for a License of IP Receivable on Reaching a Sales- or Usage-Based Milestone

In many industries, it is common for contracts related to a license of IP to include payment terms tied to milestones (“milestone payments”). These milestone payments are frequently structured in such a way that entitlement to or payment of an amount specified in the contract is triggered once a sales target (i.e., a specified level of sales) has been reached (e.g., a $10 million milestone payment is triggered once cumulative sales by the licensee exceed $100 million).

Revenue with respect to such milestone payments should be recognized when the sales- or usage-based milestone is reached (or later if the related performance obligation has not been satisfied), as required by the exception for sales- or usage-based royalties set out in ASC 606-10-55-65. This requirement applies to milestone payments triggered by reference to any sales- or usage-based thresholds even when the milestone amount to be paid is fixed.

However, this exception should not be applied to milestone payments related to the occurrence of any other event or indicator (e.g., regulatory approval or proceeding into a beta phase of testing).

Paragraph BC415 of ASU 2014-09 states, “The [FASB and IASB] decided that for a license of intellectual property for which the consideration is based on the customer’s subsequent sales or usage, an entity should not recognize any revenue for the variable amounts until the uncertainty is resolved (that is, when a customer’s subsequent sales or usage occurs).” This paragraph illustrates the boards’ intent that the exception should apply to consideration only when the consideration is (1) related to licenses of IP and (2) based on the customer’s subsequent sales or usage.

12.7.3.4 Application of the Sales- or Usage-Based Royalty Exception to a Refundable Up-Front Payment

There are certain situations in which (1) an up-front payment is made for the sale of a license and (2) the up-front payment is refundable depending on actual sales or usage of the license. In these cases, we believe that the sales- or usage-based royalty exception would apply.

Example 12-35

Entity S licenses its software to an OEM, which then integrates S’s software with its own software in hardware devices (e.g., computers, tablets, and smart devices) to be sold to end users. The license constitutes a right-to-use license under ASC 606-10-55-58(b) and ASC 606-10-55-59(a) (i.e., a license of functional IP). Entity S sells 5,000 licenses to the OEM for $10 per license (i.e., $50,000 in total consideration) that is paid at contract inception. In addition, S provides the OEM with 5,000 activation keys, each of which allows the OEM to download S’s software for integration with the OEM’s own software to be included in one hardware device. The license agreement allows the OEM to acquire additional software licenses for $10 per license by requesting additional activation keys, which S readily provides to the OEM. Entity S has concluded that providing additional license keys to the OEM does not transfer any additional rights not already controlled by the OEM.

The OEM can return any unused activation keys (i.e., with respect to licensed software not integrated with the OEM’s devices). The OEM will receive a refund of $10 per license for any activation keys returned.

Entity S’s consideration for the transfer of the licensed software is contingent on the OEM’s subsequent usage. Accordingly, S must apply the requirements of ASC 606-10-55-65 (with respect to both the initial 5,000 licenses sold and any additional licenses that may be purchased by the OEM).

Although the OEM has paid for the initial 5,000 activation keys at contract inception, because the amounts are refundable to the extent that the OEM does not use the IP by integrating it with the OEM’s software to be included in hardware devices, the consideration is in the form of a sales- or usage-based royalty. Entity S would therefore be prohibited from recognizing revenue until the subsequent usage of the IP occurs (i.e., when the OEM integrates the software with the hardware and no longer has the right to return the activation keys).

Because the sales- or usage-based royalty exception applies to this transaction, it would not be appropriate for S to account for the transaction under the general guidance on sales with a right of return (see Section 6.3.5.3).

12.7.4 Recognition of Sales-Based Royalties When Information Is Received From the Licensee After the End of the Reporting Period

In certain licensing arrangements for which the consideration received from the customer is based on the subsequent sales of IP, information associated with those subsequent sales may not be available before the end of the reporting period. Provided that the related performance obligation has been satisfied or partially satisfied, ASC 606-10-55-65 requires that sales-based royalties received for a license of IP be recognized when the subsequent sale or usage by the licensee occurs. It would not be appropriate to delay recognition until the sales information is received.

Example 12-36

Entity LN enters into a software license with Entity B that allows inclusion of the software in computers that B sells to third parties. Under the terms of the license, LN receives royalties on the basis of the number of computers sold that include the licensed software. Upon delivery of the software to B, LN satisfies the performance obligation to which the sales-based royalty was allocated. Thereafter, LN receives quarterly sales data in arrears, which allow it to calculate the royalty payments due under the license.

Entity LN should recognize revenue (royalty payments) for computer sales made by B up to the end of its reporting period even though sales data had not been received at the end of that reporting period.

In this scenario, royalties should be recognized for sales made by B up to the end of LN’s reporting period on the basis of sales data received before LN’s financial statements are issued or available to be issued. If necessary, LN should estimate sales made in any period not covered by such data. It would not be appropriate for entities to omit sales-based royalties from financial statements merely because the associated sales data were received after the end of the reporting period or were not received when the financial statements were issued or available to be issued.

This conclusion is consistent with the following view expressed in a speech delivered on June 9, 2016, by Wesley Bricker, then deputy chief accountant in the SEC's Office of the Chief Accountant, at the 35th Annual SEC and Financial Reporting Institute Conference:

The standard setters did not provide a lagged reporting exception with the new standard. Accordingly, I believe companies should apply the sales- and usage-based royalty guidance as specified in the new standard. The reporting, which may require estimation of royalty usage, should be supported by appropriate internal accounting controls.

12.7.5 Sales- or Usage-Based Royalties With a Minimum Guarantee

Sometimes, the sales- or usage-based royalty may be subject to a minimum guarantee, which establishes a floor for the amount of consideration to be paid to the entity. The sales- or usage-based royalty exception applies only when the consideration due under the licensing agreement is variable and the variability is directly related to sales or usage of the underlying IP. That is, the exception does not apply to any fixed consideration in a licensing arrangement.

12.7.5.1 Application of the Sales- or Usage-Based Royalty Exception to Guaranteed Minimum Royalties Related to Functional IP

If there are no other performance obligations, a minimum guarantee related to functional IP (i.e., a right-to-use license) should be recognized as revenue at the point in time that the entity transfers control of the license to the customer. Any royalties that exceed the minimum guarantee should be recognized as the subsequent sales or usage related to the IP occurs, in accordance with ASC 606-10-55-65.

Example 12-37

Entity LH enters into a five-year license agreement with Customer MC under which MC can air all of the existing seasons of a TV show in exchange for royalties from MC’s sales and usage of the IP. In addition, the contract contains a minimum guarantee of $1 million per year. The existing seasons of the TV show have stand-alone functionality and thus represent functional IP.

Ignoring potential effects of financing, LH should recognize the total minimum guarantee of $5 million for the contract when control of the functional IP is transferred to the customer and the license period begins. This is because (1) the $5 million is fixed as a result of the minimum guarantee and (2) the underlying IP (i.e., the TV show) is functional (revenue is recognized at a point in time). Additional royalties that exceed the $1 million minimum guarantee in any year should be recognized as the subsequent sales and usage occur.

The above issue is addressed in Implementation Q&A 60 (compiled from previously issued TRG Agenda Papers 58 and 60). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

12.7.5.2 Application of the Sales- or Usage-Based Royalty Exception to Guaranteed Minimum Royalties Related to Symbolic IP

For licenses of symbolic IP, the revenue standard does not prescribe a one-size-fits-all model for recognizing revenue over time in situations in which a sales- or usage-based royalty contract with a customer includes a minimum guaranteed amount of consideration. As discussed at the November 2016 TRG meeting, the following are three acceptable approaches for recognizing revenue in those situations:

Approach A — Recognize revenue as the subsequent sales or usage occurs in accordance with ASC 606-10-55-65 if an entity expects that the total royalties will exceed the minimum guarantee. This approach would be appropriate only if the estimated sales- or usage-based royalties are expected to exceed the minimum guarantee.
Approach B — Estimate the transaction price (as fixed consideration plus expected royalties to be earned over the license term) and recognize revenue over time by using an appropriate measure of progress, but limit cumulative revenue recognized to the cumulative royalties in excess of the minimum guarantee. Like Approach A, this approach would be appropriate only if the estimated sales- or usage-based royalties are expected to exceed the minimum guarantee. Under this approach, an entity will need to periodically revisit its estimate of the total consideration (fixed and variable) and update its measure of progress accordingly (which may result in a cumulative adjustment to revenue).
Approach C — Recognize the minimum guarantee over time by using an appropriate measure of progress over the license period, and recognize incremental royalties in excess of the minimum guarantee as the subsequent sales or usage related to those incremental royalties occurs.

An entity should evaluate its facts and circumstances to determine which method under the standard appropriately depicts its progress toward completion. In addition, entities should consider providing appropriate disclosures to help users of their financial statements understand which approach is being applied. Examples of such disclosures include the key judgments the entity applied in selecting a measure of progress for recognizing revenue from a license of symbolic IP.

The above issue is addressed in Implementation Q&A 59 (compiled from previously issued TRG Agenda Papers 58 and 60). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

The example below further illustrates how to apply the three acceptable approaches for recognizing revenue from symbolic IP arrangements with sales- or usage-based royalties that include minimum guarantees.

Example 12-38

Entity G, a professional sports team, enters into a three-year contract with Entity Y to license G’s team logo trademark (which is symbolic IP). Entity Y intends to include the trademark on various sports merchandise (e.g., hats, shirts, and shorts) and sell this merchandise to end consumers. In exchange for the three-year trademark license, Y will pay G sales-based royalties equal to 6 percent of Y’s gross sales of merchandise that includes G’s trademark. The contract also guarantees a minimum of $1.5 million in royalties for the three-year period.

Over the term of the contract, Y generates annual gross sales, and is therefore required to pay royalties to G, as follows:

Year 1 — Annual gross sales of $15 million, royalties of $900,000.
Year 2 — Annual gross sales of $8 million, royalties of $480,000.
Year 3 — Annual gross sales of $13 million, royalties of $780,000.

Entity G would recognize revenue over the three-year period under Approach A, B, or C in the manner described below.

Approach A

Entity G could apply Approach A only if it expects its estimated sales-based royalties to exceed the minimum guarantee of $1.5 million. Under this approach, G would use a measure of progress that corresponds to the annual gross sales realized by Y (for which there are corresponding royalty payments due to G) and recognize annual revenue in the amounts shown in the table below.

Under Approach A, G would recognize revenue as the subsequent sales occur. Entity G should monitor its estimates of royalties each reporting period and update its measure of progress if it no longer expects to earn total royalties that exceed the minimum guarantee.

Approach B

Like Approach A, Approach B could be applied only if G expects its estimated sales-based royalties to exceed the minimum guarantee of $1.5 million. Under this approach, G would estimate the total transaction price (for the three-year period) and select a measure of progress that results in G’s recognition of the estimated (and constrained) transaction price as G transfers the right to access its symbolic IP to Y. If G uses a time-based measure of progress, it would recognize annual revenue in the amounts shown in the table below.

Under Approach B, G would estimate the total consideration it expects to receive from Y during the three-year period (as fixed consideration for the minimum guarantee plus expected royalties to be earned over the license term) and recognize revenue over time by using an appropriate measure of progress, but limit cumulative revenue recognized to the cumulative royalties due. Therefore, in year 1, G recognizes annual revenue of $720,000, one-third of the total expected consideration to be received of $2.16 million. However, in year 2, G is limited to recognizing revenue of $660,000 because the cumulative royalties received through year 2 is $1.38 million. As a result, the cumulative revenue recognized through year 2 is constrained to the cumulative amount of royalties due.

Entity G should periodically revisit its estimate of the total consideration (fixed and variable) and update its measure of progress accordingly (which may result in a cumulative adjustment to revenue). Entity G should also monitor its estimates of royalties each reporting period and update its measure of progress if it no longer expects to earn total royalties that exceed the minimum guarantee.

Approach C

Entity G would be required to apply Approach C if it does not expect its estimated sales-based royalties to exceed the minimum guarantee of $1.5 million. Under this approach, G would recognize the minimum guarantee over time by using an appropriate measure of progress and recognize incremental royalties in excess of the minimum guarantee as the subsequent sales related to those incremental royalties occur. If G uses a time-based measure of progress, it would recognize annual revenue in the amounts shown in the table below.

Under Approach C, G would recognize $500,000 in each of year 1 and year 2, which is equal to one-third of the minimum guarantee amount of $1.5 million. Entity G would not recognize any variable consideration (i.e., royalties earned above the $1.5 million minimum guarantee) until year 3, when the cumulative consideration received exceeds the minimum guarantee of $1.5 million. The revenue recognized in year 3 is the sum of (1) the remaining $500,000 of the minimum guarantee and (2) the incremental royalties of $660,000 in excess of the minimum guarantee.

12.7.6 Allocating Fixed Consideration and Sales- or Usage-Based Royalties in a Licensing Arrangement With More Than One Performance Obligation

Complexities related to the allocation of the transaction price to multiple performance obligations may arise when licensing contracts include a combination of fixed consideration and royalties subject to the sales- or usage-based royalty exception. As discussed in Section 12.7.5.2, there are several acceptable approaches to accounting for a licensing arrangement that includes both a minimum guaranteed amount and a sales- or usage-based royalty for any sales or usage in excess of that minimum amount in a license of symbolic IP.

ASC 606-10

Example 35 — Allocation of Variable Consideration

55-270 An entity enters into a contract with a customer for two intellectual property licenses (Licenses X and Y), which the entity determines to represent two performance obligations each satisfied at a point in time. The standalone selling prices of Licenses X and Y are $800 and $1,000, respectively.

Case A — Variable Consideration Allocated Entirely to One Performance Obligation

55-271 The price stated in the contract for License X is a fixed amount of $800, and for License Y the consideration is 3 percent of the customer’s future sales of products that use License Y. For purposes of allocation, the entity estimates its sales-based royalties (that is, the variable consideration) to be $1,000, in accordance with paragraph 606-10-32-8.

55-272 To allocate the transaction price, the entity considers the criteria in paragraph 606-10-32-40 and concludes that the variable consideration (that is, the sales-based royalties) should be allocated entirely to License Y. The entity concludes that the criteria in paragraph 606-10-32-40 are met for the following reasons:

The variable payment relates specifically to an outcome from the performance obligation to transfer License Y (that is, the customer’s subsequent sales of products that use License Y).
Allocating the expected royalty amounts of $1,000 entirely to License Y is consistent with the allocation objective in paragraph 606-10-32-28. This is because the entity’s estimate of the amount of sales-based royalties ($1,000) approximates the standalone selling price of License Y and the fixed amount of $800 approximates the standalone selling price of License X. The entity allocates $800 to License X in accordance with paragraph 606-10-32-41. This is because, based on an assessment of the facts and circumstances relating to both licenses, allocating to License Y some of the fixed consideration in addition to all of the variable consideration would not meet the allocation objective in paragraph 606-10-32-28.

55-273 The entity transfers License Y at inception of the contract and transfers License X one month later. Upon the transfer of License Y, the entity does not recognize revenue because the consideration allocated to License Y is in the form of a sales-based royalty. Therefore, in accordance with paragraph 606-10-55-65, the entity recognizes revenue for the sales-based royalty when those subsequent sales occur.

55-274 When License X is transferred, the entity recognizes as revenue the $800 allocated to License X.

Case B — Variable Consideration Allocated on the Basis of Standalone Selling Prices

55-275 The price stated in the contract for License X is a fixed amount of $300, and for License Y the consideration is 5 percent of the customer’s future sales of products that use License Y. The entity’s estimate of the sales-based royalties (that is, the variable consideration) is $1,500 in accordance with paragraph 606-10-32-8.

55-276 To allocate the transaction price, the entity applies the criteria in paragraph 606-10-32-40 to determine whether to allocate the variable consideration (that is, the sales-based royalties) entirely to License Y. In applying the criteria, the entity concludes that even though the variable payments relate specifically to an outcome from the performance obligation to transfer License Y (that is, the customer’s subsequent sales of products that use License Y), allocating the variable consideration entirely to License Y would be inconsistent with the principle for allocating the transaction price. Allocating $300 to License X and $1,500 to License Y does not reflect a reasonable allocation of the transaction price on the basis of the standalone selling prices of Licenses X and Y of $800 and $1,000, respectively. Consequently, the entity applies the general allocation requirements in paragraphs 606-10-32-31 through 32-35.

55-277 The entity allocates the transaction price of $300 to Licenses X and Y on the basis of relative standalone selling prices of $800 and $1,000, respectively. The entity also allocates the consideration related to the sales-based royalty on a relative standalone selling price basis. However, in accordance with paragraph 606-10-55-65, when an entity licenses intellectual property in which the consideration is in the form of a sales-based royalty, the entity cannot recognize revenue until the later of the following events: the subsequent sales occur or the performance obligation is satisfied (or partially satisfied).

55-278 License Y is transferred to the customer at the inception of the contract, and License X is transferred three months later. When License Y is transferred, the entity recognizes as revenue the $167 ($1,000 ÷ $1,800 × $300) allocated to License Y. When License X is transferred, the entity recognizes as revenue the $133 ($800 ÷ $1,800 × $300) allocated to License X.

55-279 In the first month, the royalty due from the customer’s first month of sales is $200. Consequently, in accordance with paragraph 606-10-55-65, the entity recognizes as revenue the $111 ($1,000 ÷ $1,800 × $200) allocated to License Y (which has been transferred to the customer and is therefore a satisfied performance obligation). The entity recognizes a contract liability for the $89 ($800 ÷ $1,800 × $200) allocated to License X. This is because although the subsequent sale by the entity’s customer has occurred, the performance obligation to which the royalty has been allocated has not been satisfied.

Example 57 — Franchise Rights

55-375 An entity enters into a contract with a customer and promises to grant a franchise license that provides the customer with the right to use the entity’s trade name and sell the entity’s products for 10 years. In addition to the license, the entity also promises to provide the equipment necessary to operate a franchise store. In exchange for granting the license, the entity receives a fixed fee of $1 million, as well as a sales-based royalty of 5 percent of the customer’s sales for the term of the license. The fixed consideration for the equipment is $150,000 payable when the equipment is delivered.

Identifying Performance Obligations

55-376 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity observes that the entity, as a franchisor, has developed a customary business practice to undertake activities such as analyzing the consumers’ changing preferences and implementing product improvements, pricing strategies, marketing campaigns, and operational efficiencies to support the franchise name. However, the entity concludes that these activities do not directly transfer goods or services to the customer.

55-377 The entity determines that it has two promises to transfer goods or services: a promise to grant a license and a promise to transfer equipment. In addition, the entity concludes that the promise to grant the license and the promise to transfer the equipment are each distinct. This is because the customer can benefit from each good or service (that is, the license and the equipment) on its own or together with other resources that are readily available (see paragraph 606-10-25-19(a)). The customer can benefit from the license together with the equipment that is delivered before the opening of the franchise, and the equipment can be used in the franchise or sold for an amount other than scrap value. The entity also determines that the promises to grant the franchise license and to transfer the equipment are separately identifiable in accordance with the criterion in paragraph 606-10-25-19(b). The entity concludes that the license and the equipment are not inputs to a combined item (that is, they are not fulfilling what is, in effect, a single promise to the customer). In reaching this conclusion, the entity considers that it is not providing a significant service of integrating the license and the equipment into a combined item (that is, the licensed intellectual property is not a component of, and does not significantly modify, the equipment). Additionally, the license and the equipment are not highly interdependent or highly interrelated because the entity would be able to fulfill each promise (that is, to license the franchise or to transfer the equipment) independently of the other. Consequently, the entity has two performance obligations:

The franchise license
The equipment.

Allocating the Transaction Price

55-378 The entity determines that the transaction price includes fixed consideration of $1,150,000 and variable consideration (5 percent of the customer’s sales from the franchise store). The standalone selling price of the equipment is $150,000 and the entity regularly licenses franchises in exchange for 5 percent of customer sales and a similar upfront fee.

55-379 The entity applies paragraph 606-10-32-40 to determine whether the variable consideration should be allocated entirely to the performance obligation to transfer the franchise license. The entity concludes that the variable consideration (that is, the sales-based royalty) should be allocated entirely to the franchise license because the variable consideration relates entirely to the entity’s promise to grant the franchise license. In addition, the entity observes that allocating $150,000 to the equipment and allocating the sales-based royalty (as well as the additional $1 million in fixed consideration) to the franchise license would be consistent with an allocation based on the entity’s relative standalone selling prices in similar contracts. Consequently, the entity concludes that the variable consideration (that is, the sales-based royalty) should be allocated entirely to the performance obligation to grant the franchise license.

Licensing

55-380 The entity assesses the nature of the entity’s promise to grant the franchise license. The entity concludes that the nature of its promise is to provide a right to access the entity’s symbolic intellectual property. The trade name and logo have limited standalone functionality; the utility of the products developed by the entity is derived largely from the products’ association with the franchise brand. Substantially all of the utility inherent in the trade name, logo, and product rights granted under the license stems from the entity’s past and ongoing activities of establishing, building, and maintaining the franchise brand. The utility of the license is its association with the franchise brand and the related demand for its products.

Subparagraph superseded by Accounting Standards Update No. 2016-10.
Subparagraph superseded by Accounting Standards Update No. 2016-10.
Subparagraph superseded by Accounting Standards Update No. 2016-10.

55-381 The entity is granting a license to symbolic intellectual property. Consequently, the license provides the customer with a right to access the entity’s intellectual property and the entity’s performance obligation to transfer the license is satisfied over time in accordance with paragraph 606-10-55-58A. The entity recognizes the fixed consideration allocable to the license performance obligation in accordance with paragraph 606-10-55-58A and paragraph 606-10-55-58C. This includes applying paragraphs 606-10-25-31 through 25-37 to identify the method that best depicts the entity’s performance in satisfying the license (see paragraph 606-10-55-382).

55-382 Because the consideration that is in the form of a sales-based royalty relates specifically to the franchise license (see paragraph 606-10-55-379), the entity applies paragraph 606-10-55-65 in recognizing that consideration as revenue. Consequently, the entity recognizes revenue from the sales-based royalty as and when the sales occur. The entity concludes that recognizing revenue resulting from the sales-based royalty when the customer’s subsequent sales occur is consistent with the guidance in paragraph 606-10-55-65(b). That is, the entity concludes that ratable recognition of the fixed $1 million franchise fee plus recognition of the periodic royalty fees as the customer’s subsequent sales occur reasonably depict the entity’s performance toward complete satisfaction of the franchise license performance obligation to which the sales-based royalty has been allocated.

The examples below illustrate possible approaches that may be appropriate when a licensing arrangement includes (1) fixed consideration and sales- or usage-based royalties and (2) more than one performance obligation.

Example 12-39

Entity X, a cable TV network company, enters into a four-year contract with Entity Y on January 1, 201X. The contract gives Y an exclusive license, including digital streaming rights (within specific territories), to a preexisting library of X’s historical content in addition to any new content that becomes available during the four-year term. Entity X determines that there are two distinct performance obligations in accordance with ASC 606-10-25-19 through 25-22 as follows:

A license of the preexisting library of content (i.e., the historical content) transferred to Y at the outset of the contract. Entity X determines that this is a right-to-use license of IP for which revenue is recognized at a point in time in accordance with ASC 606-10-55-63.
A license for any new content that is transferred to Y as it becomes available throughout the duration of the contract. Entity X determines that the obligation to update the license arrangement to include new content is a stand-ready obligation to provide updates to Y over the license term. Entity X concludes that it will satisfy this obligation ratably over the four-year license term.

Entity Y is required to pay X a royalty fee of $2 per subscriber per month over the contract term, subject to a minimum guaranteed amount of $10 million. Entity X estimates that over the contract term, it is probable that X will be entitled to total royalties of $30 million. In addition, X determines that (1) the stand-alone selling price of the license of historical content is $12 million (40 percent of the total estimated transaction price) and (2) the stand-alone selling price of the license of new content is $18 million (60 percent of the total estimated transaction price). The number of subscribers to Y’s service in year 1 is such that X is entitled to a royalty of $13 million.

Entity X determines that there are at least two acceptable approaches (“Approach A” and “Approach B”) to allocating the $10 million guaranteed minimum fee and the $2 per subscriber royalty fee between the two performance obligations in the contract.

Whichever approach is adopted, as discussed below, X will need to consider whether it is required to constrain the amount of revenue recognized in accordance with ASC 606-10-32-11 and apply the sales- or usage-based royalty exception in ASC 606-10-55-65.

Revenue Recognition Based on Initial Allocation of Fixed and Variable Consideration

Approach A

Under Approach A, X allocates both the fixed and variable consideration to each performance obligation on the basis of the relative stand-alone selling prices of the historical and new content as follows:

In year 1, X recognizes revenue as follows:

$4 million of the guaranteed minimum revenue allocated to the historical content is recognized upon the initial transfer of the historical content to Y.
$1.5 million of the guaranteed minimum revenue is allocated to and recognized for the new content ($6 million ÷ 4 years of license term).
The royalty payments received in excess of the $10 million guaranteed revenue are subject to the guidance in ASC 606-10-55-65 on recognizing revenue related to sales- or usage-based royalties. Therefore, $3 million ($13 million of royalties owed for year 1 less the $10 million of guaranteed minimum revenue) is allocated on a relative stand-alone selling price basis. Accordingly, $1.2 million is allocated to and recognized for the historical content, and $1.8 million is allocated to and recognized for the new content.

Thus, the total revenue recognized in year 1 under Approach A is $8.5 million, as illustrated in the table below.

Note that the royalties in excess of the guaranteed minimum that are allocated to the new content in year 1 ($1.8 million) do not need to be restricted in accordance with ASC 606-10-55-65 because the total revenue recognized for the new content ($3.3 million) is less than the amount corresponding to the measure of progress ($18 million ÷ 4 years of license term = $4.5 million).

Approach B

Under Approach B, X allocates the consideration on a first in, first out basis. Accordingly, the guaranteed minimum and estimated royalties are first allocated to the historical content and then to the new content, as illustrated in the table below. Note that the estimated royalties are subject to the constraint that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved (see Section 6.3.3 for further discussion of this objective).

In year 1, X recognizes revenue as follows:

$10 million of the guaranteed minimum allocated to the historical content is recognized upon the initial transfer of the historical content to Y.
$2 million of the variable consideration allocated to the historical content is recognized when the first $2 million of royalties earned in excess of the guaranteed $10 million becomes payable by Y.
While on a pro rata basis, X would recognize $4.5 million ($18 million ÷ 4 years of license term) with respect to the new content, X is able to recognize only $1 million with respect to the new content ($13 million of royalties owed for year 1 less the $12 million recognized with respect to the historical content) since the variable consideration is subject to the restriction in ASC 606-10-55-65 on recognizing revenue related to sales- or usage-based royalties.

Thus, the total revenue recognized in year 1 under Approach B is $13 million, as illustrated in the table below.

Revenue Recognition Based on Updated Allocation of Fixed and Variable Consideration

Each of the approaches discussed above is affected differently by a change in the estimate of royalties to which the entity expects to be entitled. The impact of any change in estimate under each approach should be carefully considered in accordance with the guidance on estimating and constraining variable consideration, whose objective is to include some or all of an amount of variable consideration estimated in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved (see Section 6.3.3 for further discussion of this objective).

Suppose that after one year, X updates the transaction price in accordance with ASC 606-10-32-14 and concludes that it is probable that X will be entitled to total royalties of only $20 million over the four-year contract term as a result of changing market conditions (i.e., $10 million less than the original estimated transaction price). Under ASC 606-10-32-43, X is required to reallocate the transaction price to each performance obligation on the same basis as at contract inception. Also assume that in year 2, only $2 million in additional royalties is earned and payable to X (total consideration of $15 million has been earned to date, and there is an expectation that an additional $5 million will be received for the remaining contract term).

The effect of the updated expectations on revenue recognized in year 2 under each approach is discussed below.

Approach A

Under Approach A, X updates the allocation of the fixed and variable consideration to each performance obligation on the basis of the relative stand-alone selling prices of the historical and new content as follows:

Accordingly, revenue is recognized as follows:

Note that the royalties allocated to the new content ($3 million) are not restricted in accordance with ASC 606-10-55-65 because the total revenue recognized for new content ($6 million) does not exceed the amount corresponding to the measure of progress, or ($12 million ÷ 4 years of license term) × 2 years = $6 million.

Approach B

Under Approach B, X updates the allocation of the fixed and variable consideration to each performance obligation on the basis of the relative stand-alone selling prices of the historical and new content as follows:

As a result of the updated estimate of the transaction price, X is limited in recognizing additional revenue in year 2 when it reallocates the total expected consideration between the historical and new content. Revenue is recognized as follows:

Note that the royalties allocated to the new content ($5 million) are restricted under Approach B in accordance with ASC 606-10-55-65 because the total revenue otherwise recognized for the new content ($7 million) would exceed the amount corresponding to the measure of progress, or ($12 million ÷ 4 years of license term) × 2 years = $6 million. Consequently, $1 million of the royalties received in year 2 would need to be deferred.

As noted in the tables above, Approach A and Approach B have different accounting outcomes for both the consideration recognized as revenue in year 1 of the agreement and the changes in subsequent years to the estimated consideration to which X expects to be entitled. Care should be taken in the election of a policy, and careful evaluation of the objective behind constraining estimates of variable consideration should guide this election.

Example 12-40

Entity K, a biotechnology company, enters into a contract with Customer C to provide a license of functional IP as well as R&D services. As a result of the late stage of development of the IP and other factors, K has concluded that the license and R&D services are distinct performance obligations. The contract consideration includes (1) an up-front payment ($30 million), (2) royalties of 8 percent of future sales (estimated to be $50 million), and (3) a reimbursement for the R&D services at cost plus a fixed margin (estimated to be $20 million). Entity K has concluded that the license to IP is predominant in the arrangement.

Entity K has estimated the stand-alone selling prices of the performance obligations as follows:

Performance Obligation	Stand-Alone Selling Price
License	$ 80 million
R&D services	$ 20 million

Because the sales- or usage-based royalty exception is a recognition constraint (applied as part of step 5 of ASC 606’s revenue model), K could still consider the sales-based royalties in the estimated transaction price to be allocated even though they are subject to the sales- or usage-based royalty exception (and are constrained at contract inception). That is, K might reasonably conclude that it can allocate the royalties (estimated to be $50 million) together with the up-front fee of $30 million (a total expected amount of $80 million) entirely to the license since such allocation would be consistent with the stand-alone selling price of the license and, therefore, with the allocation objective in ASC 606-10-32-28 and ASC 606-10-32-40. Entity K could also allocate the $20 million to which it expects to be entitled for performing the R&D services entirely to the R&D services performance obligation. Such allocation would also be consistent with the allocation objective because the consideration to which K expects to be entitled as it performs the R&D services represents the stand-alone selling price for those services. The approach described herein is consistent with the approach illustrated in Example 35, Case A, of ASC 606.

As a result of the above allocations, K would recognize (1) revenue of $30 million when the license is transferred at contract inception ($80 million total consideration allocated to the license, of which $50 million is constrained because of the sales- or usage-based royalty exception) and (2) revenue for the R&D services at the contractual reimbursement rate as services are performed. Additional revenue related to the transfer of the license would be recognized as royalties become due (i.e., once sales associated with the licensed IP occur).

Example 12-41

Assume the same facts as in the previous example, except that the R&D services are reimbursed by Customer C at cost with no margin (estimated to be $15 million). Since Entity K would not typically provide R&D services on a stand-alone basis for cost (i.e., with no margin), use of the allocation approach described in the previous example would not result in an allocation that is consistent with the allocation objective in ASC 606-10-32-28 and ASC 606-10-32-40. Consequently, K would not be able to use the same approach in this situation.

If K continues to believe that the royalties are entirely related to the license, K could allocate the total expected transaction price ($95 million) to the performance obligations on a relative stand-alone selling price basis as follows:

Performance Obligation	Stand-Alone Selling Price	Relative Allocation	Allocation of Estimated Contract Consideration
License	$ 80 million	80%	$ 76 million
R&D services	$ 20 million	20%	$ 19 million
Total	$ 100 million	100%	$ 95 million

As the table illustrates, this approach would result in the allocation of $76 million to the license and $19 million to the R&D services. If K concludes that the royalties are entirely related to the license (i.e., the criteria in ASC 606-10-32-40 are met), it would recognize revenue of $26 million when the license is transferred at contract inception (the $76 million allocated transaction price less the $50 million that is constrained because of the sales- or usage-based royalty exception). Further, K would recognize (1) revenue of $19 million allocated to the R&D services as the R&D services are performed by using a single measure of progress and (2) additional revenue related to the transfer of the license as royalties become due (i.e., once sales associated with the licensed IP occur).

12.7.7 Applicability of the Sales- or Usage-Based Royalty Exception to Agents

The guidance in ASC 606-10-55-65 discusses situations in which an entity transfers a license of IP to a customer in exchange for a sales- or usage-based royalty. However, in some cases, an entity may be compensated in the form of a sales- or usage-based royalty for services that are directly related to a license of IP, but the entity itself is not licensing the IP because it is not the owner of the IP. The examples below illustrate situations in which an entity provides services in exchange for a sales- or usage-based royalty that is directly related to a license of IP.

Example 12-42

Company X, acting as a film distributor (agent), enters into arrangements to distribute filmed media content to theaters or other outlets (e.g., video on demand service providers) to make the content available for viewing by various audiences. The filmed content was produced and is owned by another entity (the “licensor”). In such arrangements, X acts as an agent between the licensor and the customer (e.g., a theater or another outlet). In exchange for performing the agency services, X is entitled to variable consideration based on the licensor’s royalties underlying the sales related to the licensed IP (e.g., ticket sales). The licensor’s earnings and, in turn, the fees earned by X are directly tied to the sales of the licensed IP.

Example 12-43

Company Y, acting as a talent agent, finds roles for its clients in films or other theatrical productions. Each of Y’s clients is paid a stated royalty percentage based on the sales or usage of the film or production (i.e., the IP), and Y’s commission is equal to a stated percentage of the royalty earned by the client. Company Y does not own or control the film or production at any point, and neither does Y’s client; rather, Y’s ability to generate commissions depends on how the film or production is monetized. Accordingly, the client’s earnings and, in turn, the commissions earned by Y are directly tied to the sales or usage of the licensed IP.

Example 12-44

Company Z, acting as an agent, identifies licensees to enter into contracts with Z’s clients (i.e., licensors). Each of Z’s clients is paid a stated royalty percentage based on the sales and usage of the IP licensed by the licensee (e.g., a college logo on merchandise), and Z’s commission is a stated percentage of the royalty earned by its client. Company Z does not own or control the IP at any point; rather, Z’s ability to generate commissions is dependent on the existence of its client’s IP. Accordingly, the client’s earnings and, in turn, the commissions earned by Z are directly tied to the sales or usage of the licensed IP.

In each of the examples above, the agent may account for the fees or commissions it earned in accordance with either of the following views, which are equally acceptable:

View 1 — The sales- or usage-based royalty exception in ASC 606-10-55-65 is applicable.
View 2 — The sales- or usage-based royalty exception in ASC 606-10-55-65 does not apply. Because the agent is not licensing IP on its own, it determines that the consideration it received was not in exchange for a license of IP; rather, the consideration was in exchange for the agency service it promised to perform under the contract. Therefore, the agent concludes that it should apply the variable consideration guidance in ASC 606-10-32-5 through 32-14, including the guidance on constraining estimates of variable consideration (see Section 6.3.3).

Generally, the sales- or usage-based royalty exception may be applied only in limited situations by the licensor (i.e., when an entity licenses its IP and is compensated in the form of a royalty that varies on the basis of the customer’s sales or usage of the licensed IP). However, there are situations in which an entity may apply the sales- or usage-based royalty exception even though it does not own the IP or act as the principal in the arrangement (i.e., it does not control or license the IP). When determining whether it is appropriate to apply the sales- or usage-based royalty exception in these situations, entities should consider the nature of the services being provided to the customer and use judgment to determine whether such services are directly related to the IP that is being licensed. That is, if the revenue to be received is based on a sales- or usage-based royalty from a license of IP and the service provided by the entity is directly related to that IP, it would be acceptable to apply the royalty exception in ASC 606-10-55-65.

This conclusion is consistent with the discussion in paragraph BC415 of ASU 2014-09, which explains that if the exception did not apply, an entity would be required to “report, throughout the life of the contract, significant adjustments to the amount of revenue recognized at inception of the contract as a result of changes in circumstances, even though those changes in circumstances are not related to the entity’s performance.” On the basis of discussion with the FASB staff, we understand that the Board did not intend to limit the exception to owners of the IP (i.e., the logic for providing the exception would apply equally to the owners of the IP and others receiving a portion of a royalty for services directly related to the license of the IP).

If the services being provided are not directly linked to the underlying IP being licensed or the entity’s compensation does not vary on the basis of the sales or usage of the licensed IP, it would not be appropriate to apply the sales- or usage-based royalty exception.

Chapter 13 — Contract Costs

13.2 Costs of Obtaining a Contract

ASC 340-40

15-2 The guidance in this Subtopic applies to the incremental costs of obtaining a contract with a customer within the scope of Topic 606 on revenue from contracts with customers (excluding any consideration payable to a customer, see paragraphs 606-10-32-25 through 32-27).

ASC 340-40 provides an overall, comprehensive framework to account for costs of obtaining a contract that are within the scope of ASC 606. That is, if a contract falls within the scope of ASC 606, an entity should look to ASC 340-40 for all relevant guidance on costs of obtaining the contract.

Specifically, ASC 340-40 provides the following guidance on recognizing the incremental costs of obtaining a contract with a customer:

ASC 340-40

25-1 An entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs.

25-2 The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission).

25-3 Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained shall be recognized as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained.

The flowchart below illustrates the process that entities should use in applying the guidance in ASC 340-40-25-1 through 25-3 to determine the treatment of costs of obtaining a contract with a customer.

13.2.1 General Considerations for Identifying Incremental Costs of Obtaining a Contract With a Customer

ASC 340-40-25-2 states that the “incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission).” Application of this guidance requires an entity to identify those costs that are incurred (i.e., accrued) as a direct result of obtaining a contract with a customer. An entity should apply existing guidance outside of the revenue standard to determine whether a liability should be recognized as a result of obtaining a contract with a customer. Upon determining that a liability needs to be recorded, the entity should determine whether the related costs were incurred because, and only because, a contract with a customer was obtained.

In many circumstances, it may be clear whether particular costs are costs that an entity incurs to obtain a contract. For example, if an entity incurs a commission liability solely as a result of obtaining a contract with customer, the commission would be an incremental cost incurred to obtain a contract with a customer. However, in other circumstances, an entity may need to exercise judgment and consider existing accounting policies for liability accruals when determining whether a cost is incurred in connection with obtaining a contract with a customer. If the determination of whether a cost has been incurred is affected by other factors (i.e., factors in addition to obtaining a contract with a customer), an entity will need to take additional considerations into account when assessing whether a cost is an incremental cost associated with obtaining a contract with a customer.

Examples 1 and 2 in ASC 340-40 illustrate how to identify incremental costs of obtaining a contract.

ASC 340-40

Example 1 — Incremental Costs of Obtaining a Contract

55-2 An entity, a provider of consulting services, wins a competitive bid to provide consulting services to a new customer. The entity incurred the following costs to obtain the contract:

55-3 In accordance with paragraph 340-40-25-1, the entity recognizes an asset for the $10,000 incremental costs of obtaining the contract arising from the commissions to sales employees because the entity expects to recover those costs through future fees for the consulting services. The entity also pays discretionary annual bonuses to sales supervisors based on annual sales targets, overall profitability of the entity, and individual performance evaluations. In accordance with paragraph 340-40-25-1, the entity does not recognize an asset for the bonuses paid to sales supervisors because the bonuses are not incremental to obtaining a contract. The amounts are discretionary and are based on other factors, including the profitability of the entity and the individuals’ performance. The bonuses are not directly attributable to identifiable contracts.

55-4 The entity observes that the external legal fees and travel costs would have been incurred regardless of whether the contract was obtained. Therefore, in accordance with paragraph 340-40-25-3, those costs are recognized as expenses when incurred, unless they are within the scope of another Topic, in which case, the guidance in that Topic applies.

Example 2 — Costs That Give Rise to an Asset

55-5 An entity enters into a service contract to manage a customer’s information technology data center for five years. The contract is renewable for subsequent one-year periods. The average customer term is seven years. The entity pays an employee a $10,000 sales commission upon the customer signing the contract. Before providing the services, the entity designs and builds a technology platform for the entity’s internal use that interfaces with the customer’s systems. That platform is not transferred to the customer but will be used to deliver services to the customer.

Incremental Costs of Obtaining a Contract

55-6 In accordance with paragraph 340-40-25-1, the entity recognizes an asset for the $10,000 incremental costs of obtaining the contract for the sales commission because the entity expects to recover those costs through future fees for the services to be provided. The entity amortizes the asset over seven years in accordance with paragraph 340-40-35-1 because the asset relates to the services transferred to the customer during the contract term of five years and the entity anticipates that the contract will be renewed for two subsequent one-year periods.

The FASB staff noted that the accounting for sales commissions is generally straightforward in situations in which (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 or other costs incurred 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.
Anticipated contract renewals.

Stakeholders expressed concerns that the term “incremental” could lead to broad interpretations of the types of costs that would qualify as costs to be capitalized under the revenue standard. In response to those concerns, the FASB staff noted the following:

An entity should consider whether costs would have been incurred if the customer (or the entity) decided that it would not enter into the contract just as the parties were about to sign the contract. If the costs (e.g., the legal costs of drafting the contract) would have been incurred even though the contract was not executed, the costs would not be incremental costs of obtaining a contract.
When an entity is identifying incremental costs incurred to obtain a contract, it may be important for the entity to first consider guidance outside of the revenue standard on determining whether and, if so, when a liability has been incurred. That is, other guidance will generally determine when a cost has been incurred, while ASC 340-40 provides guidance on determining whether costs should be capitalized or expensed.
When sales commissions are paid to different levels of employees, the revenue standard does not differentiate among the commissions on the basis of the employees’ respective functions or titles. For example, if an entity’s commission policy on new contracts was to pay 10 percent sales commission to the sales employee, 5 percent to the sales manager, and 3 percent to the regional sales manager, all of the commissions are viewed as incremental because the commissions would not have been incurred if the contract had not been obtained.

Entities should continue to refer to existing U.S. GAAP on liability recognition to determine whether and, if so, when a liability needs to be recorded in connection with a contract with a customer. Therefore, an entity should initially apply the specific guidance on determining the recognition and measurement of the liability (e.g., commissions, payroll taxes, 401(k) match). If the entity recognizes a liability, only then should the entity determine whether to record the related debit as an asset or as an expense.

However, entities need to use judgment to determine whether certain costs, such as commissions paid to multiple employees for the signing of a contract, are truly incremental. Entities should apply additional skepticism to understand whether an employee’s compensation (i.e., commissions or bonus) — particularly for individuals in different positions in the organization and employees who are ranked higher in an organization — is related solely to executed contracts or is also influenced by other factors or metrics (e.g., employee general performance or customer satisfaction ratings). Only those costs that are incremental (e.g., costs that resulted from obtaining the contract) may be capitalized (as long as other asset recognition criteria are met).

The table below outlines the views detailed in TRG Agenda Paper 57 and broadly summarized in Q&A 78 of the FASB staff’s Revenue Recognition Implementation Q&As (the “Implementation Q&As”). Quoted text is from TRG Agenda Paper 57.

Topic	Example/Question	Views Discussed	View Selected by FASB Staff
Fixed employee salaries	“Example 1: An entity pays an employee an annual salary of $100,000. The employee’s salary is based upon the employee’s prior-year signed contracts and the employee’s projected signed contracts for the current year. The employee’s salary will not change based on the current year’s actual signed contracts; however, salary in future years likely will be impacted by the current year’s actual signed contracts. What amount, if any, should the entity record as an asset for incremental costs to obtain a contract during the year?”	View A: “Determine what portion of the employee’s salary is related to sales projections and allocate that portion of the salary as an incremental cost to obtain a contract.” View B: “Do not capitalize any portion of the employee’s salary as an incremental cost to obtain a contract. The costs are not incremental costs to any contract because the costs would have been incurred regardless of the employee’s signed contracts in the current year.”	View B. “[N]one of the employee’s salary should be capitalized as an incremental cost to obtain a contract. . . . Whether the employee sells 100 contracts, 10 contracts, or no contracts, the employee is still only entitled to a fixed salary.” “[T]he objective of the requirements in [ASC] 340-40-25-1 is not to allocate costs that are associated in some manner with an entity’s marketing and sales activity. The objective is to identify the incremental costs that an entity would not have incurred if the contract had not been obtained.”
Some, but not all, costs are incremental	“Example 2: An entity pays a 5% sales commission to its employees when they obtain a contract with a customer. An employee begins negotiating a contract with a prospective customer and the entity incurs $5,000 of legal and travel costs in the process of trying to obtain the contract. The customer ultimately enters into a $500,000 contract and, as a result, the employee receives a $25,000 sales commission. What amount should the entity capitalize as an incremental cost to obtain the contract?”	View A: “The entity should capitalize only $25,000 for the sales commission. Those costs are the only costs that are incremental costs to obtain the contract because the entity would not have incurred the costs if the contract had not been obtained.” View B: “The entity should capitalize $30,000, which includes the sales commission, legal expenses, and travel expenses. The entity would not have been able to obtain the contract without incurring those expenses.”	View A. “[T]he sales commission is the only cost that the entity would not have incurred if the contract had not been obtained. While the entity incurs other costs that are necessary to facilitate a sale (such as legal, travel and many others), those costs would have been incurred even if the customer decided at the last moment not to execute the contract.” Consider a similar situation in which an entity “incurs the same type of legal and travel expenses to negotiate a contract, but the customer decides not to enter into the contract right before the contract was to be signed by both parties. [T]he travel and legal expenses would still have been incurred even though the contract was not obtained. However, the commission would not have been incurred.”
Timing of commission payments	“Example 3: An entity pays an employee a 4% sales commission on all of the employee’s signed contracts with customers. For cash flow management, the entity pays the employee half of the commission (2% of the total contract value) upon completion of the sale, and the remaining half of the commission (2% of the total contract value) in six months. The employee is entitled to the unpaid commission, even if the employee is no longer employed by the entity when payment is due. An employee makes a sale of $50,000 at the beginning of year one. What amount should the entity capitalize as an incremental cost to obtain the contract?”	View A: “Capitalize half of the commission ($1,000) and expense the other half of the commission ($1,000).” View B: “Capitalize the entire commission ($2,000).”	View B. “The commission is an incremental cost that relates specifically to the signed contract and the employee is entitled to the unpaid commission. [T]he timing of payment does not impact whether the costs would have been incurred if the contract had not been obtained.” “In this fact pattern, only the passage of time needs to occur for the entity to pay the second half of the commission. However, . . . there could be other fact patterns in which additional factors might impact the payment of a commission to an employee.” For example, an entity could make the second half of the commission contingent upon the employee’s selling additional services to the customer or upon the customer’s “completing a favorable satisfaction survey about its first six months of working with the entity.” Therefore, an “entity will need to assess its specific compensation plans to determine the appropriate accounting for incremental costs of obtaining a contract.”
Commissions paid to different levels of employees	“Example 4: An entity’s salesperson receives a 10% sales commission on each contract that he or she obtains. In addition, the following employees of the entity receive sales commissions on each signed contract negotiated by the salesperson: 5% to the manager and 3% to the regional manager. Which commissions are incremental costs of obtaining a contract?”	View A: “Only the commission paid to the salesperson is considered incremental because the salesperson obtained the contract.” View B: “Only the commissions paid to the salesperson and the manager are considered incremental because the other employee likely would have had no direct contact with the customer.” View C: “All of the commissions are incremental because the commissions would not have been incurred if the contract had not been obtained.”	View C. “The new revenue standard does not make a differentiation based on the function or title of the employee that receives the commission. It is the entity that decides which employee(s) are entitled to a commission directly as a result of entering into a contract.” “[I]t is possible that several commissions payments are incremental costs of obtaining the same contract. However, [stakeholders are encouraged] to ensure that each of the commissions are incremental costs of obtaining a contract with a customer, rather than variable compensation (for example, a bonus)” that would not be incremental because it also relies on factors other than sales.
Commission payments subject to a threshold	“Example 5: An entity has a commission program that increases the amount of commission a salesperson receives based on how many contracts the salesperson has obtained during an annual period. The breakdown is as follows: 0-9 contracts . . . 0% commission 10-19 contracts . . . 2% of value of contracts 1-19 20+ contracts . . . 5% of value of contracts 1-20+ Which commissions are incremental costs of obtaining a contract?”	View A: “No amounts should be capitalized because the commission is not directly attributable to a specific contract.” View B: “The costs are incremental costs of obtaining a contract with a customer and, therefore, the costs should be capitalized.”	View B. Both the 2 percent commission and the 5 percent commission are incremental costs of obtaining a contract. “The entity would apply other GAAP to determine whether a liability for the commission payments should be recognized. When a liability is recognized, the entity would recognize a corresponding asset for the commissions. This is because the commissions are incremental costs of obtaining a contract with a customer. The entity has an obligation to pay commissions as a direct result of entering into contracts with customers. The fact that the entity’s program is based on a pool of contracts (versus a program in which the entity pays 3% for all contracts) does not change the fact that the commissions would not have been incurred if the entity did not obtain the contracts with those customers.”

The above issue is addressed in Implementation Q&A 78 (compiled from previously issued TRG Agenda Papers 57 and 60). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

13.2.2 Sales Commissions and Compensation Structures

Commissions are often cited as an example of an incremental cost incurred to obtain a contract. Acknowledging that it may be difficult for an entity to determine whether a commission paid was incremental to obtaining the new contract, the boards considered permitting a policy election that would allow an entity to choose to recognize the acquisition costs as either an asset or an expense. However, such an election would be contrary to the goal of increasing comparability, which is one of the key objectives of the revenue standard; therefore, the boards ultimately decided not to allow an accounting policy election for costs of obtaining a contract. See Sections 14.6.3 and 14.7.4 for discussion of the presentation of contract costs in an entity’s classified balance sheet and income statement, respectively.

Some commission plans include substantive service conditions that need to be met before a commission associated with a contract (or group of contracts) is actually earned by the salesperson. In such cases, some or all of the sales commission may not be incremental costs incurred to obtain a contract with the customer since the costs were not actually incurred solely as a result of obtaining a contract with a customer. Rather, the costs were incurred as a result of obtaining a contract with a customer and the salesperson’s providing ongoing services to the entity for a substantive period.

A commission structure could have a service condition that is determined to be nonsubstantive. In such a case, the commission is likely to be an incremental cost incurred to obtain a contract with a customer if no other conditions need to be met for the salesperson to earn the commission. In other cases, a commission plan could include a service condition, but the reporting entity determines on the basis of the amount and structure of the commission payments that part of the entity’s commission obligation is an incremental cost incurred to obtain a contract with a customer (because it is not tied to a substantive service condition) while the rest of the commission is associated with ongoing services provided by the salesperson (because it is tied to a substantive service condition).

Sometimes, there may be other factors that affect the commission obligation, but the ultimate costs are still incremental costs incurred to obtain the contract. For example, a commission may be payable to a salesperson if a customer’s total purchases exceed a certain threshold regardless of whether the salesperson is employed when the threshold is met (i.e., there is no service condition). In these cases, although no liability may be recorded when the contract with the customer is obtained (because of the entity’s assessment of the customer’s likely purchases), if the customer’s purchases ultimately exceed the threshold and the commission is paid, the commission is an incremental cost of obtaining the contract. That is, the commission is a cost that the entity would not have incurred if the contract had not been obtained. This situation is economically similar to one involving a paid commission that is subject to clawback if the customer does not purchase a minimum quantity of goods or services.

Entities will need to carefully evaluate the facts and circumstances when factors other than just obtaining a contract with a customer affect the amount of a commission or other incurred costs. Entities should consider their existing policies on accruing costs when determining which costs are incremental costs incurred to obtain a contract with a customer.

Example 13-1

Entity A’s internal salespeople earn a commission based on a fixed percentage (4 percent) of sales invoiced to a customer. Half of the commission is paid when a contract with a customer is signed; the other half is paid after 12 months, but only if the salesperson is still employed by A. Entity A concludes that there is a substantive service period associated with the second commission payment, and A’s accounting policy is to accrue the remaining commission obligation ratably as the salesperson provides ongoing services to A.

Entity A enters into a three-year noncancelable service contract with a customer on January 1, 20X7. The total transaction price of $3 million is invoiced on January 1, 20X7. The salesperson receives a commission payment of 2 percent of the invoice amount ($60,000) when the contract is signed; the other half of the 4 percent commission will be paid after 12 months if the salesperson continues to be employed by A at that time. That is, if the salesperson is not employed by A on January 1, 20X8, the second commission payment will not be made. Entity A records a commission liability of $60,000 on January 1, 20X7, and accrues the second $60,000 commission obligation ratably over the 12-month period from January 1, 20X7, through December 31, 20X7.

Entity A concludes that only the first $60,000 is an incremental cost incurred to obtain a contract with a customer. Because there is a substantive service condition associated with the second $60,000 commission, A concludes that the additional cost is a compensation cost incurred in connection with the salesperson’s ongoing service to A. That is, the second $60,000 commission obligation was not incurred solely to obtain a contract with a customer but was incurred in connection with ongoing services provided by the salesperson.

If the salesperson would be paid the commission even if no longer employed, or if A otherwise concluded that the service condition was not substantive, the entire $120,000 would be an incremental cost incurred to obtain a contract and would be capitalized in accordance with ASC 340-40-25-1. Entities will need to exercise professional judgment when determining whether a service condition is substantive.

Because commission and compensation structures can vary significantly between entities, an entity should evaluate its specific facts and circumstances when determining which costs are incremental costs incurred to obtain a contract with a customer. Since many entities pay sales commissions to obtain contracts with customers, questions have arisen regarding how to apply the revenue standard’s cost guidance to such commissions, including:

Whether certain commissions (e.g., commissions on contract renewals or modifications, commission payments that are contingent on future events, and commission payments that are subject to clawback or thresholds) qualify as assets.
The types of costs to capitalize (e.g., whether and, if so, how an entity should consider fringe benefits such as payroll taxes, pension, or 401(k) match) in determining the amount of commissions to record as incremental costs.
The pattern of amortization for assets related to multiple performance obligations (e.g., for contract cost assets related to multiple performance obligations that are satisfied over disparate points or periods of time).

Entities should continue to first refer to existing U.S. GAAP on liability recognition to determine whether and, if so, when a liability from a contract with a customer needs to be recorded. For example, an entity would apply the specific U.S. GAAP on liability (e.g., commissions, payroll taxes, 401(k) match) and then determine whether to record the related debit as an asset or expense.

In addition, the revenue standard is clear that (1) an entity should amortize the asset on a systematic basis and (2) the method should reflect the pattern of transfer of goods or services to a customer to which the asset is related. That is, the asset should be amortized in a manner that reflects the benefit (i.e., revenue) generated from the asset. For further discussion, see Section 13.4.1.

The above issue is addressed in Implementation Q&As 67 through 75 (compiled from previously issued TRG Agenda Papers 23, 25, 57, and 60). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

13.2.2.1 Tiered Commissions

Commission plans for a specific employee that involve initial contracts and contract renewals might be established in such a way that (1) the commission is subject to a cumulative contract threshold and (2) commission rates change depending on the number (or cumulative value) of contracts signed. For instance, fixed or percentage commissions may commence or change once a specified threshold is achieved for the cumulative number or value of contracts. The examples below, which are adapted from examples considered by the FASB staff in TRG Agenda Paper 23, illustrate various cumulative threshold scenarios.

Example 13-2

Once a cumulative threshold number of contracts is reached, the entity pays commission on individual contracts as a percentage of the value of each contract in the manner shown in the table below.

Number of Contracts Signed	Commission Rate
1–5	0% commission
6–10	3% of individual contract price
11 or more	5% of individual contract price

Example 13-3

Once a cumulative threshold value of contracts is reached, the entity pays commission on individual contracts as a percentage of the value of each contract in the manner shown in the table below.

Value of Contracts Signed	Commission Rate
First $1 million	0% commission
Next $4 million	3% of individual contract price
More than $5 million	5% of individual contract price

Example 13-4

Once a cumulative threshold number of contracts is reached, the entity pays commission on the last contract as a percentage of the cumulative value of that contract and the preceding contracts in the manner shown in the table below, taking into account any commission already paid.

Number of Contracts Signed	Commission Rate
1–5	0% commission
6	3% of value of contracts 1–6
7–10	0% commission
11 or more	5% of value of all contracts (including commission already paid on contracts 1–6)

Example 13-5

As shown in the table below, the entity pays the first commission when the first contract is signed. Subsequently, once a cumulative threshold number of contracts is reached, the entity pays a commission on the threshold contract that is greater than the commission paid on the initial contract and takes into account any commissions previously paid. In this example, it is assumed that the entity has no history of sales employees’ closing more than 15 new contracts in a period.

Number of Contracts Signed	Commission Amount
1	$ 3,000
10	$ 5,000	cumulative commission (including $3,000 already paid)
15	$ 10,000	cumulative commission (including $5,000 already paid)

Assume that the commissions in all of the examples above are incremental costs incurred to obtain a contract that should be capitalized in accordance with ASC 340-40-25-1.

There are at least two acceptable approaches to determining which commissions are incremental to obtaining a contract in the scenarios described above. One approach (“Approach A”) would be to specifically attribute the incremental costs of each contract to that contract. For example, if no commission is paid until the fifth contract is signed, the commission would be attributed to only the fifth contract. Another approach (“Approach B”) would be to accrue commission for each contract on the basis of the average commission rate expected to be paid under the commission plan. For example, although a commission is paid only once the fifth contract is signed, the commission is earned, and would be accrued, as contracts 1 through 5 are signed. Entities should consider their historical policies for recording commission liabilities when determining which approach to apply.

Under the two alternative approaches, the entity in each of the illustrative examples above should account for the tiered commissions as follows:

Example 13-2:
- Approach A — When the 6th contract is signed, the entity should capitalize 3 percent of the price of that contract and successive contracts as an incremental cost of obtaining a contract until the 11th contract is signed, at which point the entity should capitalize 5 percent of the price of that contract and successive contracts.
- Approach B — The entity should estimate the total amount of commission to be earned for the period and capitalize a ratable amount of commission costs upon the signing of each contract. For example, if the entity estimates that seven contracts, each valued at $10,000, will be signed and therefore the total estimated price of the 6th and 7th contract is $20,000, it estimates the total commission to be capitalized as $600 ($20,000 × 3% commission). Upon the signing of each $10,000 contract, the entity may capitalize $86 of commission ($600 total estimated commission ÷ the 7 expected contracts signed = $86 estimated commission per contract).
Example 13-3:
- Approach A — Upon the signing of the specific contract that results in the aggregate value of over $1 million in contract value, the entity should capitalize 3 percent of the price of that contract and successive contracts as an incremental cost of obtaining a contract until the $5 million aggregate value is reached, at which point the entity should capitalize 5 percent of the price of that contract and successive contracts.
- Approach B — The entity should estimate the total amount of commission to be earned for the period and capitalize a ratable amount of commission costs upon the signing of each contract. For example, if the entity estimates that three contracts will be signed with an aggregate of $4 million in contract value (contract 1 is $1 million, contract 2 is $1 million, and contract 3 is $2 million), the entity will estimate $90,000 in commissions to be capitalized, or ($4 million − $1 million) × 3% commission. The entity may capitalize the relative value for each contract:
  - Contract 1: ($1 million ÷ $4 million) × $90,000 = $22,500.
  - Contract 2: ($1 million ÷ $4 million) × $90,000 = $22,500.
  - Contract 3: ($2 million ÷ $4 million) × $90,000 = $45,000.
Example 13-4:
- Approach A — When the 6th contract is signed, the entity should capitalize 3 percent of the cumulative prices of contracts 1 through 6 as an incremental cost of obtaining the 6th contract. Similarly, when the 11th contract is signed, the entity should capitalize 5 percent of the cumulative prices of contracts 1 through 11 (less the 3 percent previously paid on contracts 1 through 6) as an incremental cost of obtaining the 11th contract. Further, the entity should capitalize 5 percent of the price of each successive contract (beyond the 11th contract) as an incremental cost of obtaining a contract.
- Approach B — The entity should estimate the total amount of commission to be earned for the period and capitalize a ratable amount of commission costs upon the signing of each contract. For example, if the entity estimates that eight contracts will be signed and the estimated cumulative prices of contracts 1 through 6 will be $32,000, it will estimate $960 in commissions to be capitalized ($32,000 × 3% commission). If the price of each contract is the same, the entity may capitalize $120 upon the signing of each contract ($960 total estimated commission ÷ the 8 expected contracts signed = $120 estimated commission per contract).
Example 13-5:
- Approach A — Once the initial contract is signed, the entity should capitalize $3,000 as an incremental cost of obtaining that contract. The entity would not capitalize any additional amounts when contracts 2 through 9 are signed because the next commission “tier” has not been met. Once the 10th contract is signed, the entity should capitalize an additional $2,000. Similarly, the entity would not capitalize any additional amounts when contracts 11 through 14 are signed and should capitalize an additional $5,000 once the 15th contract is signed.
- Approach B — The entity should estimate the total amount of commission to be earned for the period and capitalize a ratable amount of commission costs upon the signing of each contract. For example, if the entity estimates that 11 contracts will be signed and the price of each contract is the same, it may capitalize $455 when each contract is signed ($5,000 ÷ the 11 contracts signed = $455 to be capitalized as the commission amount per contract).

The above issue is addressed in Implementation Q&A 69 (compiled from previously issued TRG Agenda Papers 23 and 25). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

13.2.2.2 Fringe Benefits

The example below illustrates the determination of whether fringe benefits such as 401(k) match contributions associated with sales commissions should be capitalized as incremental costs of obtaining contracts with customers.

Example 13-6

Entity C has a policy to match 401(k) contributions based on salaries paid to sales representatives, including sales commissions. These sales commissions are determined to meet the definition of incremental costs of obtaining contracts with customers in ASC 340-40-25-2 and are therefore capitalized in accordance with ASC 340-40-25-1.

When 401(k) match contributions (along with other fringe benefits) are attributed directly to sales commissions that are determined to be incremental costs of obtaining contracts with customers, the 401(k) match contributions also qualify as incremental costs of obtaining the contracts since such costs would not have been incurred if the contracts had not been obtained. However, incremental costs of obtaining contracts with customers would not include fringe benefits constituting an allocation of costs that would have been incurred regardless of whether a contract with a customer had been obtained.

The above issue is addressed in Implementation Q&A 74 (compiled from previously issued TRG Agenda Papers 23, 25, 57, and 60). For additional information and Deloitte’s summary of issues discussed in the Implementation Q&As, see Appendix C.

13.2.2.3 Asset Manager Costs

The FASB noted that the treatment of sales commissions paid to third-party brokers in arrangements between asset managers and other parties may vary depending on the facts and circumstances of the arrangement (i.e., the commission would be recognized in some cases as an expense and in other cases as an asset). This outcome was not the FASB’s intent; therefore, the Board decided to retain specific cost guidance for investment companies in ASC 946-605-25-8, which has been moved to ASC 946-720. Further, in December 2016, the FASB issued ASU 2016-20, which aligns the cost capitalization guidance in ASC 946 for advisers to both public funds and private funds (see Chapter 18).

13.2.3 Practical Expedient in ASC 340-40-25-4 for Expensing Contract Acquisition Costs

ASC 340-40

25-4 As a practical expedient, 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.

If an entity elects the practical expedient to expense incremental costs of obtaining a contract when incurred because the amortization period of the asset would have been one year or less, the entity is also required, under ASC 606-10-50-22, to disclose such election (see Chapter 15 on disclosure requirements). In addition, the practical expedient should be applied consistently to contracts with similar characteristics and in similar circumstances.

13.2.3.1 Whether the Practical Expedient Must Be Applied to All Contracts

The practical expedient in ASC 340-40-25-4 to expense contract acquisition costs that would be amortized over a period of less than one year needs to be applied consistently to contracts with similar characteristics and in similar circumstances in accordance with ASC 606-10-10-3. Therefore, if an entity has contracts with dissimilar characteristics or dissimilar circumstances, it can choose for each class of contract whether to apply the expedient.

The identification of contracts with similar characteristics and the evaluation of similar circumstances should be performed as an entity-wide assessment. An entity with multiple subsidiaries or business units that operate in multiple jurisdictions might determine that different subsidiaries or business units have contracts with dissimilar characteristics or dissimilar circumstances.

13.2.3.2 Whether the Practical Expedient May Be Applied Selectively on a Contract-by-Contract or Cost-by-Cost Basis

An entity is required to apply the practical expedient in ASC 340-40-25-4 consistently to contracts with similar characteristics and in similar circumstances in accordance with ASC 606-10-10-3. Therefore, if an entity has contracts with dissimilar characteristics or dissimilar circumstances, it can choose for each class of contract whether to apply the expedient, but it is not permitted to apply the practical expedient selectively on a contract-by-contract basis.

Further, an entity is not permitted to apply the practical expedient in ASC 340-40-25-4 to some costs attributable to performance obligations in a contract but not others. The incremental costs of obtaining a contract that are required to be capitalized in accordance with ASC 340-40-25-1 are related to the contract as a whole; the capitalized costs of obtaining a contract form a single asset even if the contract contains more than one performance obligation. Therefore, if the practical expedient in ASC 340-40-25-4 is applied, it should be applied to the contract as a whole. The practical expedient is available only if the amortization period of the entire asset that the entity otherwise would have recognized is one year or less.

13.2.3.3 Practical Expedient Unavailable When the Amortization Period Is Greater Than One Year

The example below illustrates a situation in which the practical expedient in ASC 340-40-25-4 would not be available.

Example 13-7

Entity B enters into a contract with a customer to provide the following:

Product X delivered at a point in time.
Maintenance of Product X for one year.
An extended warranty on Product X that covers years 2 and 3 (Product X comes with a one-year statutory warranty).

Each of the elements is determined to be a separate performance obligation.

A sales commission of $200 is earned by the salesperson. This represents $120 for the sale of Product X (payable irrespective of whether the customer purchases the maintenance or extended warranty) and an additional $40 each for the sale of the maintenance contract and the sale of the extended warranty ($80 commission for the sale of both).

The commission is determined to meet the definition of an incremental cost of obtaining the contract in ASC 340-40-25-2 and is therefore capitalized in accordance with ASC 340-40-25-1.

In this fact pattern, the entity cannot elect the practical expedient in ASC 340-40-25-4 to expense costs as incurred because the amortization period of the asset that the entity would recognize is more than one year (i.e., the extended warranty performance obligation included in the contract is for years 2 and 3). The entity may, however, determine that it is appropriate to attribute the asset created by the commission to the individual performance obligations and record amortization of the asset in an amount that corresponds to the revenue recognized as each good or service is transferred to the customer (see Section 13.4.1.1).

13.2.3.4 Amortization Periods Slightly Greater Than One Year

As previously noted, an entity is precluded from using the practical expedient in ASC 340-40-25-4 if the amortization period of the asset that the entity otherwise would have recognized is greater than one year. This restriction applies even if the amortization period is only slightly greater than one year.

Example 13-8

Entity A enters into a noncancelable contract with a customer to provide marketing services for 13 months. A commission of $100 is earned by the salesperson in connection with A’s entering into the contract with the customer. The commission is determined to meet the definition of an incremental cost of obtaining the contract in ASC 340-30-25-2 and is therefore capitalized in accordance with ASC 340-40-25-1. Entity A concludes that the asset is related to the entire contract to provide 13 months of marketing services.

In this fact pattern, the entity cannot elect the practical expedient in ASC 340-40-25-4 to expense costs as incurred since the amortization period of the asset that the entity would otherwise recognize is more than one year (i.e., the 13 months in which marketing services are being performed).

13.2.4 Using the Portfolio Approach When Accounting for Contract Costs

The guidance in ASC 340-40 was developed contemporaneously with that in ASC 606. ASC 340-40-05-1 expressly indicates that ASC 340-40 is aligned with ASC 606, stating that “[t]his Subtopic provides accounting guidance for the following costs related to a contract with a customer within the scope of Topic 606 on revenue from contracts with customers.”

ASC 606 is applied at the individual contract level (or to a combination of contracts accounted for under ASC 606-10-25-9). In addition, ASC 606-10-10-4 allows an entity to apply, as a practical expedient, the revenue recognition guidance to a portfolio of contracts rather than an individual contract. The practical expedient can only be used “if the entity reasonably expects that the effects on the financial statements of applying [the revenue recognition guidance] to the portfolio would not differ materially from applying [the revenue recognition guidance] to the individual contracts (or performance obligations) within that portfolio.” In addition, ASC 606-10-10-3 states that an “entity shall apply this guidance, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances.”

If an entity reasonably expects that contract costs recorded under a portfolio approach would not differ materially from contract costs that would be recorded individually, it may apply a portfolio approach to account for the costs. The entity would use judgment in determining the characteristics of the portfolio in a manner similar to its assessment of whether a portfolio satisfies the requirements in ASC 606-10-10-4.

In applying the portfolio approach, an entity should consider paragraph BC69 of ASU 2014-09, which states, in part, that the FASB and IASB “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.” In determining the characteristics and composition of the portfolio, an entity should consider the nature and timing of costs incurred and the pattern of transferring control of the related good or service to the customer (e.g., amortization of the capitalized costs).

13.2.5 Determining When to Recognize and How to Measure Incremental Costs

Arrangements for the payment of some incremental costs of obtaining a contract may be complex. For example, payment of a sales commission may be (1) contingent on a future event, (2) subject to clawback, or (3) based on achieving cumulative targets.

The revenue standard does not address the issue of when to initially recognize the incremental costs of obtaining a contract. Rather, ASC 340-40 only addresses which costs to capitalize and subsequent recognition of amortization or impairment expense. Therefore, other Codification topics (e.g., ASC 275, ASC 710, ASC 712, ASC 715, and ASC 718) specify when a liability for costs should be recognized and how that liability should be measured.

If an entity concludes that a liability for incremental costs of obtaining a contract should be recognized under the relevant Codification topic, the guidance in ASC 340-40-25-1 should be applied to determine whether those recognized costs should be capitalized as an asset or recognized immediately as an expense.

Chapter 14 — Presentation

14.1 Overview

ASC 606-10

45-1 When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable.

As discussed in Chapter 4, a contract with a customer creates legal rights and obligations. The rights under the contract will generally give rise to contract assets as the entity performs (or accounts receivable, if an unconditional right to consideration exists); and contract liabilities are created when consideration is received (or receivable) in advance of performance. Each reporting period, an entity is required to assess its financial position related to its contracts with customers. Depending on the extent to which an entity has performed and the amount of consideration received (or receivable) by the entity under a contract, the entity could record a contract asset or a contract liability.

Paragraph BC317 of ASU 2014-09 indicates that an entity should present its remaining rights and obligations under a contract on a net basis. The reasoning behind this is that neither party to the contract would continue to fulfill its obligations if it knew that the other party would not perform. Because the rights and obligations in a contract are interdependent, contract assets and contract liabilities that arise in the same contract should be presented net.

Receivables should be recorded separately from contract assets since only the passage of time is required before consideration is due. That is, receivables are only subject to credit risk. In contrast, contract assets are subject to more than just credit risk (e.g., they are also subject to performance risk). As discussed in paragraph BC323 of ASU 2014-09, the FASB and IASB believed that making a distinction between contract assets and receivables was important to financial statement users. Consequently, only contract assets and contract liabilities are reported net. Accounts receivable should be reported separately.

ASC 606-10-45-5 addresses the use of alternative descriptions for contract assets and contract liabilities as follows:

ASC 606-10

45-5 This guidance uses the terms contract asset and contract liability but does not prohibit an entity from using alternative descriptions in the statement of financial position for those items. If an entity uses an alternative description for a contract asset, the entity shall provide sufficient information for a user of the financial statements to distinguish between receivables and contract assets.

Paragraph BC321 of ASU 2014-09 notes the FASB’s and IASB’s observation that “some industries have historically used different labels to describe contract assets and contract liabilities or may recognize them in more than one line item either in the financial statements or in the notes.” The ASU does not prohibit an entity from using alternative terms or from using additional line items to present the assets and liabilities, but it requires an entity to provide appropriate disclosures that adequately describe the assets and liabilities.

Terms that are commonly used in practice to describe contract assets and contract liabilities include, but are not limited to, the following:

Contract assets — Unbilled receivables, progress payments to be billed.
Contract liabilities — Deferred revenue, unearned revenue.

For discussion of income statement presentation matters, including the requirements in SEC Regulation S-X, see Sections 14.7.3 through 14.7.6.

14.3 Refund Liabilities

Some contracts with customers may result in refund liabilities owed to customers. The most common of such refund liabilities are return provisions in sales contracts that permit the customer to return the product if certain circumstances arise. These liabilities may also arise when an entity receives cash in advance, but the agreement is cancelable because of certain termination provisions in the agreement (see Section 4.4.1). When these provisions are present in a contract, the seller would recognize a liability to reflect its obligation to return amounts paid or payable by the customer (i.e., a refund liability).

An agreement that includes a provision for termination without penalty may not be a contract under step 1 of ASC 606 (i.e., a contract may not exist for the cancelable term). Such a provision may therefore affect the presentation of these arrangements on the balance sheet. For a cancelable contract (with a termination right without penalty), funds received in advance should not be classified as a contract liability. Funds received in advance that are associated with a cancelable term (with a termination right without penalty) should be presented separately from any contract liability as a refund liability, or similar liability.

A refund liability should not be presented together with contract liabilities that arise under the same contract. A contract liability is defined in ASC 606-10-45-2 as “an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer.” A refund liability, however, represents the customer’s conditional right to consideration from the seller (as opposed to consideration receivable from the customer) and does not represent a performance obligation. Consequently, we believe that the refund liability should be presented separately from the contract liability. Note that as a result, the refund liability would not be netted with any contract assets the entity may recognize.

Example 14-1

Entity A sells Product X to 10 separate customers for $100 each and does not charge a restocking fee. On the basis of its historic experience, A expects that one of these products will be returned. As a result, A should recognize a refund liability of $100 for the one product out of 10 that it expects will be returned. In addition to Product X, A also sells Product Z (considered a separate performance obligation from Product X). One customer has prepaid for Product Z in the amount of $1,000. As a result, A has recorded a contract liability of $1,000.

In accordance with the guidance above, A should record a refund liability of $100 and a separate contract liability of $1,000 (i.e., A should not present the refund liability together with the contract liability).

For a discussion about offsetting refund liabilities against accounts receivable, see Example 14-6.

Chapter 15 — Disclosure

15.1 Background and Objective

One of the goals of the FASB and IASB in the revenue project was to provide financial statement users with more useful information through improved disclosures. ASC 606-10-50-1 outlines the objective of the revenue standard’s disclosure requirements as follows:

ASC 606-10

50-1 The objective of the disclosure requirements in this Topic is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. To achieve that objective, an entity shall disclose qualitative and quantitative information about all of the following:

Its contracts with customers (see paragraphs 606-10-50-4 through 50-16)
The significant judgments, and changes in the judgments, made in applying the guidance in this Topic to those contracts (see paragraphs 606-10-50-17 through 50-21)
Any assets recognized from the costs to obtain or fulfill a contract with a customer in accordance with paragraph 340-40-25-1 or 340-40-25-5 (see paragraphs 340-40-50-1 through 50-6).

Connecting the Dots

As discussed in Section 1.9.2, the revenue standard requires entities to disclose both quantitative and qualitative information that enables “users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.” Entities should be proactive in developing the disclosures required by the revenue standard because of the substantive system and implementation challenges that may arise when entities (1) gather the information necessary for drafting the required disclosures and (2) implement controls to review related disclosures and underlying data. Among the disclosures that may pose system and implementation challenges are those related to (1) remaining performance obligations (commonly referred to as the “backlog” disclosure), (2) contract assets and contract liabilities, and (3) disaggregation of revenue (including the relationship between disaggregated revenue and segment information). Even if the timing or amount of revenue recognized is not affected by the revenue standard, the disclosure obligations will be affected.

The revenue standard includes significant disclosure requirements, which are both quantitative and qualitative. Meeting these disclosure requirements will require significant judgment. Some disclosures may be applicable for some entities while immaterial or extraneous for others.

See Deloitte’s July 11, 2018, Heads Up for additional information about the disclosures required under the revenue standard and examples of such disclosures.

15.1.1 Level of Aggregation or Disaggregation

ASC 606-10

50-2 An entity shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. An entity shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics.

Entities should (1) “consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements,”1 (2) “aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics,”2 and (3) not repeat disclosures if the information is already presented in the manner required by other accounting standards.

15.1.2 Disclosures in Comparative and Interim Periods

ASC 606-10

50-3 Amounts disclosed are for each reporting period for which a statement of comprehensive income (statement of activities) is presented and as of each reporting period for which a statement of financial position is presented. An entity need not disclose information in accordance with the guidance in this Topic if it has provided the information in accordance with another Topic.

In a manner consistent with presentation requirements, entities are required to provide the prescribed disclosures for both current and comparative periods.

Throughout this chapter of the Roadmap, we provide illustrative examples that highlight certain aspects of the revenue standard’s disclosure guidance and reflect our views on how that guidance might be applied. However, these examples are not intended to be templates or comprehensive resources. Rather, they should be regarded as tools to help entities consider key judgments and issues arising in the application of the requirements.

The illustration below gives an overview of the annual disclosure requirements in ASC 606 (there are certain exceptions for nonpublic entities; see Chapter 16).

Annual Disclosures

The illustration below gives an overview of the interim disclosure requirements in ASC 270. The items shown in gray illustrate the annual required disclosures that are not required during interim periods.

Interim Disclosures3

Refer to Section 15.1.4 for a more comprehensive summary of the disclosure requirements, including information on the disclosures that a nonpublic entity may elect not to apply as well as interim disclosures. As shown in Section 15.1.4, certain information about performance obligations (including remaining performance obligations) must still be provided in interim disclosures.

15.1.3 Omission of Disclosures

ASC 606-10-50-1 notes that the “objective of the disclosure requirements in [ASC 606] is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.” The revenue standard delineates three broad disclosure categories and detailed disclosure requirements for meeting this objective.

Throughout ASC 606-10-50, the FASB consistently uses the term “shall” in conjunction with the information specified (e.g., “shall disclose,” “shall provide,” “shall explain”). Therefore, the specific disclosures would generally be required. However, like other mandatory disclosure provisions in the Codification, those in ASC 606 do not require financial statement disclosures that are irrelevant or immaterial. In paragraph BC331 of ASU 2014-09, the FASB and IASB acknowledge that an entity needs to consider both relevance and materiality when determining the disclosures to be provided:

The [FASB and IASB] also decided to include disclosure guidance to help an entity meet the disclosure objective. However, those disclosures should not be viewed as a checklist of minimum disclosures, because some disclosures may be relevant for some entities or industries but may be irrelevant for others. The Boards also observed that it is important for an entity to consider the disclosures together with the disclosure objective and materiality. Consequently, paragraph 606-10-50-2 clarifies that an entity need not disclose information that is immaterial.

For example, an entity would most likely not discuss the methods it uses to measure progress on performance obligations satisfied over time if (1) revenue was not recognized in such a manner or (2) management concludes that the quantitative and qualitative impact of the disclosure requirement is immaterial (e.g., an immaterial portion of total revenue is recognized in such manner). However, as with other materiality assessments, entities should carefully consider whether the omission of a required disclosure represents an error. Entities are encouraged to consult with their legal and financial advisers when making such determinations.

Further, while the disclosures specified in ASC 606 are generally viewed as mandatory, the manner in which an entity satisfies each of the revenue standard’s disclosure requirements may vary significantly. ASC 606-10-50-2 specifies that an entity should evaluate the level of detail to provide in its required disclosures and the amount of emphasis to place on each disclosure requirement.

Accordingly, the level of detail or prominence that an entity includes to achieve each of the specific disclosure requirements could differ depending on the entity’s specific facts and circumstances.

The assessment of which disclosures need to be provided should be made for each reporting period since a disclosure deemed to be irrelevant or immaterial in previous periods may subsequently become relevant and material (e.g., as a result of increases in the monetary values to be disclosed or changes in qualitative factors).

15.1.4 Summary of Disclosure Requirements, Including Election for Nonpublic Entities and Interim Requirements

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)4
Disaggregation of revenue	Disaggregate revenue into categories that depict how revenue and cash flows are affected by economic factors.	Yes5	Yes
Disaggregation of revenue	Sufficient information to understand the relationship between disaggregated revenue and each disclosed segment’s revenue information.	Yes	Yes
Contract balances	Opening and closing balances (receivable, contract assets, and contract liabilities).	No	Yes
	Amount of revenue recognized from beginning contract liability balance.	Yes	Yes
	Explanation of significant changes in contract balances (using qualitative and quantitative information).	Yes	No
Performance obligations (including remaining performance obligations)	Qualitative information about (1) when performance obligations are typically satisfied, (2) significant payment terms, (3) the nature of goods or services promised, (4) obligations for returns of refunds, and (5) warranties.	No	No
	Amount of revenue recognized from performance obligations satisfied in prior periods (e.g., changes in transaction price estimates).	Yes	Yes
	Transaction price allocated to the remaining performance obligations:
	Disclosure of quantitative amounts.	Yes	Yes
	Quantitative or qualitative explanation of when remaining performance obligation amounts will be recognized as revenue.	Yes	Yes
Significant judgments and estimates	Qualitative information about determining the timing of:
	Performance obligations satisfied over time (e.g., methods of measuring progress, why methods are representative of the transfer of goods or services, judgments used in the evaluation of when a customer obtains control of goods or services).	Yes6	No
	Performance obligations satisfied at a point in time — specifically, the significant judgments used in the evaluation of when a customer obtains control.	Yes	No
	Qualitative and quantitative information7 about:
	Determining the transaction price (e.g., estimating variable consideration, adjusting for the time value of money, noncash consideration).	Yes	No
	Constraining estimates of variable consideration.	No	No
	Allocating the transaction price, including estimating stand-alone selling prices and allocating discounts and variable consideration.	Yes	No
	Measuring obligations for returns, refunds, and other similar obligations.	Yes	No
Contract costs	Qualitative information about:
	Judgments made in determining the amount of the costs incurred to obtain or fulfill a contract.	Yes	No
	The method the entity uses to determine the amortization for each reporting period.	Yes	No
	Quantitative information about:
	The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract, by main category of asset.	Yes	No
	The amount of amortization and any impairment losses recognized in the reporting period.	Yes	No
Practical expedients	Disclosure of practical expedients used.	Yes8	No

Footnotes

Quoted from ASC 606-10-50-2.

See footnote 1.

IAS 34 provides the interim disclosure requirements under IFRS Accounting Standards. In addition, IFRS 15 amended IAS 34 to require entities to disclose information about disaggregated revenue from contracts with customers during interim periods. IFRS 15 does not require entities to disclose information about contract balances and remaining performance obligations on an interim basis as required under U.S. GAAP. For more information about differences between U.S. GAAP and IFRS Accounting Standards on revenue-related topics, see Appendix A.

This column represents the interim disclosure requirements in years after the year of adoption of the revenue standard.

At a minimum, a nonpublic entity must disclose revenue that is disaggregated in accordance with the timing of transfer of goods or services (e.g., goods transferred at a point in time and services transferred over time) and qualitative information about how economic factors affect revenue and cash flows.

The election available to nonpublic entities applies only to the requirement to disclose information about why the methods used to recognize revenue over time provide a faithful depiction of the transfer of goods or services to a customer. Nonpublic entities are still required to disclose the information about the methods used to recognize revenue over time in accordance with ASC 606-10-50-18(a).

This includes the methods, inputs, and assumptions used in an entity’s assessment.

However, nonpublic entities that have elected the practical expedient or policy election in ASU 2021-02 are required to disclose the practical expedient or policy election used.

15.2 Contracts With Customers

ASC 606-10

50-4 An entity shall disclose all of the following amounts for the reporting period unless those amounts are presented separately in the statement of comprehensive income (statement of activities) in accordance with other Topics:

Revenue recognized from contracts with customers, which the entity shall disclose separately from its other sources of revenue
Credit losses recorded (in accordance with Subtopic 326-20 on financial instruments measured at amortized cost) on any receivables or contract assets arising from an entity’s contracts with customers, which the entity shall disclose separately from credit losses from other contracts.

The first disclosure requirement seems obvious, but it may not always be straightforward. That is, an entity must disclose its revenue from contracts with customers unless the revenue is presented separately in the statement of comprehensive income (or statement of activities, in the case of a nonprofit entity). As a result, the entity must determine which of its contracts or revenue streams are being accounted for in accordance with ASC 606 rather than in accordance with guidance on other revenue transactions, such as those related to financial instruments (interest income), leases (lease income), or insurance contracts. For example, an entity may be a lessor and derive revenue from its leasing operations in addition to various services it provides in contracts with customers. As further discussed in Chapter 3, some contracts with customers (or portions of contracts with customers) are outside the scope of ASC 606. In those circumstances, unless the lessor’s two sources of revenue are separately presented in the income statement, the lessor must disclose the breakdown of those two revenue sources: (1) revenue from contracts with customers (i.e., those contracts or portions of a contract that are being accounted for in accordance with ASC 606) and (2) lease income accounted for in accordance with ASC 842.

To take another example, an entity that derived revenue from financial instruments, leases, and contracts with customers (ASC 606 contracts) may present or disclose its revenues as follows:

Similarly, an entity is required to disclose any impairment losses related to its contracts with customers (e.g., bad debt expense on customer receivables and impairment of contract assets) separately from other impairments, such as losses recorded on other financial instruments (e.g., investments) or lease receivables.

15.2.1 Interaction Between ASC 606 and SEC Regulation S-X, Rule 5-03(b)

As explained in Section 14.7.6, SEC Regulation S-X, Rule 5-03(b), requires various line items to be presented on the face of the income statement. In addition, ASC 606 includes requirements related to the disaggregation of revenue, which are discussed in Section 15.2.2. While ASC 606 permits the disaggregated information to be presented or disclosed, the requirements of Rule 5-03(b) cannot be satisfied solely by meeting the ASC 606 requirements. Therefore, public entities need to consider both sets of requirements when preparing their financial statements (i.e., they must comply with the SEC’s presentation requirements regardless of how disaggregated revenue amounts are disclosed in the footnotes).

15.2.2 Disaggregation of Revenue

The table below summarizes the disclosure requirements discussed in this section, including the disclosures that a nonpublic entity may elect not to apply as well as required interim disclosures.

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)
Disaggregation of revenue	Disaggregate revenue into categories that depict how revenue and cash flows are affected by economic factors.	Yes9	Yes
Disaggregation of revenue	Sufficient information to understand the relationship between disaggregated revenue and each disclosed segment’s revenue information.	Yes	Yes

To meet the revenue standard’s disclosure objective, an entity is required to disaggregate revenue into categories. Revenue from contracts with customers presented in the statement of comprehensive income typically comprises sales of various types of goods and services and involves customers from different markets or geographic regions. As discussed in paragraph BC336 of ASU 2014-09, “because the most useful disaggregation of revenue depends on various entity-specific or industry-specific factors, the Boards decided that Topic 606 should not prescribe any specific factor to be used as the basis for disaggregating revenue from contracts with customers.” Instead, the boards included implementation guidance that provides examples of categories that may be appropriate to disclose in an entity’s financial statements. One or more than one category may be presented depending on what is most meaningful to the business.

The revenue standard’s implementation guidance also suggests that an entity should consider various sources of information (e.g., investor information, internal reports) in determining the categories to use for disaggregation of revenue. To enable users of the financial statements to understand the relationship between an entity’s revenue and how the entity manages its business, entities are required to describe the relationship between disaggregated revenue and segment disclosures in accordance with ASC 280. These disclosures do not need to be in a particular format; as a result, some entities may describe the interaction between the two required disclosures in the revenue footnote, while others may include the disclosures in the segment footnote. In addition, since the guidance is not prescriptive, the disclosures may also be presented in a tabular format or narrative format.

Entities should examine whether (1) the information necessary to produce these disclosures is readily available and (2) there are proper controls in place for reviewing this information.

ASC 606-10

50-5 An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. An entity shall apply the guidance in paragraphs 606-10-55-89 through 55-91 when selecting the categories to use to disaggregate revenue.

55-89 Paragraph 606-10-50-5 requires an entity to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Consequently, the extent to which an entity’s revenue is disaggregated for the purposes of this disclosure depends on the facts and circumstances that pertain to the entity’s contracts with customers. Some entities may need to use more than one type of category to meet the objective in paragraph 606-10- 50-5 for disaggregating revenue. Other entities may meet the objective by using only one type of category to disaggregate revenue.

55-90 When selecting the type of category (or categories) to use to disaggregate revenue, an entity should consider how information about the entity’s revenue has been presented for other purposes, including all of the following:

Disclosures presented outside the financial statements (for example, in earnings releases, annual reports, or investor presentations)
Information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments
Other information that is similar to the types of information identified in (a) and (b) and that is used by the entity or users of the entity’s financial statements to evaluate the entity’s financial performance or make resource allocation decisions.

55-91 Examples of categories that might be appropriate include, but are not limited to, all of the following:

Type of good or service (for example, major product lines)
Geographical region (for example, country or region)
Market or type of customer (for example, government and nongovernment customers)
Type of contract (for example, fixed-price and time-and-materials contracts)
Contract duration (for example, short-term and long-term contracts)
Timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time)
Sales channels (for example, goods sold directly to consumers and goods sold through intermediaries).

50-6 In addition, an entity shall disclose sufficient information to enable users of financial statements to understand the relationship between the disclosure of disaggregated revenue (in accordance with paragraph 606-10-50-5) and revenue information that is disclosed for each reportable segment, if the entity applies Topic 280 on segment reporting.

50-7 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission (SEC), may elect not to apply the quantitative disaggregation disclosure guidance in paragraphs 606-10-50-5 through 50-6 and 606-10-55-89 through 55-91. If an entity elects not to provide those disclosures, the entity shall disclose, at a minimum, revenue disaggregated according to the timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred to customers over time) and qualitative information about how economic factors (such as type of customer, geographical location of customers, and type of contract) affect the nature, amount, timing, and uncertainty of revenue and cash flows.

The following example in ASC 606 illustrates how an entity could present the disaggregation of its revenue in a tabular format to meet the quantitative disclosure requirements in ASC 606-10-50-6:

ASC 606-10

Example 41 — Disaggregation of Revenue — Quantitative Disclosure

55-296 An entity reports the following segments: consumer products, transportation, and energy, in accordance with Topic 280 on segment reporting. When the entity prepares its investor presentations, it disaggregates revenue into primary geographical markets, major product lines, and timing of revenue recognition (that is, goods transferred at a point in time or services transferred over time).

55-297 The entity determines that the categories used in the investor presentations can be used to meet the objective of the disaggregation disclosure requirement in paragraph 606-10-50-5, which is to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table illustrates the disaggregation disclosure by primary geographical market, major product line, and timing of revenue recognition, including a reconciliation of how the disaggregated revenue ties in with the consumer products, transportation, and energy segments in accordance with paragraphs 606-10-50-6.

Connecting the Dots

For many years, segment reporting has been a perennial topic of focus for the SEC (and SEC comment letters) and, as such, a topic of focus for many companies. Focus areas related to segments include (1) the identification and aggregation of operating segments, (2) changes in reportable segments, (3) product and service revenue by segment, (4) operating segments and goodwill impairment, and (5) information about geographic areas. Because of the historical challenges related to segment disclosures and the revenue standard’s requirements related to disaggregation, it is critical for each organization to evaluate the appropriate level at which to present its disaggregated revenue balances. As stated in ASC 606-10-55-90, an entity can make this determination by using (1) “[d]isclosures presented outside the financial statements (for example, in earnings releases, annual reports, or investor presentations),” (2) “[i]nformation regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments,” and (3) other similar information “that is used by the entity or users of the entity’s financial statements to evaluate the entity’s financial performance or make resource allocation decisions.”

At the 2016 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff highlighted that the disclosure guidance in ASC 606 on disaggregation of revenue is similar to the segment reporting guidance, but it noted that ASC 606 does not provide an impracticability exception. Further, the SEC staff stated that its reviews of filings will include reviews of other materials, such as investor presentations and earnings releases, to determine whether the appropriate amount of disaggregation is disclosed.

In recent years, the SEC staff has issued comments to registrants on various themes related to the disaggregation of revenue under ASC 606. In those comments, the staff has:

Questioned differences between the categories of revenue disclosed in the financial statements and the manner in which sales are categorized in other places such as MD&A, earnings releases, earnings calls, investor presentations, income statements, materials reviewed by the CODM, and other materials used by the registrant to evaluate the registrant’s financial performance or make resource allocation decisions.
Requested clear disclosures about how the revenue categories identified fairly depict the effect of economic factors on the nature, amount, timing, and uncertainty of revenue and cash flows. Economic factors could be macroeconomic, industry-specific, or entity-specific. The SEC staff has asked registrants to specifically address how they considered the guidance in ASC 606-10-55-89 through 55-91.
Noted that fewer revenue categories were disclosed than would be expected given the variety of products and services described in other places within or outside of the financial statements. The SEC staff has challenged a registrant’s aggregation of revenue sources that, on the basis of other information provided by the registrant, appear to have different characteristics and risk profiles that would result in differences in the nature, amount, timing, and uncertainty of revenue and cash flows. For example, the following characteristics have been observed by the staff:
- A revenue source that may or may not be subject to returns.
- The dollar magnitude of contribution to margins.
- Sales by brand.
- Underlying market trends.
- Volatility in demand.
- Uncertainty regarding availability of resources.
- The regulatory environment.
- The business model or strategy.

For additional information and excerpts from a sample of SEC comment letters on this topic, see Section 2.18.4 of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

The following illustrative disclosure of a company’s disaggregation of revenue highlights some of the questions an entity may think about when implementing the guidance on disaggregating revenue balances:

Connecting the Dots

The disclosure of disaggregated revenue does not need to be in any particular format and may be presented in a tabular format or a narrative format.

At the November 2016 TRG meeting, in response to a question about the form of this disclosure, the FASB staff indicated that a tabular reconciliation (such as that of Example 41 in ASC 606-10-55-296 and 55-297) is not required. However, the staff also noted that an entity must still provide the information required under ASC 606-10-50-6 (i.e., information that enables users to understand the relationship between the disclosure of disaggregated revenue and revenue disclosed for each reportable segment). A summary of the TRG’s discussion is available in TRG Agenda Paper 60.

15.2.3 Contract Balances

The table below summarizes the disclosure requirements discussed in this section through Section 15.2.3.5.2, including the disclosures that a nonpublic entity may elect not to apply as well as required interim disclosures.

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)
Contract balances	Opening and closing balances (receivables, contract assets, and contract liabilities).	No	Yes
	Amount of revenue recognized from beginning contract liability balance.	Yes	Yes
	Explanation of significant changes in contract balances (using qualitative and quantitative information).	Yes	No

According to paragraph BC343 of ASU 2014-09:

Users of financial statements emphasized that it was critical to them to have information on the movements in the contract balances presented separately because it would help them understand information about the following:

The amount of the opening balance of the contract liability balance that will be recognized as revenue during the period
The amount of the opening balance of the contract asset that will be transferred to accounts receivable or collected in cash during the period.

Because of this feedback, items (a) and (b) above were incorporated into the requirements in ASC 606-10-50-8(a) and (b) shown below. In a manner similar to how the FASB designed the disclosure requirements related to the disaggregation of revenue, the Board provided some optionality in terms of how contract balances and changes in contract balances should be presented (i.e., a tabular format is not required).

Questions that entities could consider in preparing these disclosures (and others) include, but are not limited to, the following:

On reassessment of disclosures already presented in the financial statements, are those disclosures sufficient?
What controls are in place to test the completeness and accuracy of the information disclosed?
Is the legacy accounting information system capable of providing this information? Is that system within the scope of internal control over financial reporting?
If the entity had any acquisitions or divestitures during the fiscal year, do those acquisitions or divestitures affect the revenue disclosures?
What qualitative information would the financial statement user find relevant to supplement quantitative information?
Have there been material changes in the timing of when performance obligations will result in revenue recognition?
What payment terms (e.g., payments in arrears, milestones, contingent payments, post-paid customers) give rise to contract assets?
What transactions (e.g., business combinations) would change future balances?
Why did the balance(s) change?
In a typical contract, how does the satisfaction of performance obligations correlate with customer payment?

ASC 606-10

50-8 An entity shall disclose all of the following:

The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed
Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period
Subparagraph superseded by Accounting Standards Update No. 2016-20.

50-9 An entity shall explain how the timing of satisfaction of its performance obligations (see paragraph 606-10-50-12(a)) relates to the typical timing of payment (see paragraph 606-10-50-12(b)) and the effect that those factors have on the contract asset and the contract liability balances. The explanation provided may use qualitative information.

50-10 An entity shall provide an explanation of the significant changes in the contract asset and the contract liability balances during the reporting period. The explanation shall include qualitative and quantitative information. Examples of changes in the entity’s balances of contract assets and contract liabilities include any of the following:

Changes due to business combinations
Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification
Impairment of a contract asset
A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be reclassified to a receivable)
A change in the time frame for a performance obligation to be satisfied (that is, for the recognition of revenue arising from a contract liability).

15.2.3.1 Disclosure of Opening and Closing Balances — Receivables, Contract Assets, and Contract Liabilities

In a manner consistent with the disclosure requirement to present or disclose revenue from contracts with customers, an entity must present separately on the face of the financial statements or disclose the opening and closing balances of receivables, contract assets, and contract liabilities. In addition, an entity may consider disclosing where such balances are included in the statement of financial position.

15.2.3.2 Disclosure of Revenue Recognized From Contract Liability Balance

Drawing on the components of a rollforward of contract balances, the revenue standard requires quantitative disclosure of amounts recognized in the current reporting period (and comparative periods presented) that were in the prior period-end’s contract liability balance.

For example, suppose that an entity had a deferred revenue (contract liability) balance of $2,000 as of December 31, 20X7. In accordance with ASC 606-10-50-8(b), the entity is required to disclose what amount of that $2,000 was recorded in 20X8 (or the first quarter of 20X8, depending on the reporting period presented). If $1,500 of the $2,000 was recognized as revenue in the first quarter of 20X8, the entity should disclose $1,500 as the amount of revenue recognized during that period that was previously included in the deferred revenue (contract liability) balance as of December 31, 20X7.

15.2.3.3 Election Available to Nonpublic Entities

ASC 606-10

50-11 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide any or all of the disclosures in paragraphs 606-10-50-8 through 50-10 and 606-10-50-12A. However, if an entity elects not to provide the disclosures in paragraphs 606-10-50-8 through 50-10 and 606-10-50-12A, the entity shall provide the disclosure in paragraph 606-10-50-8(a), which requires the disclosure of the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed.

15.2.3.4 Disclosure Examples

The example below, which is reproduced from the FASB’s and IASB’s 2011 exposure draft on revenue (issued by the FASB as a proposed ASU), illustrates a reconciliation of contract assets and contract liabilities. Although such a reconciliation is not required, the example shows how some entities may present some of the required information on contract balances.

Example in the FASB’s and IASB’s 2011 Exposure Draft

Example 19 — Reconciliation of Contract Assets and Contract Liabilities

An entity has two main business units: a services business and a retail business. Customers of the services business typically pay a portion of the promised consideration in advance of receiving the services and the remaining amount upon completion of the services. The service contracts do not include a significant financing component. Customers of the retail business typically pay in cash at the time of transfer of the promised goods.

During 20X1, the entity recognized revenue of $18,500 from contracts with customers ($1,000 of which was cash sales from the entity’s retail business). The entity received $3,500 payments in advance.

Included in the transaction price of one of the entity’s services contracts is a performance bonus that the entity will receive only if it meets a specified milestone by a specified date. The entity includes that performance bonus in the transaction price and recognizes revenue over time using an appropriate method of measuring progress. As of December 31, 20X0, the entity was not reasonably assured to be entitled to the cumulative amount of consideration that was allocated to the entity’s past performance at that date. However, during 20X1 the entity became reasonably assured to be entitled to the performance bonus. Consequently, the entity recognized a contract asset and revenue of $500 for the portion of the bonus relating to the entity’s performance in the previous reporting period.

As a result of a business combination on December 31, 20X1, the entity’s contract assets increased by $4,000 and its contract liabilities increased by $1,900.

The illustrative disclosure below shows how an entity might provide the information required under ASC 606-10-50-8 through 50-10.

15.2.3.5 Additional Considerations

15.2.3.5.1 Rollforward of Contract Balances

Under ASC 606, an entity is required to present or disclose opening and closing contract balances in its annual and interim financial statements. In addition, an entity is required under ASC 606-10-50-8(b) to disclose revenue recognized from the prior year-end contract liability balance.10 However, an entity does not need to provide a full rollforward of the information required under ASC 606-10- 50-8(b) about revenue recognized from the prior year-end contract liability balance.

Paragraph BC346 of ASU 2014-09 states, in part:

[The FASB and IASB] decided that, instead of requiring a tabular reconciliation of the aggregate contract balances [as they had proposed in their 2010 and 2011 exposure drafts on revenue], they would require an entity to disclose qualitative and quantitative information about the entity’s contract balances (see paragraphs 606-10-50-8 through 50-10). This approach balances the needs of users of financial statements with preparers’ concerns because the qualitative and quantitative disclosures provide users of financial statements with the information they requested (that is, information on when contract assets are typically transferred to accounts receivable or collected as cash and when contract liabilities are recognized as revenue). In addition, the Boards decided that those disclosures would be more cost-effective than a reconciliation. The Boards also observed that this approach would not result in a significant change for many entities that are already disclosing similar information.

Accordingly, a rollforward of contract balances is not required because the FASB decided that in a manner consistent with paragraph BC346 of ASU 2014-09, entities should be given some flexibility to determine how to present contract balances and changes in those balances.

However, at the November 2016 TRG meeting,11 the FASB staff noted that although a full rollforward is not required, an entity may elect to present the disclosures related to contract balances in the form of a full rollforward. Further, when doing so, an entity may:

Present such information on a quarterly basis to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, which is the disclosure objective stated in the revenue standard.
Provide a gross figure that includes revenue recognized (1) from the prior recorded contract liability balance and (2) that flowed in and out of the balance in the same period (i.e., the typical line item [deduction] that would be present in a full rollforward of the contract liability balance).
Include a quarterly rollforward of each quarter separately, but omit a year-to-date rollforward. For example, a calendar-year-end public company reporting its second-quarter financial information may provide a rollforward of the three months ended March 31 and a separate rollforward of the three months ended June 30, but may forgo providing a rollforward of the six months ended June 30.

15.2.3.5.2 Contract Liability Balance Disclosures

An entity should present certain liabilities, such as refund liabilities, separately from contract liabilities (see Section 14.3 for a discussion about the need to present refund liabilities separately from contract liabilities). These liabilities may commonly arise when an entity sells products with a right of return and the entity expects that a certain quantity of those products will be returned (see Sections 6.3.5.2 and 6.3.5.3). These liabilities may also arise when an entity receives cash in advance, but the agreement is cancelable because of certain termination provisions in the agreement (see Section 4.4.1).

Assume that an entity chooses to present a full rollforward of its contract liability. Further assume that (1) some of the entity’s arrangements contain termination provisions and (2) amounts received by the entity that are related to such contracts have been recorded as a liability separate from the contract liability. The entity would not be permitted to include the separate liability in its contract liability balance disclosures required by ASC 606-10-50-8. However, one approach may be to reclassify the separate liability as a contract liability when, for example, the contract is no longer cancelable without penalty and the amounts are recharacterized as deferred revenue. The illustrative disclosure below demonstrates the contract liability rollforward approach for entities that elect such presentation related to their separate liabilities.

Illustrative Disclosure — Contract Liability Balance Rollforward

Changes in the contract liability balance were as follows for the years ended December 31, 20X8, and December 31, 20X7:

15.2.4 Performance Obligations

The table below summarizes the disclosure requirements discussed in this section through Section 15.2.4.3.2, including the disclosures that a nonpublic entity may elect not to apply as well as required interim disclosures.

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)
Performance obligations (including remaining performance obligations)	Qualitative information about (1) when performance obligations are typically satisfied, (2) significant payment terms, (3) the nature of goods or services promised, (4) obligations for returns or refunds, and (5) warranties.	No	No
	Amount of revenue recognized from performance obligations satisfied in prior periods (e.g., changes in transaction price estimates).	Yes	Yes
	Transaction price allocated to the remaining performance obligations: Disclosure of quantitative amounts. Quantitative or qualitative explanation of when remaining performance obligation amounts will be recognized as revenue.	Yes	Yes
		Yes	Yes

Quantitative and qualitative information about an entity’s performance obligations should also be disclosed. These required disclosures should complement an entity’s accounting policy disclosure and, like the other disclosures required under the revenue standard, should be tailored and written in a manner that avoids boilerplate language. Questions that entities may consider helpful in developing the required disclosures related to performance obligations include the following:

What are the typical promises made to the customer?
Does the entity satisfy the performance obligation(s) upon shipment, upon delivery, as services are rendered, or upon completion of service?
If bill-and-hold arrangements are in place, have performance obligations associated with these contracts been disclosed?
How is the entity’s performance tied to its payment terms?
When is payment typically due?
Does the contract contain a significant financing component?
Is the consideration amount variable (e.g., because of return or refund rights)? If so, what drives the variability (e.g., assumptions and judgments)?
Is the estimate of variable consideration typically constrained? Is it consistent with estimates in prior periods?
Is there a performance obligation to arrange for another party to transfer goods or services (i.e., is the entity acting as an agent)?
Are there any material rights created by (1) favorable renewal terms or (2) customer loyalty or incentive programs?
Does the entity offer warranties? If so, are they assurance-type warranties or promised services?

15.2.4.1 Nature of Performance Obligations

ASC 606-10

50-12 An entity shall disclose information about its performance obligations in contracts with customers, including a description of all of the following:

When the entity typically satisfies its performance obligations (for example, upon shipment, upon delivery, as services are rendered, or upon completion of service) including when performance obligations are satisfied in a bill-and-hold arrangement
The significant payment terms (for example, when payment typically is due, whether the contract has a significant financing component, whether the consideration amount is variable, and whether the estimate of variable consideration is typically constrained in accordance with paragraphs 606-10-32-11 through 32-13)
The nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (that is, if the entity is acting as an agent)
Obligations for returns, refunds, and other similar obligations
Types of warranties and related obligations.

The illustrative disclosure below shows how an entity might provide the information required under ASC 606-10-50-12.

15.2.4.2 Disclosure of Revenue Recognized From Past Performance

In accordance with ASC 606-10-50-12A, an entity is required to disclose “out of period” adjustments attributable to changes in estimates. That is, if an estimate of variable consideration is adjusted (or a royalty is received after a right-to-use license has been transferred to the customer) and an adjustment to revenue is accordingly recognized in the period, the adjustment to revenue should be disclosed.

ASC 606-10

50-12A An entity shall disclose revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price).

The example below illustrates the application of ASC 606-10-50-12A.

Example 15-1

An entity has entered into a long-term construction contract that includes two forms of consideration: a fixed component of $3,000 and a potential performance bonus of $1,000. Therefore, the total potential consideration in this contract is $4,000. However, at contract inception, no variable consideration is included in the transaction price — that is, the transaction price is constrained (see Chapter 6 for further discussion on estimating and constraining the transaction price).

As of June 30, 20X8, the entity’s performance under the contract is 50 percent complete. Therefore, using the original estimate of the transaction price, the entity recognizes revenue of $1,500 (50 percent of $3,000).

Subsequently, on the basis of further information and estimation during the entity’s third-quarter close process, it is believed to be probable that the entity will receive the performance bonus. Therefore, the entity includes a cumulative catch-up adjustment in accordance with ASC 606-10-32-42 through 32-45 (see Chapter 6) and updates its transaction price to $4,000. As a result, on September 30, 20X8, in addition to recording the revenue associated with the incremental progress in performance achieved during the third quarter of 20X8, the entity records $500 in revenue to catch up during that quarter for the prior periods of performance under the contract.

In accordance with ASC 606-10-50-12A, this $500 cumulative catch-up adjustment should be disclosed. The entity may make this disclosure as follows:

The disclosure may be presented in a narrative format in the entity’s financial statements. For example, the entity could provide a narrative disclosure that states, “For the three-month period ending September 30, 20X8, the Company recognized $500 in revenue from performance obligations satisfied in prior periods; the cumulative catch-up adjustment resulted from a change in transaction price related to variable consideration that was constrained in the prior period.”12

15.2.4.3 Transaction Price Allocated to the Remaining Performance Obligations

The requirement in ASC 606-10-50-13 to provide information on the transaction price allocated to the remaining performance obligations is a new and challenging disclosure requirement; however, it is viewed as a critical disclosure by users of financial statements. Many refer to this disclosure as the “backlog” disclosure because it requires disclosure of expected future revenue to be recorded on partially completed contracts.

Specifically, ASC 606-10-50-13 requires disclosure as follows:

ASC 606-10

50-13 An entity shall disclose the following information about its remaining performance obligations:

The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period
An explanation of when the entity expects to recognize as revenue the amount disclosed in accordance with paragraph 606-10-50-13(a), which the entity shall disclose in either of the following ways:
1. On a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations
2. By using qualitative information.

For example, suppose that a calendar-year-end entity sells a two-year noncancelable magazine subscription to a customer on April 1, 20X8, for an up-front payment of $24. Therefore, as of December 31, 20X8, the entity has fulfilled nine months of the contract by delivering nine magazines to the customer and has recognized $9 of revenue. In accordance with ASC 606-10-50-13, the entity is required to include in its disclosures for December 31, 20X8, a quantitative disclosure of the remainder ($15) as the transaction price allocated to the remaining performance obligations since it expects to fulfill the remaining 15 months of the subscription and recognize the remaining $15 in revenue in future periods (i.e., in the years ending (1) December 31, 20X9, and (2) December 31, 20Y0).

Since determining when performance obligations are satisfied is a matter of judgment, as discussed above and in Section 15.3, the required disclosures related to remaining performance obligations may be subjective and difficult to determine. In light of this, entities could consider the following questions when developing their disclosures in accordance with ASC 606-10-50-13 through 50-15:

For existing contracts, do the entity’s disclosures accurately portray:
- The amount and expected timing of revenue to be recognized from the remaining performance obligations?
- Trends related to the amounts and expected timing of revenue to be recognized from the remaining performance obligations?
- Risks associated with expected future revenue? (Risks may increase if remaining performance obligations are not satisfied until much later.)
- The effect of changes in judgments or circumstances?
Is the timing of revenue recognition uncertain? (If so, qualitative disclosures may be appropriate.)
Are there contracts and associated performance obligations that have an original expected duration of one year or less? (See Section 15.2.4.3.1.)
Has the entity recognized revenue as invoiced in accordance with ASC 606-10-55-18? (See Section 15.2.4.3.1.)
Has the entity recognized sales- or usage-based royalties in exchange for a license of intellectual property (IP) in accordance with ASC 606-10-55-65 through 55-65B? (See Section 15.2.4.3.1.)
Has the entity allocated variable consideration entirely to a wholly unsatisfied performance obligation or distinct good or service that forms part of a series in accordance with ASC 606-10-32-40? (See Section 15.2.4.3.1.)
What is the relationship between the required disclosures about remaining performance obligations and other disclosures, such as MD&A disclosures and backlog disclosures in filings outside the financial statements, if applicable? (For example, entities that voluntarily disclose information about future revenues in backlog disclosures within filings outside the financial statements should consider where this information is coming from, whether it would satisfy the revenue standard’s disclosure requirements, and whether the appropriate controls for reviewing this information are already implemented and operating effectively.)

15.2.4.3.1 Election Not to Provide Certain Disclosures

Under ASC 606-10-50-16, certain nonpublic entities can elect not to provide the disclosures described in ASC 606-10-50-13 through 50-15. In addition, an election under ASC 606-10-50-14 or 50-14A is available to all entities for contracts in any of the following circumstances:

The original expected duration of the contract is one year or less.
Revenue from the satisfaction of the performance obligations is recognized in the amount invoiced in accordance with ASC 606-10-55-18 (see Section 8.5.8.1).
The contract provides for variable consideration constituting a sales- or usage-based royalty promised in exchange for a license of IP that is accounted for in accordance with ASC 606-10-55-65 through 55-65B (see Section 12.7).
Certain instances in which the guidance in ASC 606-10-32-40 is applied (see Section 7.5.4).

ASC 606-10

50-14 An entity need not disclose the information in paragraph 606-10-50-13 for a performance obligation if either of the following conditions is met:

The performance obligation is part of a contract that has an original expected duration of one year or less.
The entity recognizes revenue from the satisfaction of the performance obligation in accordance with paragraph 606-10-55-18.

50-14A An entity need not disclose the information in paragraph 606-10-50-13 for variable consideration for which either of the following conditions is met:

The variable consideration is a sales-based or usage-based royalty promised in exchange for a license of intellectual property accounted for in accordance with paragraphs 606-10-55-65 through 55-65B.
The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with paragraph 606-10-25-14(b), for which the criteria in paragraph 606-10-32-40 have been met.

50-14B The optional exemptions in paragraphs 606-10-50-14(b) and 606-10-50-14A shall not be applied to fixed consideration.

50-15 An entity shall disclose which optional exemptions in paragraphs 606-10-50-14 through 50-14A it is applying. In addition, an entity applying the optional exemptions in paragraphs 606-10-50-14 through 50-14A shall disclose the nature of the performance obligations, the remaining duration (see paragraph 606-10-25-3), and a description of the variable consideration (for example, the nature of the variability and how that variability will be resolved) that has been excluded from the information disclosed in accordance with paragraph 606-10- 50-13. This information shall include sufficient detail to enable users of financial statements to understand the remaining performance obligations that the entity excluded from the information disclosed in accordance with paragraph 606-10-50-13. In addition, an entity shall explain whether any consideration from contracts with customers is not included in the transaction price and, therefore, not included in the information disclosed in accordance with paragraph 606-10-50-13. For example, an estimate of the transaction price would not include any estimated amounts of variable consideration that are constrained (see paragraphs 606-10-32-11 through 32-13).

50-16 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide the disclosures in paragraphs 606-10-50-13 through 50-15.

As noted in ASC 606-10-50-14B above, if an entity elects to use the optional exemptions from the requirement to disclose the information described in ASC 606-10-50-13, the entity would still need to disclose the amount of fixed consideration allocated to outstanding performance obligations. That is, the entity would still need to disclose the amount of consideration allocated to outstanding performance obligations that is not contingent on the resolution of an uncertainty (i.e., not variable consideration).

The example below illustrates a situation in which an entity would not be required to disclose information about its remaining performance obligations because the contract is cancelable within one year or less without substantive penalty.

Example 15-2

On November 1, 20X0, Company A enters into a two-year term software license agreement to provide a right-to-use license of IP and postcontract customer support (PCS) during the contract term to Customer B in exchange for a fixed fee of $2,400, which is prepaid by B at contract inception. Customer B can terminate the contract for convenience at any time by providing 90 days’ notice to A in exchange for a pro rata refund of its prepaid consideration. For example, if B notifies A that it intends to terminate the agreement at the beginning of month 2, B would no longer be able to use the IP after the end of month 4 (i.e., 90 days later) but would receive a refund of $2,000 (i.e., consideration for months 5 through 24). As a result of the cancellation provision, the contract would be accounted for as a three-month term license (and PCS) with optional renewals. See Section 4.4.1.1.2.

Company A’s year-end is December 31. As of December 31, 20X0, A is not required to disclose information about its remaining performance obligations in its contract with B in accordance with the disclosure requirement in ASC 606-10-50-13. This is because ASC 606-10-50-14 states that an entity does not need to disclose information about its remaining performance obligations (as required under ASC 606-10-50-13) if the performance obligation is part of a contract that has an original expected duration of one year or less.

Although A’s contract with B has a stated contract term of two years, the contract is legally enforceable for only three months because of B’s ability to terminate the contract for convenience with no penalty by providing 90 days’ notice. Therefore, for purposes of applying the guidance and disclosure requirements in ASC 606, the contract term is only three months. If the election is not made and B has not given notice to cancel the contract, the remaining performance obligation that could be included in the disclosure would be limited to the three-month obligation to provide PCS.

In addition, because $2,100 of the up-front consideration received from B is related to potential contract renewals that are, in effect, optional purchases (i.e., consideration for months 4 through 24), that amount should initially be presented as a deposit liability (or similar liability) rather than a contract liability. That is, on November 1, 20X0, the $2,100 does not represent A’s obligation to transfer goods or services to a customer for which the entity has received consideration (or for which the amount is due) from the customer. This is because A is not obligated to transfer additional term licenses and PCS to the customer until the customer exercises its option to renew the contract (by electing not to terminate the contract).

This presentation and the disclosure requirements could be the same for other contracts that include cancellation provisions with no substantive termination penalties or pro rata refund provisions (e.g., a contract to provide two years of consulting services or SaaS for $2,400 that is cancelable without a substantive penalty by giving 90 days’ notice).

15.2.4.3.2 Illustrative Examples

The Codification examples below illustrate how an entity could disclose its allocation of the transaction price to the remaining performance obligations to meet the requirements of ASC 606-10-50-13.

ASC 606-10

Example 42 — Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations

55-298 On June 30, 20X7, an entity enters into three contracts (Contracts A, B, and C) with separate customers to provide services. Each contract has a two-year noncancellable term. The entity considers the guidance in paragraphs 606-10-50-13 through 50-15 in determining the information in each contract to be included in the disclosure of the transaction price allocated to the remaining performance obligations at December 31, 20X7.

Contract A

55-299 Cleaning services are to be provided over the next two years typically at least once per month. For services provided, the customer pays an hourly rate of $25.

55-300 Because the entity bills a fixed amount for each hour of service provided, the entity has a right to invoice the customer in the amount that corresponds directly with the value of the entity’s performance completed to date in accordance with paragraph 606-10-55-18. Consequently, the entity could elect to apply the optional exemption in paragraph 606-10-50-14(b). If the entity elects not to disclose the transaction price allocated to remaining performance obligations for Contract A, the entity would disclose that it has applied the optional exemption in paragraph 606-10-50-14(b). The entity also would disclose the nature of the performance obligation, the remaining duration, and a description of the variable consideration that has been excluded from the disclosure of remaining performance obligations in accordance with paragraph 606-10-50-15.

Contract B

55-301 Cleaning services and lawn maintenance services are to be provided as and when needed with a maximum of four visits per month over the next two years. The customer pays a fixed price of $400 per month for both services. The entity measures its progress toward complete satisfaction of the performance obligation using a time-based measure.

55-302 The entity discloses the amount of the transaction price that has not yet been recognized as revenue in a table with quantitative time bands that illustrates when the entity expects to recognize the amount as revenue. The information for Contract B included in the overall disclosure is as follows.

Contract C

55-303 Cleaning services are to be provided as and when needed over the next two years. The customer pays fixed consideration of $100 per month plus a one-time variable consideration payment ranging from $0–$1,000 corresponding to a one-time regulatory review and certification of the customer’s facility (that is, a performance bonus). The entity estimates that it will be entitled to $750 of the variable consideration. On the basis of the entity’s assessment of the factors in paragraph 606-10-32-12, the entity includes its estimate of $750 of variable consideration in the transaction price because it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The entity measures its progress toward complete satisfaction of the performance obligation using a time-based measure.

55-304 The entity discloses the amount of the transaction price that has not yet been recognized as revenue in a table with quantitative time bands that illustrates when the entity expects to recognize the amount as revenue. The entity also includes a qualitative discussion about any significant variable consideration that is not included in the disclosure. The information for Contract C included in the overall disclosure is as follows.

55-305 In addition, in accordance with paragraph 606-10-50-15, the entity discloses qualitatively that part of the performance bonus has been excluded from the disclosure because it was not included in the transaction price. That part of the performance bonus was excluded from the transaction price in accordance with the guidance on constraining estimates of variable consideration.

55-305A The entity does not meet the criteria to apply the optional exemption in paragraph 606-10-50-14A because the monthly consideration is fixed and the variable consideration does not meet the condition in paragraph 606-10-50-14A(b).

Example 43 — Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations — Qualitative Disclosure

55-306 On January 1, 20X2, an entity enters into a contract with a customer to construct a commercial building for fixed consideration of $10 million. The construction of the building is a single performance obligation that the entity satisfies over time. As of December 31, 20X2, the entity has recognized $3.2 million of revenue. The entity estimates that construction will be completed in 20X3 but it is possible that the project will be completed in the first half of 20X4.

55-307 At December 31, 20X2, the entity discloses the amount of the transaction price that has not yet been recognized as revenue in its disclosure of the transaction price allocated to the remaining performance obligations. The entity also discloses an explanation of when the entity expects to recognize that amount as revenue. The explanation can be disclosed either on a quantitative basis using time bands that are most appropriate for the duration of the remaining performance obligation or by providing a qualitative explanation. Because the entity is uncertain about the timing of revenue recognition, the entity discloses this information qualitatively as follows:

As of December 31, 20X2, the aggregate amount of the transaction price allocated to the remaining performance obligation is $6.8 million, and the entity will recognize this revenue as the building is completed, which is expected to occur over the next 12–18 months.

The illustrative disclosure below further demonstrates how an entity may provide a quantitative disclosure of the transaction price to be allocated to the remaining performance obligations.13

15.2.5 Impact of Termination Provisions on Disclosure

Termination provisions may significantly affect revenue recognition for entities. In addition, contracts with termination provisions may affect an entity’s financial statement disclosures.

15.2.5.1 Effect of Termination Provisions on Disclosures Related to Remaining Performance Obligations

In an arrangement with a termination provision, an entity should not include amounts that are subject to termination without penalty in its required disclosures related to remaining performance obligations. Under the requirements outlined in ASC 606-10-50-13, an entity must disclose the “aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied . . . as of the end of the reporting period.”

When arrangements include provisions for termination without penalty, the amounts excluded from the assessment under step 1 of ASC 606 are, in effect, optional purchases. Any amounts that are paid or due are thus accounted for as a refund liability (or similar liability) and not a contract liability. Because these amounts are related to a cancelable arrangement for which a contract does not exist (as determined under step 1), they do not represent any part of the transaction price (as determined under step 3) related to unsatisfied performance obligations (which would be identified as part of step 2).

15.2.5.2 Supplemental Disclosures Related to Termination Provisions

An entity is not necessarily precluded from separately disclosing the amounts of refund liability within the financial statement notes that discuss remaining performance obligations. An entity must not indicate that the refund liabilities are part of the transaction price related to its remaining performance obligations. However, the entity generally would not be precluded from specifying the refund liability in its financial statement notes if it properly describes this GAAP amount.

For example, an entity might provide the disclosure below.

Illustrative Disclosure — Transaction Price Allocated to Remaining Performance Obligations

As of December 31, 20X7, approximately $4.5 million of revenue is expected to be recognized from remaining performance obligations. The Company expects to recognize revenue on approximately 65 percent of these amounts over the next 12 months, with the remaining balance recognized thereafter.

In addition, approximately $0.8 million is recorded as a refund liability in the Company’s consolidated balance sheet that is not included in the above remaining performance obligations. This liability is generally related to amounts received from customers but is associated with termination provisions for arrangements that are cancelable at the customer’s discretion (and the Company would be required to refund such amounts).

15.2.5.3 Effect of Termination Provisions on Contract Balance Disclosures

When some of an entity’s arrangements contain termination provisions, any amounts received that are not associated with contracts identified under step 1 of ASC 606 should be recorded as a separate liability apart from the contract liability. Therefore, the entity would not be permitted to include the refund liability in its contract liability balance disclosures required by ASC 606-10-50-8. However, if the entity chooses to present a full rollforward of its contract liability, one approach may be to reclassify the refund liability as a contract liability when the termination right lapses (i.e., when the contract is no longer cancelable without penalty and the amounts are recharacterized as deferred revenue). Under this approach, the reclassification of the refund liability as a contract liability would be presented in a manner consistent with the illustrative disclosure in Section 15.2.3.5.2.

Footnotes

See footnote 5.

In December 2016, the FASB issued ASU 2016-20, which clarified (by moving the content previously in ASC 606-10-50-8(c) to ASC 606-10-50-12A) that “the disclosure of revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods applies to all performance obligations and is not limited to performance obligations with corresponding contract balances.”

For more information about the November 7, 2016, TRG meeting, see TRG Agenda Paper 60 and Deloitte’s November 2016 TRG Snapshot.

The illustrative disclosure example above demonstrates how an entity might provide information in its interim financial statements. When considering their annual financial statements, most entities provide an annual disclosure of revenue recognized in the current reporting period from performance obligations satisfied (or partially satisfied) in the previous annual reporting period.

This illustrative disclosure includes the optional exemptions applied in ASC 606-10-50-14 and 50-14A. In addition to disclosing the optional exemptions applied, an entity should disclose the qualitative information required in ASC 606-10-50-15.

15.3 Significant Judgments

The table below summarizes the disclosure requirements discussed in this section through Section 15.3.2, including the disclosures that a nonpublic entity may elect not to apply as well as required interim disclosures.

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)
Significant judgments and estimates	Qualitative information about determining the timing of: Performance obligations satisfied over time (e.g., methods of measuring progress, why methods are representative of transfer of goods or services, judgments used in the evaluation of when a customer obtains control of goods or services).	Yes14	No
	Performance obligations satisfied at a point in time — specifically, the significant judgments used in the evaluation of when a customer obtains control.	Yes	No
	Qualitative and quantitative information15 about:
	Determining the transaction price (e.g., estimating variable consideration, adjusting for the time value of money, noncash consideration).	Yes	No
	Constraining estimates of variable consideration.	No	No
	Allocating the transaction price, including estimating stand-alone selling prices and allocating discounts and variable consideration.	Yes	No
	Measuring obligations for returns, refunds, and other similar obligations.	Yes	No

An entity is required to disclose information about the judgments, and changes in judgments, it made in applying ASC 606 to help financial statement users better understand the application of its accounting policies as well as the assumptions and methods used. Questions that entities could consider in implementing the revenue standard’s disclosure requirements related to significant judgments and estimates include the following:

Are all significant judgments and estimates related to variable consideration, significant financing components, or noncash consideration included in the disclosures?
Are all significant judgments and estimates related to the determination of stand-alone selling prices included in the disclosures?
Has the entity adequately disclosed information about the methods, inputs, and assumptions used in the annual financial statements?
- What judgments does the entity make in selecting an appropriate measure of progress?
- What estimates does the entity make in determining the level of completion?
- What information does management consider to determine when performance obligations are satisfied?
Has the entity adequately described significant judgments and estimates related to (1) performance obligations satisfied at a point in time, (2) performance obligations satisfied over time, and (3) the transaction price and amounts allocated to performance obligations?

ASC 606-10

50-17 An entity shall disclose the judgments, and changes in the judgments, made in applying the guidance in this Topic that significantly affect the determination of the amount and timing of revenue from contracts with customers. In particular, an entity shall explain the judgments, and changes in the judgments, used in determining both of the following:

The timing of satisfaction of performance obligations (see paragraphs 606-10-50-18 through 50-19)
The transaction price and the amounts allocated to performance obligations (see paragraph 606-10-50-20).

The illustration below summarizes the requirements in ASC 606 related to the disclosure of significant judgments about revenue.

15.3.1 Determining the Timing of Satisfaction of Performance Obligations (i.e., the Timing of Revenue Recognition)

ASC 606-10

50-18 For performance obligations that an entity satisfies over time, an entity shall disclose both of the following:

The methods used to recognize revenue (for example, a description of the output methods or input methods used and how those methods are applied)
An explanation of why the methods used provide a faithful depiction of the transfer of goods or services.

50-19 For performance obligations satisfied at a point in time, an entity shall disclose the significant judgments made in evaluating when a customer obtains control of promised goods or services.

50-21 An entity except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide any or all of the following disclosures:

Paragraph 606-10-50-18(b), which states that an entity shall disclose, for performance obligations satisfied over time, an explanation of why the methods used to recognize revenue provide a faithful depiction of the transfer of goods or services to a customer
Paragraph 606-10-50-19, which states that an entity shall disclose, for performance obligations satisfied at a point in time, the significant judgments made in evaluating when a customer obtains control of promised goods or services . . . .

15.3.2 Determining the Transaction Price and the Amounts Allocated to Performance Obligations

ASC 606-10

50-20 An entity shall disclose information about the methods, inputs, and assumptions used for all of the following:

Determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money, and measuring noncash consideration
Assessing whether an estimate of variable consideration is constrained
Allocating the transaction price, including estimating standalone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable)
Measuring obligations for returns, refunds, and other similar obligations.

c. Paragraph 606-10-50-20, which states that an entity shall disclose the methods, inputs, and assumptions used to determine the transaction price and to allocate the transaction price. However, if an entity elects not to provide the disclosures in paragraph 606-10-50-20, the entity shall provide the disclosure in paragraph 606-10-50-20(b), which states that an entity shall disclose the methods, inputs, and assumptions used to assess whether an estimate of variable consideration is constrained.

Footnotes

See footnote 6.

See footnote 7.

15.4 Contract Costs

The table below summarizes the disclosure requirements discussed in this section, including the disclosures that a nonpublic entity may elect not to apply as well as required interim disclosures.

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)
Contract costs	Qualitative information about: Judgments the entity made in determining the amount of the costs incurred to obtain or fulfill a contract. The method the entity uses to determine the amortization for each reporting period.	Yes	No
		Yes	No
	Quantitative information about: The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract, by main category of asset. The amount of amortization and any impairment losses recognized in the reporting period.	Yes	No
		Yes	No

Entities are required to disclose significant judgments related to contract costs to help users of financial statements understand the types of costs that the entity has recognized as assets and how those assets are subsequently amortized or impaired.

ASC 340-40

50-1 Consistent with the overall disclosure objective in paragraph 606-10-50-1 and the guidance in paragraphs 606-10-50-2 through 50-3, an entity shall provide the following disclosures of assets recognized from the costs to obtain or fulfill a contract with a customer in accordance with paragraphs 340-40-25-1 or 340-40-25-5.

50-2 An entity shall describe both of the following:

The judgments made in determining the amount of the costs incurred to obtain or fulfill a contract with a customer (in accordance with paragraph 340-40-25-1 or 340-40-25-5)
The method it uses to determine the amortization for each reporting period.

50-3 An entity shall disclose all of the following:

The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract with a customer (in accordance with paragraph 340-40-25-1 or 340-40-25-5), by main category of asset (for example, costs to obtain contracts with customers, precontract costs, and setup costs)
The amount of amortization and any impairment losses recognized in the reporting period.

50-4 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission, may elect not to provide the disclosures in paragraphs 340-40-50-2 through 50-3.

The illustrative disclosure below shows how an entity may disclose the qualitative information required under ASC 340-40-50-1.

15.5 Disclosure of Practical Expedients Used

The table below summarizes the disclosure requirements discussed in this section, including the disclosures that a nonpublic entity may elect not to apply as well as required interim disclosures.

Category	Disclosure Requirements	Election Available to Nonpublic Entities	Interim Requirement (ASC 270)
Practical expedients	Disclosure of practical expedients used.	Yes16	No

A number of practical expedients are available to both public business entities (PBEs) and nonpublic entities in the application of the recognition and measurement principles within the standard. Specific disclosures similar to accounting policy disclosures are required if an entity elects certain of these practical expedients. For example, an entity is required to disclose that it is electing the practical expedients related to (1) significant financing components (as discussed further in Section 6.4.1), (2) contract costs (as discussed further in Chapter 13), and (3) disclosures for remaining performance obligations (as discussed further in Section 15.2.4.3.1).

ASC 606-10

50-22 If an entity elects to use the practical expedient in either paragraph 606-10-32-18 (about the existence of a significant financing component) or paragraph 340-40-25-4 (about the incremental costs of obtaining a contract), the entity shall disclose that fact.

50-23 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide the disclosures in paragraph 606-10-50-22.

ASC 340-40

50-5 If an entity elects to use the practical expedient in paragraph 340-40-25-4 on the incremental costs of obtaining a contract, the entity shall disclose that fact.

50-6 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission, may elect not to provide the disclosure in paragraph 340-40-50-5.

ASC 952-606

50-1 If an entity elects to use the practical expedient in paragraph 952-606-25-2, the entity shall disclose that fact.

50-2 An entity that makes the accounting policy election to recognize pre-opening services as a single performance obligation as described in paragraph 952-606-25-3 shall disclose that fact.

Further, the amendments in ASU 2016-10, ASU 2016-12, and ASU 2021-02 include additional practical expedients related to the following:

Shipping and handling activities — ASU 2016-10 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 as a promised service. The ASU also explains that shipping and handling activities performed before the control of a product is transferred do not constitute a promised service to the customer in the contract (i.e., they represent fulfillment costs). The election to account for shipping and handling services as a promised good or service or a fulfillment cost typically should not apply to companies 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. Refer to Section 5.2.4.3 for further information.

An entity that elects to apply this accounting policy is required to provide the accounting policy disclosures in ASC 235-10-50-1 through 50-6.
Sales tax presentation — ASU 2016-12 permits entities to exclude from the transaction price all sales taxes that are assessed by a governmental authority and that are “imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes).” However, such an accounting policy election does not apply to taxes assessed on “an entity’s total gross receipts or imposed during the inventory procurement process.” Refer to Section 6.7 for further information.

An entity that elects to exclude sales taxes is required to provide the accounting policy disclosures in ASC 235-10-50-1 through 50-6.
Private-company franchisor — ASU 2021-02 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. Refer to Section 5.3.5 for further information.

A private-company franchisor that elects to use the practical expedient is required to provide the disclosure in ASC 952-606-50-1. In addition, a private-company franchisor that elects to use the practical expedient and to account for preopening services as a single performance obligation is required to provide the disclosure in ASC 952-606-50-2.

If entities elect one or more practical expedients, they should disclose that fact in their financial statements. Entities should consider the appropriate placement for the disclosure of their use of practical expedients. For example, some or all of the elections might appropriately be included in “Significant Accounting Policies” (i.e., footnote 1), whereas it may be appropriate to include other elections in the revenue recognition footnote. The guidance does not dictate where such disclosures should be included; it only indicates that they must be included.

The illustrative disclosure below shows how an entity may disclose that management has elected certain practical expedients available under the revenue standard.

The illustrative disclosure below shows how an entity may describe its use of the practical expedient related to contract costs in accordance with ASC 606-10-50-22.

Footnotes

See footnote 8.

Chapter 16 — Nonpublic-Entity Elections

16.2 Disclosure Elections

The Background Information and Basis for Conclusions of ASU 2014-09 explains that one of the goals of ASC 606 is to improve the revenue disclosure guidance under U.S. GAAP. As a result of the disclosure requirements in ASC 606 (which are discussed in detail in Chapter 15), financial statement users will have better information to help them make financial decisions. However, when the FASB was developing the revenue standard, it received feedback from nonpublic entities related to (1) the increased costs that nonpublic entities would incur to meet the expanded disclosure requirements and (2) questions about why nonpublic entities should be required to provide the same level of disclosure as public entities given that users of nonpublic-entity financial statements, typically debt holders, have greater access to management. The FASB considered the costs and benefits of its disclosure package and decided to provide various relief to nonpublic entities.

The table below summarizes the disclosures that a nonpublic entity may elect not to apply (the ASU’s disclosure requirements are covered in Chapter 15 as well as in the left column below).

Disclosure Requirement	Election for Nonpublic Entities
Present or disclose revenue and any impairment losses recognized separately from other sources of revenue or impairment losses from other contracts. (ASC 606-10-50-4; see Section 15.2)	None.
A disaggregation of revenue to “depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors” (the ASU also provides implementation guidance). (ASC 606-10-50-5 and 50-6; see Section 15.2.2)	An entity may elect not to provide the quantitative disclosure but should, at a minimum, provide revenue disaggregated according to the timing of transfer of goods or services (e.g., goods transferred at a point in time and services transferred over time). (ASC 606-10-50-7; see Section 15.2.2)
Information about (1) contract assets and contract liabilities (including changes in those balances) and the amount of revenue recognized in the current period that was previously recognized as a contract liability (ASC 606-10-50-8 through 50-10) and (2) the amount of revenue recognized that is related to performance obligations satisfied in prior periods (ASC 606-10-50-12A). (See Sections 15.2.3 and 15.2.4)	An entity may elect not to provide the disclosures but should disclose the opening and closing balances of receivables, contract assets, and contract liabilities (if not separately presented or disclosed). (ASC 606-10-50-11; see Section 15.2.3.3)
Information about performance obligations (e.g., types of goods or services, significant payment terms, typical timing of satisfying obligations, and other provisions). (ASC 606-10-50-12; see Section 15.2.4)	None.
Information about an entity’s transaction price allocated to the remaining performance obligations, including (in certain circumstances) the “aggregate amount of the transaction price allocated to the [remaining] performance obligations” and when the entity expects to recognize that amount as revenue. (ASC 606-10-50-13 through 50-15; see Section 15.2.4.3)	An entity may elect not to provide these disclosures. (ASC 606-10-50-16; see Section 15.2.4.3)
A description of the significant judgments, and changes in those judgments, that affect the amount and timing of revenue recognition (including information about the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the transaction price to performance obligations). (ASC 606-10-50-17 through 50-20; see Sections 15.3 through 15.3.2)	In accordance with ASC 606-10-50-21, an entity may elect not to provide any or all of the following disclosures: An explanation of why the methods used to recognize revenue provide a faithful depiction of the transfer of goods or services to the customer. For performance obligations satisfied at a point in time, the significant judgments used in evaluating when a customer obtains control. The methods, inputs, and assumptions used to determine the transaction price, except that an entity must disclose the methods, inputs, and assumptions used to assess whether an estimate of variable consideration is constrained. (ASC 606-10-50-21; see Section 15.3.2)
Information about an entity’s accounting for costs of obtaining or fulfilling a contract (including account balances, judgments, amortization methods and amounts, and impairment losses). (ASC 340-40-50-2 and 50-3; see Section 15.4)	An entity may elect not to provide these disclosures. (ASC 340-40-50-4; see Section 15.4)
Information about the entity’s policy decisions (i.e., when the entity used the practical expedients allowed by the ASU). (ASC 606-10-50-14 through 50-16, ASC 606-10-50-22, and ASC 340-40-50-5; see Sections 6.4.1, 15.2.4.3.1, and 15.5)	An entity may elect not to provide these disclosures. (ASC 606-10-50-14 through 50-16, ASC 606-10-50-23, and ASC 340-40-50-6; see Sections 15.2.4.3.1 and 15.5). However, private-company franchisors that elect to use the practical expedient and policy election in ASC 952-606-25-2 and 25-3 must disclose those elections (ASC 952-606-50-1 and 50-2; see Section 5.3.5).

Connecting the Dots

Interim reporting requirements, including those related to disclosure, are outlined in ASC 270. In particular, public entities are required to disclose, at a minimum, the financial information required under ASC 270-10-50-1. Revenue disclosures are specifically addressed in ASC 270-10-50-1(a), which requires the disclosure of “[s]ales or gross revenues, provision for income taxes, net income, and comprehensive income.” Section B of ASU 2014-09, Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables, expands this interim reporting requirement by adding the following guidance:

50-1A Consistent with paragraph 270-10-50-1, a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission, shall disclose all of the following information about revenue from contracts with customers consistent with the guidance in Topic 606:

A disaggregation of revenue for the period, see paragraphs 606-10-50-5 through 50-6 and paragraphs 606-10-55-89 through 55-91.
The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers (if not otherwise separately presented or disclosed), see paragraph 606-10-50-8(a).
Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period, see paragraph 606-10-50-8(b).
Revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price), see paragraph 606-10-50-12A.
Information about the entity’s remaining performance obligations as of the end of the reporting period, see paragraphs 606-10-50-13 through 50-15.

Many nonpublic entities are not subject to interim financial reporting requirements and therefore would not be required to comply with the interim disclosure requirements in ASC 270. In addition, the same entities that are determined to be nonpublic for purposes of applying ASC 606 are outside the scope of the requirements in ASC 270-10-50-1A. As a result, even if a nonpublic entity produces interim financial information, it is not required to provide the disclosures outlined above that are required to be presented for public entities.

Chapter 17 — Sales of Nonfinancial Assets Within the Scope of ASC 610-20

17.1 Overview and Background

ASC 610-20

05-1 This Subtopic provides guidance on the recognition of gains and losses on transfers of nonfinancial assets and in substance nonfinancial assets to counterparties that are not customers. Although the guidance in this Subtopic applies to contracts with noncustomers, it refers to revenue recognition principles in Topic 606 on revenue from contracts with customers.

ASU 2014-09 provides guidance on the recognition and measurement of transfers of nonfinancial assets, which is codified in ASC 610-20. The revenue standard amends or supersedes the guidance in ASC 350 and ASC 360 on determining the gain or loss recognized upon the derecognition of nonfinancial assets, including in-substance nonfinancial assets, that are not an output of an entity’s ordinary activities, such as sales of (1) property, plant, and equipment; (2) real estate; or (3) intangible assets. ASC 610-20 does not amend or supersede guidance that addresses how to determine the gain or loss on the derecognition of a subsidiary or group of assets that meets the definition of a business. Gains or losses associated with these transactions will continue to be determined in accordance with ASC 810-10-40.

In response to stakeholder feedback indicating that (1) the meaning of the term “in-substance nonfinancial asset” is unclear because the revenue standard does not define it and (2) the scope of the guidance on nonfinancial assets is confusing and complex and does not specify how a partial sales transaction should be accounted for or which model entities should apply, the FASB issued ASU 2017-05, which clarifies the scope of ASC 610-20 as well as the accounting for partial sales of nonfinancial assets. The newly established guidance in ASC 610-20 (which consists of guidance in ASU 2014-09, as amended by ASU 2017-05) conforms the derecognition guidance on nonfinancial assets with the revenue model in ASC 606.

17.5 Exchanges of Nonfinancial Assets for Noncontrolling Interests

An entity should apply the guidance in ASC 610-20 to account for the contribution of a nonfinancial asset in exchange for a noncontrolling ownership interest in an investee.

In accordance with ASC 610-20-32-4, “the entity shall consider the noncontrolling interest received from the counterparty as noncash consideration and shall measure it in accordance with the guidance in paragraphs 606-10-32-21 through 32-24.” In a manner consistent with the guidance in ASC 606-10-32-21 through 32-24, the entity would measure the noncontrolling interest at fair value at contract inception. Any gain or loss resulting from the sale or transfer of the nonfinancial asset should be recognized when the legal entity receiving the nonfinancial asset obtains control of the asset (as determined on the basis of an evaluation of the indicators in ASC 606-10-25-30). For additional information about recognizing gains or losses on the sale (or contribution) of nonfinancial assets, see Section 17.4.

Example 17-5

Investor A and Investor B form a real estate venture. Investor A contributes cash in exchange for a 50 percent interest in the venture; B contributes real estate in exchange for the other 50 percent of the venture and receives the cash contribution made by A. Since the real estate is neither a business nor a nonprofit activity, the transaction is within the scope of ASC 610-20. First, B considers whether, after the transaction, it retains a controlling interest in the joint venture under ASC 810 and concludes that it does not. Next, B determines that control of the real estate has been transferred under ASC 606. Accordingly, B derecognizes the real estate, recognizes the full gain or loss for the difference between the consideration received (i.e., both the cash consideration and the fair value of the 50 percent interest in the venture) and the carrying amount of the assets sold, and records its investment in the real estate venture at fair value.

Chapter 18 — SEC, FASB, and Other Stakeholder Activities

18.2 SEC Activities

The SEC is a critical stakeholder given its role in both standard setting and regulating the U.S. capital markets. On August 18, 2017, the SEC staff issued SAB 116, which conforms existing SEC staff guidance with the guidance in ASC 606. As further discussed below, SAB 116 (1) supersedes both SAB Topic 13 on revenue recognition and SAB Topic 8 on retail companies and (2) modifies SAB Topic 11.A on the disclosure of operating-differential subsidies.

In addition, the SEC updated its interpretive guidance on bill-and-hold arrangements and vaccine stockpiles.

18.2.1 SAB 116 Modifications to Previously Issued SEC Staff Guidance

SAB 116 modifies previously issued SEC staff guidance as follows:

SAB Topic 13 — SAB 116 superseded SAB Topic 13 upon the adoption of ASC 606. SAB 116 notes that ASC 606 “provides a single set of revenue recognition principles governing all contracts with customers and supersedes the existing revenue recognition framework in [ASC 605], which eliminates the need for [SAB] Topic 13.” SAB 116 also states that upon adoption of ASC 606, “a registrant should no longer look to the guidance in Securities Exchange Act Release No. 23507 and Accounting and Auditing Enforcement Release No. 108 . . . for criteria to be met in order to recognize revenue” on a bill-and-hold basis.

SEC registrants should note that the bill-and-hold guidance in SAB Topic 13 (which was applicable until the adoption of ASC 606) was more detailed than the bill-and-hold guidance in ASC 606. The most noticeable distinction is that SAB Topic 13 required bill-and-hold arrangements to include a fixed delivery schedule, whereas ASC 606 does not include this requirement.
SAB Topic 8 — SAB 116 superseded SAB Topic 8 upon the adoption of ASC 606. SAB 116 notes that SAB Topic 8, which was specific to retail companies, previously provided the SEC staff’s views on “the prohibition of presenting sales of a leased or licensed department within a retailer’s statement of comprehensive income consistent with the principles codified [in ASC 605]” and “the disclosure of finance charges imposed by retailers on credit sales.” SAB 116 further states that the guidance in ASC 606 on the identification of performance obligations in a contract with a customer, the presentation of revenue as a principal (on a gross basis) or as an agent (on a net basis), and the presentation of the effects of financing in the statement of comprehensive income “eliminates the need for the guidance in [SAB] Topic 8.”
SAB Topic 11.A — SAB 116 modifies SAB Topic 11.A to clarify that “revenues from operating-differential subsidies presented under a revenue caption should be presented separately from revenue from contracts with customers accounted for under [ASC 606].” Previously, as noted in SAB 116, SAB Topic 11.A “provided the [SEC] staff’s view that revenues from operating-differential subsidies be presented as a separate line item in the income statement either under a revenue caption or as credit in the costs and expenses section.”

On November 22, 2017, the FASB issued ASU 2017-14, which rescinds certain SEC staff guidance in light of SAB 116. For additional information about ASU 2017-14, see Section 18.3.3.8.

18.2.2 Guidance on Recognizing Revenue From Vaccines Placed in a Federal Government Stockpile

On August 18, 2017, the SEC issued an interpretive release (the “2017 release”) to update the guidance in its 2005 release Commission Guidance Regarding Accounting for Sales of Vaccines and Bioterror Countermeasures to the Federal Government for Placement Into the Pediatric Vaccine Stockpile or the Strategic National Stockpile. The update was provided to bring existing guidance into conformity with ASC 606. Under the guidance in the 2017 release, vaccine manufacturers should recognize revenue when vaccines are placed into U.S. government stockpile programs because control of the vaccines has been transferred to the customer. However, these entities also need to evaluate whether storage, maintenance, or other promised goods or services associated with vaccine stockpiles are separate performance obligations. The guidance in the 2017 release applies only to the vaccine stockpile programs discussed in that release and is not applicable to any other transactions.

On November 22, 2017, the FASB issued ASU 2017-14, which rescinds certain SEC guidance in legacy U.S. GAAP and codifies in ASC 606-10-S25-1 the text of the 2017 release. For additional information about ASU 2017-14, see Section 18.3.3.8.

18.2.3 Removal of Certain SEC Observer Comments

ASU 2016-11 and ASU 2017-13 removed certain SEC observer comments from the Codification (i.e., treated them as no longer effective) upon the adoption of the revenue standard. The removed SEC observer comments include ASC 605-45-S99-1 (formerly EITF Issue 00-10), which states that (1) shipping and handling fees billed to a customer are required to be classified as revenue and (2) the classification of shipping and handling costs incurred by the seller is an accounting policy decision. It is important to note that with the removal of this comment, we generally believe that it will remain appropriate to present shipping and handling within costs of goods sold because they are considered to be fulfillment costs. However, in certain instances, it may be acceptable for an entity to present shipping and handling outside of costs of goods sold. The presentation of shipping and handling costs was discussed by Barry Kanczuker, associate chief accountant in the SEC’s Office of the Chief Accountant, in a speech at the 2017 AICPA Conference on Current SEC and PCAOB Developments, in which he stated:

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.

See Sections 18.3.3.4 and 18.3.3.7 for further discussion of ASU 2016-11 and ASU 2017-13, respectively, which detail the rescission of certain SEC guidance.

18.3 FASB Activities

18.3.1 TRG Update

Upon issuing the revenue standard, the FASB and IASB formed a joint revenue TRG. The purpose of the TRG is not to issue guidance but instead to seek and provide feedback on potential issues related to implementation of the revenue standard. By analyzing and discussing potential implementation issues, the TRG helps the boards determine whether they need to take additional action, such as providing clarification or issuing other guidance. The TRG comprises financial statement preparers, auditors, and users from a “wide spectrum of industries, geographic locations and public and private organizations,” and board members of the FASB and IASB attend the TRG’s meetings. In addition, representatives from the SEC, PCAOB, IOSCO, and AICPA are invited to observe the meetings.

In January 2016, the IASB announced that it completed its decision-making process related to clarifying the revenue standard and that it no longer plans to schedule TRG meetings for IFRS constituents. Therefore, starting in April 2016, the TRG meetings were FASB-only, but members of the IASB could participate as observers. However, it is important for consistency and comparability of financial information that both domestic registrants filing under U.S. GAAP and foreign private issuers filing under IFRS Accounting Standards keep abreast of TRG developments in the United States in a manner consistent with comments made by then SEC Deputy Chief Accountant Wesley Bricker at the December 2015 AICPA Conference on Current SEC and PCAOB Developments.

At the November 2016 TRG meeting — the last TRG meeting — the FASB announced that no future TRG meetings were scheduled. However, the Board encouraged stakeholders to submit implementation questions either directly to the TRG or through the FASB’s technical inquiry process.

The FASB maintains a full list of questions discussed by the TRG, with links to the relevant TRG Agenda Papers.

18.3.2 FASB Staff’s Revenue Recognition Implementation Q&As

In January 2020, the FASB issued its staff’s Revenue Recognition Implementation Q&As (the “Implementation Q&As”). Compiled from TRG Agenda Papers and other previously issued materials, the FASB staff’s Implementation Q&As are presented in a user-friendly format.

For a topical listing of issues addressed in the Implementation Q&As, see Appendix C.

18.3.3 Final ASUs

As noted above, the FASB has issued a number of ASUs to amend and clarify the guidance in the revenue standard. Largely the result of feedback provided by the TRG, the Board’s updates to the revenue standard are discussed throughout this Roadmap as applicable.

18.3.3.1 ASU 2015-14 on Deferral of the Effective Date

On August 12, 2015, the FASB issued ASU 2015-14, which deferred the effective date of the Board’s revenue standard, ASU 2014-09, by one year for all entities and permitted early adoption on a limited basis. Specifically:

For PBEs, the standard became effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption was permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual periods.
For nonpublic entities, the standard became effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Nonpublic entities were permitted to early adopt the standard as of the following:
- Annual reporting periods beginning after December 15, 2016, including interim periods.
- Annual reporting periods beginning after December 15, 2016, and interim periods within annual reporting periods beginning one year after the annual reporting period in which the standard was initially applied.

On June 3, 2020, the FASB issued ASU 2020-05, which permitted nonpublic entities (i.e., entities that are not PBEs) that had not yet issued their financial statements or made financial statements available for issuance as of June 3, 2020, to adopt ASC 606 for annual reporting periods beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020. See Section 18.3.3.12 for further details.

18.3.3.2 ASU 2016-08 on Principal-Versus-Agent Considerations

On March 17, 2016, the FASB issued ASU 2016-08, which amended the principal-versus-agent implementation guidance and illustrations in the revenue standard. The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle.

Key provisions of the ASU include:

Assessing the nature of the entity’s promise to the customer — When a revenue transaction involves a third party in providing goods or services to a customer, the entity must determine whether the nature of its promise to the customer is to provide the underlying goods or services (i.e., the entity is the principal in the transaction) or to arrange for the third party to provide the underlying goods or services (i.e., the entity is the agent in the transaction). See Section 10.1 for further details.
Identifying the specified goods or services — The ASU clarified that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. As defined in the ASU, a specified good or service is “a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer.” Therefore, for contracts involving more than one specified good or service, the entity may be the principal for one or more specified goods or services and the agent for others. See Section 10.1.1 for further details.
Application of the control principle — To help an entity determine whether it controls a specified good or service before the good or service is transferred to the customer (and therefore determine whether it is the principal), the ASU added ASC 606-10-55-37A. See Section 10.2 for further details.
Indicators of control — The ASU removed from the revenue standard two of the five indicators used in the evaluation of control (i.e., exposure to credit risk and whether consideration is in the form of a commission). In addition, the ASU reframed the remaining three indicators to help an entity determine when it is acting as a principal rather than as an agent. Further, the ASU added language to the indicators that explains how they are related to the control principle under the revenue standard. See Section 10.2 for further details.

18.3.3.3 ASU 2016-10 on Identifying Performance Obligations and Licensing

On April 14, 2016, the FASB issued ASU 2016-10, which amended certain aspects of the revenue standard, specifically the standard’s guidance on identifying performance obligations and the implementation guidance on licensing. The amendments in the ASU reflect feedback received by the TRG.

ASU 2016-10 amended the revenue standard as follows:

Identifying performance obligations:
- Immaterial promised goods or services — Entities may disregard goods or services promised to a customer that are immaterial in the context of the contract. See Section 5.2.3 for further details.
- Shipping and handling activities — Entities can elect to account for shipping or handling activities occurring after control of the related good has passed to the customer as a fulfillment cost rather than as a revenue element (i.e., a promised service in the contract). See Section 5.2.4.3 for further details.
- Identifying when promises represent performance obligations — ASU 2016-10 refined the revenue standard’s separation 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. See Section 5.3.2.2 for further details.
Licensing implementation guidance:
- Determining the nature of an entity’s promise in granting a license — Intellectual property (IP) is classified as either functional or symbolic, and such classification should generally dictate whether, for a license granted to that IP, revenue must be recognized at a point in time or over time, respectively. See Section 12.4 for further details.
- Sales- or usage-based royalties — The sales- or usage-based royalty exception applies whenever the royalty is predominantly related to a license of IP. ASU 2016-10 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.” See Section 12.7 for further details.
- Restrictions of time, geographic location, and use — ASU 2016-10’s examples illustrate the distinction between restrictions that represent attributes of a license and provisions that specify that additional licenses (i.e., additional performance obligations) have been promised. See Section 12.3.2 for further details.
- Renewals of licenses that provide a right to use IP — Revenue should not be recognized for renewals or extensions of licenses to use IP until the renewal period begins. See Section 12.6 for further details.

18.3.3.4 ASU 2016-11 on Rescission of SEC Guidance Because of ASUs 2014-09 and 2014-16

On May 3, 2016, the FASB issued ASU 2016-11, which rescinded certain SEC guidance in light of ASUs 2014-09 and 2014-16. Specifically, ASU 2016-11 rescinded the following SEC guidance upon the adoption of ASU 2014-09:

ASC 605-20-S99-2 (formerly EITF Issue 91-9) on revenue and expense recognition for freight services in process.
ASC 605-45-S99-1 (formerly EITF Issue 00-10) on accounting for shipping and handling fees and costs.
ASC 605-50-S99-1 (formerly EITF Issue 01-9) on accounting for consideration given by a vendor to a customer.
ASC 932-10-S99-5 (formerly EITF Issue 90-22) on accounting for gas-balancing arrangements.

18.3.3.5 ASU 2016-12 on Narrow-Scope Improvements and Practical Expedients

On May 9, 2016, the FASB issued ASU 2016-12, which amended certain aspects of ASU 2014-09. The amendments address certain implementation issues identified by the TRG and clarify, rather than change, the revenue standard’s core revenue recognition principles. Changes include the following:

Collectibility — ASU 2016-12 clarified the objective of the entity’s collectibility assessment and provided additional guidance on when an entity would recognize as revenue consideration it receives if the entity concludes that collectibility is not probable. See Section 4.3.5.3 for further details.
Presentation of sales taxes and other similar taxes collected from customers — Entities are permitted to present revenue net of sales taxes collected on behalf of governmental authorities (i.e., to exclude from the transaction price sales taxes that meet certain criteria). See Section 6.7 for further details.
Noncash consideration — 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. See Section 6.5 for further details.
Contract modifications and completed contracts at transition — The ASU established a practical expedient for contract modifications at transition and defined completed contracts as those for which all (or substantially all) revenue was recognized under the applicable revenue guidance before the revenue standard was initially applied.
Transition technical correction — Entities electing to use the full retrospective transition method to adopt the revenue standard were no longer required to disclose the effect of the change in accounting principle on the period of adoption (as historically required by ASC 250-10-50-1(b)(2)); however, entities were still required to disclose the effects on preadoption periods that were retrospectively adjusted.

18.3.3.6 ASU 2016-20 on Technical Corrections and Improvements

On December 21, 2016, the FASB issued ASU 2016-20, which amended certain aspects of ASU 2014-09 and includes technical corrections intended to clarify, rather than change, the revenue standard’s core revenue recognition principles.

Key provisions of the amendments are summarized in the table below, which is reproduced from ASU 2016-20.

Area for Correction or Improvement	Summary of Amendments
Issue 1: Loan Guarantee Fees
Topic 606 specifically identifies a scope exception for guarantees (other than product or service warranties) within the scope of Topic 460, Guarantees. Stakeholders indicated that a few consequential amendments included in Update 2014-09 are inconsistent on whether fees from financial guarantees are within the scope of Topic 606.	The amendments in this Update clarify that guarantee fees within the scope of Topic 460 (other than product or service warranties) are not within the scope of Topic 606. Entities should see Topic 815, Derivatives and Hedging, for guarantees accounted for as derivatives.
Issue 2: Contract Costs — Impairment Testing
Subtopic 340-40, Other Assets and Deferred Costs — Contracts with Customers, includes impairment guidance for costs capitalized in accordance with the recognition provisions of that Subtopic. Stakeholders raised some questions about the impairment testing of those capitalized costs.	The amendments in this Update clarify that when performing impairment testing an entity should (a) consider expected contract renewals and extensions and (b) include both the amount of consideration it already has received but has not recognized as revenue and the amount it expects to receive in the future.
Issue 3: Contract Costs — Interaction of Impairment Testing With Guidance in Other Topics
Some stakeholders raised questions about the interaction of the impairment testing in Subtopic 340-40 with guidance in other Topics.	The amendments in this Update clarify that impairment testing first should be performed on assets not within the scope of Topic 340, Topic 350, Intangibles — Goodwill and Other, or Topic 360, Property, Plant, and Equipment (such as Topic 330, Inventory), then assets within the scope of Topic 340, then asset groups and reporting units within the scope of Topic 360 and Topic 350.
Issue 4: Provisions for Losses on Construction-Type and Production-Type Contracts
When issuing Update 2014-09, the Board decided to exclude specific guidance in Topic 606 for onerous contracts. However, the Board decided to retain the guidance on the provision for loss contracts in Subtopic 605-35, Revenue Recognition — Construction-Type and Production-Type Contracts. In the consequential amendments of Update 2014-09, the testing level was changed to the performance obligation level (from the segment level). Stakeholders indicated that this amendment, in some circumstances, may require an entity to perform the loss assessment at a lower level than legacy practice.	The amendments in this Update require that the provision for losses be determined at least at the contract level. However, the amendments allow an entity to determine the provision for losses at the performance obligation level as an accounting policy election.
Issue 5: Scope of Topic 606
In Topic 606, a scope exception exists for insurance contracts within the scope of Topic 944, Financial Services — Insurance. The Board’s intention was to exclude from Topic 606 all contracts that are within the scope of Topic 944, not only insurance contracts (for example, investment contracts that do not subject an insurance entity to insurance risk).	The amendments in this Update remove the term insurance from the scope exception to clarify that all contracts within the scope of Topic 944 are excluded from the scope of Topic 606.
Issue 6: Disclosure of Remaining Performance Obligations
Topic 606 requires an entity to disclose information about its remaining performance obligations, including the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period. Topic 606 also includes optional exemptions from that disclosure for contracts with an original duration of one year or less and performance obligations in which revenue is recognized in accordance with paragraph 606-10-55-18. Stakeholders questioned whether the Board intended for an entity to estimate variable consideration for disclosure in other circumstances in which an entity is not required to estimate variable consideration to recognize revenue.	The amendments in this Update provide optional exemptions from the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. The amendments in this Update also expand the information that is required to be disclosed when an entity applies one of the optional exemptions.[1]
Issue 7: Disclosure of Prior-Period Performance Obligations
Topic 606 requires an entity to disclose revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods. Stakeholders indicated that the placement of the disclosure in the Codification results in confusion about whether this disclosure applies only to performance obligations with corresponding contract balances or to all performance obligations.	The amendments in this Update clarify that the disclosure of revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods applies to all performance obligations and is not limited to performance obligations with corresponding contract balances.
Issue 8: Contract Modifications Example
Example 7 in Topic 606 illustrates the application of the guidance on contract modifications. Some stakeholders perceived minor inconsistencies with the contract modifications guidance in Topic 606.	The amendments in this Update better align Example 7 with the principles in Topic 606.
Issue 9: Contract Asset Versus Receivable
Example 38, Case B in Topic 606 illustrates the application of the presentation guidance on contract assets and receivables. Some stakeholders expressed concern that the example indicates that an entity cannot record a receivable before its due date.	The amendments in this Update provide a better link between the analysis in Example 38, Case B and the receivables presentation guidance in Topic 606.
Issue 10: Refund Liability
Example 40 in Topic 606 illustrates the recognition of a receivable and a refund liability. Some stakeholders expressed concern that the example indicates that a refund liability should be characterized as a contract liability.	The amendment in this Update removes the reference to the term contract liability from the journal entry in Example 40.
Issue 11: Advertising Costs
Update 2014-09 supersedes much of the guidance in Subtopic 340-20, Other Assets and Deferred Costs — Capitalized Advertising Costs, because it would have conflicted with new cost capitalization guidance in Subtopic 340-40. Therefore, an entity that previously capitalized advertising costs in accordance with the guidance in Subtopic 340-20 would apply the capitalization guidance in Subtopic 340-40 upon the adoption of Update 2014-09. Guidance on when to recognize a liability had been included within Subtopic 340-20 and was inadvertently superseded by Update 2014-09.	The amendments in this Update reinstate the guidance on the accrual of advertising costs and also move the guidance to Topic 720, Other Expenses.
Issue 12: Fixed-Odds Wagering Contracts in the Casino Industry
Subtopic 924-605, Entertainment — Casinos — Revenue Recognition, [historically included] explicit guidance that [identified] fixed-odds wagering as gaming revenue. That industry-specific guidance was superseded by Update 2014-09, along with nearly all existing industry-specific revenue guidance in GAAP. Therefore, some stakeholders questioned whether fixed-odds wagering contracts are within the scope of Topic 606 or, rather, whether they should be accounted for as derivatives within the scope of Topic 815.	The amendments in this Update (a) create a new Subtopic 924-815, Entertainment — Casinos — Derivatives and Hedging, which includes a scope exception from derivatives guidance for fixed-odds wagering contracts and (b) includes a scope exception within Topic 815 for fixed-odds wagering contracts issued by casino entities.
Issue 13: Cost Capitalization for Advisors to Private Funds and Public Funds
A consequential amendment included in Update 2014-09 moved cost guidance from Subtopic 946-605, Financial Services — Investment Companies — Revenue Recognition, to Subtopic 946-720, Financial Services — Investment Companies — Other Expenses. This amendment was intended to move the guidance only and was not intended to change practice. However, the consequential amendment in Update 2014-09 could have resulted in inconsistent accounting for offering costs among advisors to public funds and private funds.	The amendments in this Update align the cost-capitalization guidance for advisors to both public funds and private funds in Topic 946.

ASU 2016-20 is based on two proposed ASUs. All except one of the amendments proposed in those exposure drafts are included in the final ASU. For the exception, which addresses preproduction costs related to long-term supply arrangements, the FASB subsequently decided to discontinue reconsideration of that topic because the Board concluded that additional guidance was not necessary. For more information about accounting for preproduction costs of a long-term supply arrangement, see Section 13.3.4.

18.3.3.7 ASU 2017-13 on Amendments to SEC Paragraphs and Rescission of Prior SEC Staff Announcements and Observer Comments

On September 29, 2017, the FASB issued ASU 2017-13, which amended the transition guidance in ASC 606-10-65 to include the SEC staff announcement at the July 20, 2017, EITF meeting regarding the ability of certain PBEs to use the non-PBE effective date when adopting the revenue standard.

In addition, ASU 2017-13 rescinded the SEC staff guidance in ASC 605-20-S99-1 (formerly EITF Topic D-96) on accounting for management fees based on a formula upon adoption of the revenue standard.

18.3.3.8 ASU 2017-14 on Amendments to SEC Paragraphs Pursuant to SAB 116 and SEC Release No. 33-10403

On November 22, 2017, the FASB issued ASU 2017-14, which codified certain SEC guidance on revenue and rescinds other such guidance that is superseded. Specifically, the ASU codified in ASC 606-10-S25-1 the text of the SEC’s 2017 release on recognizing revenue from vaccines placed in a federal government stockpile and rescinded the legacy SEC guidance in ASC 605-15-S99-1 on this topic. For more information about the SEC’s 2017 release, see Section 18.2.2.

In addition, ASU 2017-14 rescinded certain SEC staff guidance in light of SAB 116. As discussed in Section 18.2.1, SAB 116 rendered SAB Topics 8 and 13 inapplicable upon the adoption of ASC 606. Accordingly, ASU 2017-14 rescinded the following SEC staff guidance upon the adoption of ASU 2014-09:

ASC 605-10-S99-1, in which the text of SAB Topic 13 was codified to reflect the SEC staff’s views on general recognition guidance.
ASC 605-15-S99-2, in which the text of SAB Topic 8.A was codified to reflect the SEC staff’s views on retailers’ recognition of revenue from (1) sales of leased or licensed departments and (2) fees on commissions in a service arrangement.
ASC 605-15-S99-3, in which the text of SAB Topic 8.B was codified to reflect the SEC staff’s views on disclosures related to finance charges imposed by department stores and other retailers on credit sales.

Further, ASU 2017-14 amended ASC 220-10-S99-7 to reflect SAB 116’s amendments to SAB Topic 11.A, as discussed in Section 18.2.1. Those amendments to SAB Topic 11.A clarify that operating-differential subsidies presented under a revenue caption must be presented separately from revenue from contracts with customers accounted for under ASC 606.

18.3.3.9 ASU 2018-08 on Accounting for Contributions Received and Made

On June 21, 2018, the FASB issued ASU 2018-08, which clarified the scope and accounting guidance for contributions received and made. Specifically, the ASU indicates that its amendments are intended, in part, to help entities evaluate “whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of [ASC 958] or as exchange (reciprocal) transactions subject to other guidance,” such as ASC 606. The ASU explains that while the issues it aims to address have been long-standing, “the amendments in [ASU 2014-09] place an increased focus on the issues because those amendments add new disclosure requirements and eliminate certain limited exchange transaction guidance that was previously contained in [ASC] 958-605.”

18.3.3.10 ASU 2018-18 on Clarifying the Interaction Between ASC 808 and ASC 606

On November 5, 2018, the FASB issued ASU 2018-18, which made targeted improvements to the guidance on collaborative arrangements in ASC 808. See Section 3.2.9 for further discussion of collaborative arrangements and the ASU’s amendment to ASC 606-10-15-3.

18.3.3.11 ASU 2019-08 on Share-Based Consideration Payable to a Customer

On November 11, 2019, the FASB issued ASU 2019-08, which clarified the accounting for share-based payments issued as consideration payable to a customer in accordance with ASC 606. Under the ASU, entities apply the guidance in ASC 718 to measure and classify share-based payments issued to a customer that are not in exchange for a distinct good or service (i.e., share-based sales incentives). See Section 6.6 for further details.

18.3.3.12 ASU 2020-05 on Deferral of the Effective Date for Certain Entities

On June 3, 2020, the FASB issued ASU 2020-05, which amended the effective dates of the Board’s standards on revenue (ASC 606) and leasing (ASC 842) to give immediate relief to certain entities as a result of the widespread adverse economic effects and business disruptions caused by the COVID-19 pandemic. Specifically, the Board deferred the effective dates of (1) ASC 606 for private companies and private not-for-profit entities and (2) ASC 842 for private companies, private not-for-profit entities, and public not-for-profit entities. Nonpublic entities (i.e., entities that are not PBEs) were permitted to adopt ASC 606 for annual reporting periods beginning after December 15, 2019, and for interim reporting periods within annual reporting periods beginning after December 15, 2020. However, the deferrals applied only if those entities had not yet issued their financial statements (or made their financial statements available for issuance) as of June 3, 2020.

18.3.3.13 ASU 2021-02 on Practical Expedient for Private-Company Franchisors on the Identification of Performance Obligations

On January 28, 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. See Section 5.3.5 for further details.

18.3.3.14 ASU 2021-08 on Contract Assets and Contract Liabilities From Contracts With Customers Acquired in a Business Combination

In October 2021, the FASB issued ASU 2021-08, which amended ASC 805 to address inconsistencies and diversity in practice related to the accounting for revenue contracts with customers acquired in a business combination. The ASU requires an entity to apply the guidance in ASC 606 when recognizing and measuring contract assets and contract liabilities arising from those contracts. See Section 3.2.13 for further details.

18.3.4 Postimplementation Review

After the FASB issues a major new accounting standard, it begins a postimplementation review (PIR) process to evaluate whether the standard is achieving its objective by providing users of financial statements with relevant information that justifies the costs of providing it. This process enables the Board to solicit and consider stakeholder input and FASB staff research.

The FASB is currently performing a PIR of the revenue standard. The PIR process is conducted in three stages: (1) post-issuance-date implementation monitoring, (2) post-effective-date evaluation of costs and benefits, and (3) summary of research and reporting. The first stage of the revenue standard’s PIR consisted of various activities, including public meetings of the TRG, responses to technical inquiries, public webcasts, and the issuance of multiple ASUs to address effective-date deferrals and clarification or simplification of the revenue standard.2

The FASB staff has completed most of its PIR outreach and research. At the July 28, 2021, and September 21, 2022, FASB meetings, the Board discussed feedback received and research performed to date on the revenue standard. In handouts prepared for the Board’s July 2021 and September 2022 meetings, the FASB staff noted that stakeholder feedback on the revenue standard was positive overall, particularly from users of financial statements since the standard results in more useful and transparent information, improved disclosures, and comparability across entities and industries. The staff further observed that while many preparers noted significant one-time costs associated with implementation of the standard, they also highlighted that the standard has been beneficial in the long run. Since the Board’s July 2021 meeting, the FASB staff has performed research on various topics identified during its post-effective-date stakeholder outreach, including (1) principal-versus-agent considerations, (2) licensing, (3) variable consideration, (4) short-cycle manufacturing, and (5) disclosures. Although applying the revenue standard in these areas still requires significant judgment, additional standard setting is not currently on the FASB’s technical agenda and may not occur as a result of the FASB staff’s research.

The FASB staff will continue to monitor implementation of the revenue standard and provide updates to the Board on any emerging issues identified. As the PIR of the revenue standard progresses, the Board and its staff may identify areas of improvement that could result in future standard setting.

18.3.5 On the Horizon

18.3.5.1 Derivative Scope Refinements

At the FASB’s December 6, 2023, meeting, the Board discussed preagenda work on challenges associated with applying the definition of a derivative and the derivative scope exceptions to arrangements with contingent features. Such challenges had been identified in stakeholders’ responses to the FASB staff’s June 2021 invitation to comment (ITC). During the meeting, the Board decided to add a project to its technical agenda to address these challenges. Subsequently, at the FASB’s April 10, 2024, meeting, the Board further discussed the scope of its guidance on derivatives and decided to issue an exposure draft for public comment.

On July 23, 2024, the FASB issued a proposed ASU that would refine the scope of the guidance on derivatives in ASC 815 (as well as clarify the scope of the guidance on share-based payments from a customer in ASC 606, as discussed in the next section). The proposed ASU is intended, in part, to address concerns about the application of derivative accounting to contracts that have features based on the operations or activities of one of the parties to the contract.

For more information, see Deloitte’s August 2, 2024, Heads Up.

18.3.5.2 Share-Based Consideration Received From a Customer

On July 23, 2024, the FASB issued a proposed ASU that is intended to reduce diversity in the accounting for share-based payments in revenue contracts (as well as address concerns about the application of derivative accounting to contracts that have features based on the operations or activities of one of the parties to the contract, as discussed in the section above). As stated in the proposed ASU, the Board decided to issue it, in part, in response to “feedback from some stakeholders that there is a lack of clarity about which guidance an entity should apply to recognize share-based payments, such as warrants or shares, received from a customer that are consideration for the transfer of goods or services.”

The proposed ASU would clarify that when an entity has a right to receive a share-based payment from its customer in connection with a contract with that customer, the share-based payment would be accounted for as noncash consideration within the scope of ASC 606. That is, under the proposed ASU, “unless and until the share-based payment is recognized as an asset” in accordance with ASC 606, the right to receive the share-based payment would not be within the scope of ASC 815 or ASC 321.

For more information, see Deloitte’s August 2, 2024, Heads Up.

18.3.5.3 Share-Based Consideration Payable to a Customer

The FASB received an agenda request to address the current diversity in practice related to whether conditions in a share-based sales incentive provided to a customer that is tied to the customer’s purchase levels should be treated as performance conditions or service conditions. In response to this feedback, the Board decided at its June 12, 2024, meeting to add a project to its technical agenda to clarify the guidance in ASC 606 and ASC 718 on an entity’s share-based payments to a customer that are treated as consideration payable to the customer.

On September 30, 2024, the FASB issued a proposed ASU that would clarify the guidance in both ASC 606 and ASC 718 on the accounting for share-based payment awards that are granted by an entity as consideration payable to its customer. The proposed ASU’s purpose is to reduce diversity in practice and improve existing guidance, primarily by revising the definition of a “performance condition” and eliminating a forfeiture policy election specifically for service conditions associated with share-based consideration payable to a customer. In addition, the proposed ASU would clarify that the variable consideration constraint guidance in ASC 606 does not apply to share-based consideration payable to a customer regardless of whether an award’s grant date has occurred.

Comments on the proposal are due by November 14, 2024. For more information, see Deloitte’s October 1, 2024, Heads Up.

18.3.5.4 Accounting for Government Grants

On June 13, 2022, the FASB staff issued an ITC on potentially incorporating the guidance of IAS 20 on accounting for government grants into U.S. GAAP for business entities. Comments on the ITC were due by September 12, 2022.

On November 1, 2023, the FASB added to its technical agenda a project on the recognition, measurement, and presentation of government grants received by business entities. During the meeting, the Board discussed potential scope, recognition, measurement, presentation, and disclosure requirements related to the accounting for government grants. It tentatively decided that a government grant should be recognized when it is probable that the entity will comply with the conditions of the grant and the grant will be received. In addition, the Board reached tentative decisions on the recognition, measurement, and presentation requirements for a government grant related to income and assets, respectively.

On April 3, 2024, the Board tentatively decided to leverage the accounting framework of IAS 20 for government grants and make targeted improvements to the guidance on the basis of certain previous Board decisions, including decisions related to scope and the recognition threshold.

On June 4, 2024, the Board tentatively decided that the disclosure requirements of ASC 832 should apply to government grants within the scope of the project. The Board also tentatively decided to provide specific guidance on whether and, if so, and how to recognize and measure grant-related liabilities in a business combination.

The FASB is expected to include its tentative decisions in a forthcoming proposed ASU.

Footnotes

[1]

At its October 19, 2016, meeting, the FASB redeliberated its original technical correction on disclosures of remaining performance obligations, which was discussed at the August 31, 2016, meeting but for which no tentative decision was reached. At the October 19 meeting, the staff presented five alternatives on the issue, which were compiled after additional outreach was performed at the request of the Board. After extensive deliberation, the Board ultimately decided to move forward with the amendments as originally proposed. However, the Board noted the importance of monitoring adoption of the disclosure requirements to determine what information preparers were disclosing and what information investors were using so that the Board could assess whether additional amendments were necessary once implementation reviews were completed.

See Section 18.3.3 for an overview of the ASUs issued.

Appendix A — Differences Between U.S. GAAP and IFRS Accounting Standards

Although the FASB’s guidance on revenue from contracts with customers is nearly fully converged with that of the IASB, there are differences between U.S. GAAP and IFRS Accounting Standards on revenue-related topics. Some of those differences are reflected in the table below.

Topic	U.S. GAAP	IFRS Accounting Standards
Step 1 — the collectibility threshold for contracts	The guidance establishes a probable collectibility threshold, meaning likely to occur.1	The guidance establishes a probable collectibility threshold, meaning more likely than not.2
Reversal of impairment losses	An entity cannot reverse an impairment loss on capitalized costs to obtain or fulfill a contract.	An entity is required to reverse an impairment loss on capitalized costs to obtain or fulfill a contract if the impairment conditions no longer exist or have improved.
Interim disclosures	In addition to those required by ASC 270, an entity must provide interim disclosures about each of the following: The disaggregation of revenue. Contract asset and contract liability balances and significant changes in those balances. The transaction price allocated to the remaining performance obligations.	IFRS 15 amended IAS 34 to require an entity to provide interim disclosures about the disaggregation of revenue.
Requirements for nonpublic entities	The guidance applies to nonpublic entities, with some specific relief related to disclosure. Refer to Chapter 16 for additional information.	The guidance applies to all entities reporting under IFRS Accounting Standards, including nonpublic entities.

After the FASB and IASB issued ASU 2014-09 and IFRS 15, respectively, the boards decided to amend certain aspects of the revenue standard. In some cases, the amendments retained convergence; in other cases, however, the FASB decided on a solution that differs from the IASB’s. The table below outlines some additional differences between U.S. GAAP and IFRS Accounting Standards that have arisen as a result of the amendments.

Topic	U.S. GAAP	IFRS Accounting Standards
Licensing — determining the nature of an entity’s promise (see paragraphs BC51 through BC65 of ASU 2016-10)	An entity’s determination of whether a license is a right to use (for which revenue is recognized at a point in time) versus a right to access (for which revenue is recognized over time) is based on its classification of the intellectual property (IP) underlying the license as either functional or symbolic.	An entity’s determination of whether a license is a right to use versus a right to access is based on whether the customer can direct the use of, and obtain substantially all of the benefits from, the license at the point in time at which the license is granted. The customer can direct the use of, and obtain substantially all of the benefits from, the license if the underlying IP is not significantly affected by the entity’s ongoing activities.
Licensing — renewals (see paragraphs BC48 through BC50 of ASU 2016-10)	The amendment specifies that a renewal or extension is subject to the “use and benefit” guidance in ASC 606-10-55-58C, the application of which will generally result in revenue recognition at the beginning of the renewal period.	The “use and benefit” guidance does not explicitly refer to renewals. Consequently, revenue may be recognized earlier than it would be under U.S. GAAP.
Shipping and handling activities (see paragraphs BC19 through BC25 of ASU 2016-10)	The amendment provides an accounting policy election that permits an entity to account for shipping and handling activities that occur after the customer has obtained control of the related good as a fulfillment expense.	IFRS 15 does not provide an accounting policy election. If an entity performs shipping and handling services after the customer has obtained control of the related good, the shipping and handling activities will typically be accounted for as a separate performance obligation.
Noncash consideration (see paragraphs BC36 through BC43 of ASU 2016-12)	Under the amendments in ASU 2016-12, noncash consideration is measured at contract inception.	IFRS 15 does not prescribe a measurement date for noncash consideration.
Presentation of sales (and other similar) taxes (see paragraphs BC29 through BC35 of ASU 2016-12)	The amendment provides an accounting policy election that permits an entity to exclude all sales (and other similar) taxes from the measurement of the transaction price.	IFRS 15 does not provide an accounting policy election. An entity is required to identify whether it has a primary responsibility to pay the taxes or is acting only as a collection agent. If it is the primary obligor, it must include those taxes in the transaction price.
Provisions for losses on construction-type and production-type contracts	ASU 2016-20 amends the legacy guidance in ASC 605-35-25-47 to clarify that provisions for losses on construction-type and production-type contracts may be determined at either the contract or performance obligation level.	In accordance with IAS 37, the onerous test should be performed at the contract level.
Private-company franchisor	ASU 2021-02 allows a franchisor that is not a public business entity (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.	IFRS Accounting Standards do not include a similar practical expedient.
Disclosure of remaining performance obligations	ASU 2016-20 provides entities with an optional exemption from the requirement to disclose information about remaining performance obligations (ASC 606-10-50-13) for variable consideration if either (1) the variable consideration is a sales- or usage-based royalty promised in exchange for a license of IP or (2) the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.	IFRS 15 was not amended to provide similar disclosure relief.
Consideration payable to a customer — share-based payments to customers	ASU 2019-08 clarifies the accounting for share-based payments to customers and requires the application of ASC 718 for measurement and classification purposes (e.g., share-based consideration payable to a customer is calculated by using its fair-value-based measure as of the grant date).	IFRS 15 does not specify whether equity instruments granted by an entity to a customer are a type of consideration paid or payable to a customer. Further, IFRS 15 does not address how equity instruments granted to a customer in a revenue arrangement should be accounted for with regard to initial and subsequent measurement. Therefore, an entity should consider which standard (e.g., IFRS 2, IFRS 15, IAS 32), or combination of standards, could be applicable.

Further, some of the boards’ respective amendments to the revenue standard are generally expected to produce similar outcomes under U.S. GAAP and IFRS Accounting Standards despite differences between the FASB’s wording and that of the IASB. The table below provides examples of differently articulated but similar guidance under U.S. GAAP and IFRS Accounting Standards, as amended.

Topic	U.S. GAAP	IFRS Accounting Standards
Collectibility — criterion explanation and examples (see paragraphs BC9 through BC20 of ASU 2016-12)	ASU 2016-12 provides an additional explanation of the collectibility threshold’s objective, as well as implementation guidance and examples.	No additional guidance provided.
Collectibility — recognition criterion for contracts that fail step 1 (see paragraphs BC21 through BC28 of ASU 2016-12)	ASU 2016-12 adds a third criterion to allow revenue recognition when a contract fails step 1 (ASC 606-10-25-1).	Additional criterion not provided.
Immaterial goods or services (see paragraphs BC8 through BC18 of ASU 2016-10)	When identifying performance obligations, an entity is not required to assess immaterial items in the context of the contract as promised goods or services.	Overall materiality considerations should be used in the evaluation of items under IFRS Accounting Standards.
Licensing — when to consider the nature of an entity’s promise in granting a license (see paragraphs BC66 through BC69 of ASU 2016-10)	ASU 2016-10 contains explicit guidance to indicate that when a bundle of goods or services is determined to be a single performance obligation that includes a license of IP, an entity should apply the license implementation guidance to determine whether revenue related to the performance obligation should be recognized over time (including an appropriate measure of progress) or at a point in time.	No guidance added to IFRS 15; however, the Basis for Conclusions on IFRS 15 explains that the licensing implementation guidance does not override the general model — specifically, the requirements for identifying performance obligations before applying the criteria to determine the nature of an entity’s promise in granting a license.
Licensing — contractual restrictions (see paragraphs BC41 through BC47 of ASU 2016-10)	ASU 2016-10 contains explicit guidance to indicate that contractual provisions that explicitly or implicitly require an entity to transfer control of additional goods or services to the customer (e.g., additional rights) should be distinguished from contractual provisions that define attributes of a single promised license (e.g., restrictions of time or geography).	No guidance added to IFRS 15; however, the Basis for Conclusions on IFRS 15 explains that the license implementation guidance does not override the general model — specifically, the requirements for identifying performance obligations before applying the criteria to determine the nature of an entity’s promise in granting a license.
Licensing — hosting arrangements (see paragraph BC37 of ASU 2016-10)	ASU 2016-10 contains explicit guidance to indicate that the license implementation guidance is not applicable to software subject to a hosting arrangement that does not contain a license in accordance with the guidance in ASC 985-20-15-5.	No guidance added to IFRS 15; however, the Basis for Conclusions on IFRS 15 explains that the license implementation guidance does not override the general model — specifically, the requirements for identifying performance obligations before applying the criteria to determine the nature of an entity’s promise in granting a license.
Contract costs — impairment testing	ASU 2016-20 clarifies that when an entity tests capitalized contract costs for impairment, it should (1) consider expected contract renewals and extensions and (2) include any amount of consideration not yet recognized as revenue (i.e., consideration already received and amounts expected to be received in the future).	No additional guidance provided on specific factors that an entity should consider when testing capitalized contract costs for impairment.
Disclosure of prior-period performance obligations	ASU 2016-20 provides additional guidance to clarify that the disclosure of revenue from performance obligations satisfied (or partially satisfied) in prior periods applies to all performance obligations (i.e., the disclosure is not isolated to performance obligations with corresponding contract liability balances).	No additional guidance provided.
Contract modifications example	ASU 2016-20 amends Example 7 in ASC 606-10-55-125 through 55-128 to better align the wording with the contract modification guidance in ASC 606-10-25-10 through 25-13.	No amendments made to Example 7 in IFRS 15.
Contract asset versus receivable	ASU 2016-20 amends Example 38, Case B, in ASC 606-10-55-285 and 55-286 to provide a better link between the analysis and the receivables presentation guidance in ASC 606.	No amendments made to Example 38, Case B, in IFRS 15.
Refund liability	ASU 2016-20 amends Example 40 in ASC 606-10-55-293 to remove the reference to a contract liability as related to refund liabilities.	No amendments made to Example 40 in IFRS 15.

In addition, there are certain differences between legacy U.S. GAAP and IFRS Accounting Standards. While certain of the boards’ respective amendments — especially the FASB’s amendments in ASU 2016-20 — are not expected to create a new difference between U.S. GAAP and IFRS Accounting Standards, these amendments are also not expected to result in convergence between U.S. GAAP and IFRS Accounting Standards. The table below provides examples of where existing differences have been carried forward under the revenue standard.

Topic	U.S. GAAP	IFRS Accounting Standards
Onerous contracts	Although the guidance is silent on the topic of onerous contracts, it does not supersede existing provisions in other ASC subtopics, including ASC 605-20, ASC 605-35, and ASC 985-20, that require the recognition of losses for certain types of contracts with customers.	Under IAS 37, losses are recognized for all onerous contracts with customers.
Financial guarantee contracts	ASU 2016-20 clarifies that guarantee fees (other than product or service warranties) within the scope of ASC 460 are not within the scope of ASC 606.	In accordance with IFRS 9, the issuer of a financial guarantee contract should initially recognize the contract at fair value and subsequently measure it at the higher of (1) the amount of the loss allowance determined in accordance with IFRS 9 or (2) the amount initially recognized less, when appropriate, the cumulative amount of income recognized in accordance with IFRS 15.
Contract costs — interaction of impairment testing with guidance in other ASC topics	ASU 2016-20 clarifies that impairment testing on assets should be performed in the following order: (1) assets not within the scope of ASC 340, ASC 350, or ASC 360; (2) assets within the scope of ASC 340 (including contract costs capitalized under ASC 340-40); (3) asset groups and reporting units within the scope of ASC 360 and ASC 350.	Under IFRS 15, before an entity recognizes any impairment loss for a capitalized contract cost, it should recognize any impairment loss for assets related to the contract that are recognized in accordance with another IFRS Accounting Standard (e.g., IAS 2, IAS 16, or IAS 38). The resulting carrying amount of the asset should be included in the carrying amount of the cash-generating unit to which it belongs when IAS 36 is applied.
Scope of the revenue standard	ASU 2016-20 clarifies that all contracts within the scope of ASC 944 are not within the scope of ASC 606 by removing the term “insurance” from ASC 606-10-15-2(b).	IFRS 15 as originally issued excludes insurance contracts within the scope of IFRS 4 (or IFRS 17 when adopted) from the scope of IFRS 15.
Advertising costs	ASU 2016-20 reinstates the guidance on the accrual of advertising costs that was previously in ASC 340-20 and superseded by ASU 2014-09. The reinstated guidance is in ASC 720-35.	No additional guidance provided.
Cost capitalization for advisers to private funds and public funds	ASU 2016-20 amends the guidance in ASC 946-720 to align the cost capitalization guidance for advisers to both public and private funds.	IFRS Accounting Standards do not contain prescriptive guidance on the accounting for costs incurred by advisers to public and private funds.
Fixed-odds wagering contracts in the casino industry	ASU 2016-20 clarifies that fixed-odds wagering contracts in the casino industry should be accounted for under the revenue standard by providing in ASC 924-815 (added by the ASU) a scope exception to the derivatives guidance.	The IFRS Interpretations Committee previously noted that when a gaming entity takes a position against a customer, the resulting unsettled wager is a financial instrument that is likely to meet the definition of a derivative and should therefore be accounted for under IAS 39 (or IFRS 9, if adopted). At the November 2015 TRG meeting, the IASB commented that wagering contracts that meet the definition of a financial instrument within the scope of IAS 39 or IFRS 9 are excluded from the scope of IFRS 15.

Footnotes

As defined in ASC 450.

As defined in IFRS 15 and IAS 37.

Appendix B — Codification Example Index

Index of Codification Examples
Example	Paragraphs	Title	Roadmap Section(s)
ASC 340-40
Example 1	340-40-55-2–4	Incremental Costs of Obtaining a Contract	13.2.1
Example 2	340-40-55-5–9	Costs That Give Rise to an Asset	13.2.1 and 13.3
ASC 606
Example 1		Collectibility of the Consideration
Case A	606-10-55-95–98	Collectibility Is Not Probable	4.3.5.3
Case B	606-10-55-98A–98E	Credit Risk Is Mitigated	4.3.5.3
Case C	606-10-55-98F–98I	Credit Risk Is Not Mitigated	4.3.5.3
Case D	606-10-55-98J–98L	Advance Payment	4.3.5.3
Example 2	606-10-55-99–101	Consideration Is Not the Stated Price — Implicit Price Concession	4.3.5.1
Example 3	606-10-55-102–105	Implicit Price Concession	4.3.5.1
Example 4	606-10-55-106–109	Reassessing the Criteria for Identifying a Contract	4.5
Example 5	606-10-55-111	Modification of a Contract for Goods	9.2.1 and 9.2.2.3
Case A	606-10-55-112–113	Additional Products for a Price That Reflects the Standalone Selling Price	9.2.1
Case B	606-10-55-114–116	Additional Products for a Price That Does Not Reflect the Standalone Selling Price	9.2.2.3
Example 6	606-10-55-117–124	Change in the Transaction Price After a Contract Modification	9.4
Example 7	606-10-55-125–128	Modification of a Services Contract	9.2.2.1
Example 8	606-10-55-129–133	Modification Resulting in a Cumulative Catch-Up Adjustment to Revenue	9.2.2.1
Example 9	606-10-55-134–135	Unapproved Change in Scope and Price	9.1.3
Example 10		Goods and Services Are Not Distinct
Case A	606-10-55-137–140	Significant Integration Service	5.3.2.3
Case B	606-10-55-140A–140C	Significant Integration Service	5.3.2.3
Case C	606-10-55-140D–140F	Combined Item	5.3.2.3 and 12.3
Example 11		Determining Whether Goods or Services Are Distinct
Case A	606-10-55-141–145	Distinct Goods or Services	5.3.2.3 and 12.3
Case B	606-10-55-146–150	Significant Customization	5.3.2.3 and 12.3
Case C	606-10-55-150A–150D	Promises Are Separately Identifiable (Installation)	5.3.2.3
Case D	606-10-55-150E–150F	Promises Are Separately Identifiable (Contractual Restrictions)	5.3.2.3
Case E	606-10-55-150G–150K	Promises Are Separately Identifiable (Consumables)	5.3.2.3
Example 12	606-10-55-151	Explicit and Implicit Promises in a Contract	5.2.2.1
Case A	606-10-55-152–153A	Explicit Promise of Service	5.2.2.1
Case B	606-10-55-154–155	Implicit Promise of Service	5.2.2.1
Case C	606-10-55-156–157A	Services Are Not a Promised Service	5.2.2.1
Example 12A	606-10-55-157B–157E	Series of Distinct Goods or Services	5.3.3.4
Example 13	606-10-55-159–160	Customer Simultaneously Receives and Consumes the Benefits	8.4.3
Example 14	606-10-55-161–164	Assessing Alternative Use and Right to Payment	8.4.5.2
Example 15	606-10-55-165–168	Asset Has No Alternative Use to the Entity	8.4.5.1
Example 16	606-10-55-169–172	Enforceable Right to Payment for Performance Completed to Date	8.4.5.2
Example 17	606-10-55-173	Assessing Whether a Performance Obligation Is Satisfied at a Point in Time or Over Time	8.4.5.2
Case A	606-10-55-174–175	Entity Does Not Have an Enforceable Right to Payment for Performance Completed to Date	8.4.5.2
Case B	606-10-55-176–180	Entity Has an Enforceable Right to Payment for Performance Completed to Date	8.4.5.2
Case C	606-10-55-181–182	Entity Has an Enforceable Right to Payment for Performance Completed to Date	8.4.5.2
Example 18	606-10-55-184–186	Measuring Progress When Making Goods or Services Available	8.5.10
Example 19	606-10-55-187–192	Uninstalled Materials	8.5.9.2
Example 20	606-10-55-194–196	Penalty Gives Rise to Variable Consideration	6.3.1 and 6.6.4.1
Example 21	606-10-55-197–200	Estimating Variable Consideration	6.3.2.3
Example 22	606-10-55-202–207	Right of Return	6.3.5.3.1
Example 23	606-10-55-208–209	Price Concessions	6.3.3
Case A	606-10-55-210–212	Estimate of Variable Consideration Is Not Constrained	6.3.3
Case B	606-10-55-213–215	Estimate of Variable Consideration Is Constrained	6.3.3
Example 24	606-10-55-216–220	Volume Discount Incentive	6.3.5.4.2
Example 25	606-10-55-221–225	Management Fees Subject to the Constraint	6.3.3.2
Example 26	606-10-55-227–232	Significant Financing Component and Right of Return	6.4.7
Example 27	606-10-55-233–234	Withheld Payments on a Long-Term Contract	6.4.3.1.2
Example 28	606-10-55-235	Determining the Discount Rate	6.4.4
Case A	606-10-55-236–237	Contractual Discount Rate Reflects the Rate in a Separate Financing Transaction	6.4.4
Case B	606-10-55-238–239	Contractual Discount Rate Does Not Reflect the Rate in a Separate Financing Transaction	6.4.4
Example 29	606-10-55-240–243	Advance Payment and Assessment of Discount Rate	6.4.4
Example 30	606-10-55-244–246	Advance Payment	6.4.3.1.2
Example 31	606-10-55-248–250	Entitlement to Noncash Consideration	6.5
Example 32	606-10-55-252–254	Consideration Payable to a Customer	6.6.2
Example 33	606-10-55-256–258	Allocation Methodology	7.2
Example 34	606-10-55-259–260	Allocating a Discount	7.4
Case A	606-10-55-261–264	Allocating a Discount to One or More Performance Obligations	7.4
Case B	606-10-55-265–268	Residual Approach Is Appropriate	7.4
Case C	606-10-55-269	Residual Approach Is Inappropriate	7.4
Example 35	606-10-55-270	Allocation of Variable Consideration	7.5.1 and 12.7.6
Case A	606-10-55-271–274	Variable Consideration Allocated Entirely to One Performance Obligation	7.5.1 and 12.7.6
Case B	606-10-55-275–279	Variable Consideration Allocated on the Basis of Standalone Selling Prices	7.5.1 and 12.7.6
Example 38		Contract Liability and Receivable
Case A	606-10-55-284	Cancellable Contract	14.2
Case B	606-10-55-285–286	Noncancellable Contract	14.2
Example 39	606-10-55-287–290	Contract Asset Recognized for the Entity’s Performance	14.4
Example 40	606-10-55-291–294	Receivable Recognized for the Entity’s Performance	14.5
Example 41	606-10-55-296–297	Disaggregation of Revenue — Quantitative Disclosure	15.2.2
Example 42	606-10-55-298–305A	Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations	15.2.4.3.2
Example 43	606-10-55-306–307	Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations — Qualitative Disclosure	15.2.4.3.2
Example 44	606-10-55-309–315	Warranties	5.5.4
Example 45	606-10-55-317–319	Arranging for the Provision of Goods or Services (Entity Is an Agent)	10.3.1
Example 46	606-10-55-320–324	Promise to Provide Goods or Services (Entity Is a Principal)	10.2.5
Example 46A	606-10-55-324A–324G	Promise to Provide Goods or Services (Entity Is a Principal)	10.2.5
Example 47	606-10-55-325–329	Promise to Provide Goods or Services (Entity Is a Principal)	10.2.5
Example 48	606-10-55-330–334	Arranging for the Provision of Goods or Services (Entity Is an Agent)	10.3.1
Example 48A	606-10-55-334A–334F	Entity Is a Principal and an Agent in the Same Contract	10.4.1
Example 49	606-10-55-336–339	Option That Provides the Customer With a Material Right (Discount Voucher)	11.8
Example 50	606-10-55-340–342	Option That Does Not Provide the Customer With a Material Right (Additional Goods or Services)	11.2
Example 51	606-10-55-343–352	Option That Provides the Customer With a Material Right (Renewal Option)	11.9
Example 52	606-10-55-353–356	Customer Loyalty Program	11.2.2
Example 53	606-10-55-358–360	Nonrefundable Upfront Fees	5.6
Example 54	606-10-55-362–363B	Right to Use Intellectual Property	12.4.1
Example 55	606-10-55-364–366	License of Intellectual Property	12.3
Example 56	606-10-55-367	Identifying a Distinct License	12.3 and 12.4.1
Case A	606-10-55-368–370	License Is Not Distinct	12.3
Case B	606-10-55-371–374	License Is Distinct	12.3 and 12.4.1
Example 57	606-10-55-375–382	Franchise Rights	12.3, 12.4.2, and 12.7.6
Example 58	606-10-55-383–388	Access to Intellectual Property	12.4.2
Example 59		Right to Use Intellectual Property
Case A	606-10-55-389–392	Initial License	12.3.2, 12.4.1, and 12.6
Case B	606-10-55-392A–392D	Renewal of the License	12.6
Example 60	606-10-55-393–394	Sales-Based Royalty Promised in Exchange for a License of Intellectual Property and Other Goods and Services	12.7
Example 61	606-10-55-395–399	Access to Intellectual Property	12.4.2
Example 61A	606-10-55-399A	Right to Use Intellectual Property	12.3, 12.3.2, and 12.4.1
Case A	606-10-55-399B–399E	License Is the Only Promise in the Contract	12.3.2 and 12.4.1
Case B	606-10-55-399F–399J	Contract Includes Two Promises	12.3 and 12.4.1
Example 61B	606-10-55-399K–399O	Distinguishing Multiple Licenses From Attributes of a Single License	12.3.2
Example 62	606-10-55-401	Repurchase Agreements	8.7.1 and 8.7.2
Case A	606-10-55-402–404	Call Option: Financing	8.7.1
Case B	606-10-55-405–407	Put Option: Lease	8.7.2
Example 63	606-10-55-409–413	Bill-and-Hold Arrangement	8.6.9
ASC 610-20
Example 1		Scope
Case A	610-20-55-2–5	Nonfinancial Assets, In Substance Nonfinancial Assets, and a Guarantee	17.2.2.1
Case B	610-20-55-6–8	Nonfinancial Assets and Financial Assets	17.2.2.1 and 17.2.2.2
Case C	610-20-55-9–10	One Subsidiary That Holds Nonfinancial Assets and One Subsidiary That Holds Financial Assets	17.2.2.2
Example 2		Transfer of Control
Case A	610-20-55-11–14	Control Transfers Under Topics 810 and 606	17.4.1 and 17.4.2
Case B	610-20-55-15–16	Control Transfers Under Topic 810 but Not Under Topic 606	17.4.1
Example 3	610-20-55-17–19	Sale of a Nonfinancial Asset for Variable Consideration	17.4.2.2
ASC 952-606
Example 1	952-606-55-1–5	Identifying Performance Obligations	5.3.5

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

C.3 Step 1 — Identify the Contract With the Customer (Chapter 4 of the Roadmap)

C.3.1 Contract Enforceability and Termination Clauses — Implementation Q&As 7 and 8 (Compiled From TRG Agenda Papers 10, 11, 48, and 49)

The duration of a contract is predicated on the contract’s enforceable rights and obligations. Accordingly, regardless of whether one or both parties have the right to terminate the contract, an entity would need to evaluate the nature of the termination provisions, including whether they are substantive. For example, an entity would assess factors such as (1) whether the terminating party is required to pay compensation, (2) the amount of such compensation, and (3) the reason for the compensation (i.e., whether the compensation is in addition to amounts due for goods and services already delivered).

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).

C.3.2 Collectibility — Implementation Q&As 9 and 10 (Compiled From TRG Agenda Papers 13 and 25)

A collectibility assessment should take the following considerations into account:

When collectibility is probable for a portfolio of contracts, the expected amount should be recognized as revenue, and the uncollectible amount should be recorded as an impairment loss.
In determining when to reassess collectibility, an entity needs to exercise judgment on the basis of the facts and circumstances.

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.

C.3.3 Legal Determination of Contract Enforceability — Implementation Q&A 11

As a result of various third-party published interpretations, and because the guidance in ASC 606 refers to enforceability of rights and obligations as a matter of law, some stakeholders have raised questions about whether legal consultation is required as part of step 1. Although it is not a U.S. GAAP requirement to consult with legal counsel for all revenue contracts, it may sometimes be difficult to determine whether enforceable rights and obligations have been established (e.g., when a contract is not written). In these cases, an entity may need to perform additional steps, which may involve consultation with legal counsel, to determine whether a contract exists for purposes of ASC 606. In accordance with ASC 606-10-25-6, if the definition of a contract within the scope of ASC 606 is not met at inception, the entity should continually reassess its contract to determine whether the criteria for establishing the existence of a contract under ASC 606 are subsequently met.

C.6 Step 4 — Allocate the Transaction Price (Chapter 7 of the Roadmap)

C.6.1 Allocating Discounts and Variable Consideration — Implementation Q&A 38 (Compiled From TRG Agenda Papers 31 and 34)

Because discounts may be variable consideration, stakeholders have questioned which guidance should be applied when an entity’s contract with a customer includes a discount.

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.

C.6.2 Allocating Variable Consideration to a Series of Distinct Services — Implementation Q&A 45 (Compiled From TRG Agenda Papers 39 and 44)

Stakeholders have questioned whether an entity is required to allocate variable consideration on the basis of the relative stand-alone selling price of each distinct good or service in a series accounted for as a single performance obligation under ASC 606-10-25-14(b) (i.e., the series guidance).

As stated in ASC 606-10-32-29, the general allocation principle does not apply if the criteria in ASC 606-10-32-39 through 32-41 are met. A relative stand-alone selling price allocation is not required for an entity to assess whether the criteria in ASC 606-10-32-40 are met. Entities should use reasonable judgment to determine a reasonable allocation. Implementation Q&A 45 includes illustrative examples, which are summarized as follows:

Example A — An entity provides services under a multiyear IT outsourcing arrangement with continuous delivery of various activities over the contract term. The price per unit declines over time, reflecting the expected decreasing level of effort required. In addition, price benchmarking will be performed at various points during the contract, and pricing will be updated prospectively if market prices are significantly below the contract prices. The allocation objective may be met because the pricing is based on market terms and the decreasing prices are associated with declining costs of fulfilling the obligation.
Example B — An entity provides transaction processing over a multiyear term, with fees due that are based on a percentage of the dollar value processed in each transaction. The allocation objective may be met for each month of service if the fees are priced consistently throughout the contract and the rates are consistent with prices charged to other similar customers.
Example C — An entity provides hotel management services during a multiyear term, with fees due that are based on (1) a percentage of monthly rental revenue, (2) reimbursement of labor costs, and (3) a percentage of gross operating profit. The fees based on monthly rental revenue in this example are similar to fees in the hotel management example in paragraph BC285 of ASU 2014-09, which are based on occupancy rates. Accordingly, those fees may meet the allocation objective for each month of service because they reflect the value transferred to the customer in each period. In addition, the reimbursement fees may meet the allocation objective if they are representative of the costs incurred to fulfill the contract each period. Further, the fees based on a percentage of gross operating profit may meet the allocation objective if they reflect the value transferred to the customer in each period.
Example D — An entity provides a franchisee with the right to use its trade name and sell its products over a multiyear term. The entity will receive a sales-based royalty based on a fixed percentage of the franchisee’s sales. The allocation objective may be met because the fee earned each day is based on a consistent formula and percentage throughout the term and represents the value transferred to the customer each period.

C.6.3 How to Apply the Significant Financing Component Guidance to Contracts With Multiple Performance Obligations — Implementation Q&A 37 (Compiled From TRG Agenda Papers 30 and 34)

An entity will need to use judgment when attributing a significant financing component to one or more performance obligations. It may be more consistent with the overall allocation objective in ASC 606-10-32-28 to attribute the effect of a significant financing component to one or more (but not all) performance obligations in a contract by analogizing to the guidance on allocating variable consideration or to the guidance on allocating a discount.

Appendix D — Titles of Standards and Other Literature

Appendix E — Abbreviations

Abbreviation	Description
AI	artificial intelligence
AICPA	American Institute of Certified Public Accountants
ASC	FASB Accounting Standards Codification
ASU	FASB Accounting Standards Update
B&E	blend-and-extend
BC	Basis for Conclusions
CED	contract establishment date
CHIPS Act	Creating Helpful Incentives to Produce Semiconductors Act of 2022
CIMA	Chartered Institute of Management Accountants
CMS	Centers for Medicare & Medicaid Services
CODM	chief operating decision maker
CPM	cost per mille
CRM	customer relationship management
EAC	estimated total costs at completion
ED	exposure draft
EITF	Emerging Issues Task Force
EOR	employer of record
FASB	Financial Accounting Standards Board
FinREC	AICPA Financial Reporting Executive Committee
FOB	free on board
GAAP	generally accepted accounting principles
IAS	International Accounting Standard
IASB	International Accounting Standards Board
IC	independent contractor
IFRIC	IFRS Interpretations Committee
IFRS	International Financial Reporting Standard
IOSCO	International Organization of Securities Commissions
IP	intellectual property
IRA	Inflation Reduction Act of 2022
IT	information technology
ITC	invitation to comment
MD&A	Management’s Discussion and Analysis
MSA	master service agreement
NRE	nonrecurring engineering
OCA	SEC’s Office of the Chief Accountant
OEM	original equipment manufacturer
P&U	power and utilities
PBE	public business entity
PCAOB	Public Company Accounting Oversight Board
PCS	postcontract customer support
PEO	professional employer organization
PIR	postimplementation review
P.L.	Public Law
PSO	professional services organization
Q&A	question and answer
R&D	research and development
RMN	retail media network
ROFO	right of first offer
ROFR	right of first refusal
SaaS	software as a service
SAB	SEC Staff Accounting Bulletin
SEC	U.S. Securities and Exchange Commission
SG&A	selling, general, and administrative
SSP	stand-alone selling price
TCC	total care capitation
TRG	FASB/IASB transition resource group for revenue recognition
UCC	Uniform Commercial Code
U.S.C.	United States Code

Appendix F — Roadmap Updates for 2024

Substantive changes made in the 2024 edition are summarized in the tables below.

New Content

Section	Title	Description
3.2.2.1.1	Health Care Companies With Value-Based Care Arrangements	New section that discusses considerations for determining which, if any, elements of a health care company’s value-based care arrangement are within the scope of ASC 460 or ASC 606. The section includes new Example 3-6A.
3.2.10.1	Customer Litigation Settlements	New section that discusses the accounting for litigation settlements with customers that are partially or entirely within the scope of ASC 606 The section’s two subsections — Sections 3.2.10.1.1 and 3.2.10.1.2 — discuss litigation consideration received from a customer and paid to a customer, respectively.
10.2.3.1	Reseller of SaaS	New section that discusses the accounting for a reseller of SaaS that provides a significant service of integrating a third party’s service into its own services. The section includes new Example 10-5A.
11.12	Expiration of a Material Right	New section that discusses the accounting for the expiration of an option to acquire goods or services that had been identified as a material right.
12.6.5	Conversion of Perpetual Software Licenses to Term-Based Software Licenses	New section that discusses how to account for a contract modification that converts software licenses from perpetual to term-based. The section includes new Example 12-27A.
17.2.4	Transferable Tax Credits	Section added to note that entities that generate transferable tax credits (e.g., as a result of the CHIPS Act or the IRA) should consider the guidance in ASC 610-20 when (1) measuring the consideration they expect to receive in exchange for the transferable tax credits and (2) determining when control of the transferable tax credits is transferred to third parties.
18.3.5	On the Horizon	New section whose subsections discuss FASB standard-setting developments related to (1) derivative scope refinements (Section 18.3.5.1), (2) share-based consideration received from a customer (Section 18.3.5.2), (3) share-based consideration payable to a customer (Section 18.3.5.3), and (4) accounting for government grants (Section 18.3.5.4).
18.6	Tax Legislation	New section that provides cross-references to Deloitte’s Roadmap Income Taxes and other Deloitte publications that readers can consult for (1) a discussion of challenges associated with an entity’s accounting for tax credits available under the CHIPS Act, the IRA, or both, including an entity’s election to account for transferable tax credits under ASC 740 or other guidance; (2) a discussion of how entities that generate such transferable tax credits should consider the guidance in ASC 610-20; and (3) further discussion of the IRA.

Amended or Deleted Content

Section	Title	Description
On the Radar		Updated to (1) add a discussion about payments or incentives provided to a customer that require significant judgment in the application of the guidance on consideration payable to a customer; (2) expand the discussion about the PIR of ASC 606 to reflect recent developments; (3) add a summary of FASB standard-setting developments related to derivative scope refinements and share-based consideration received from a customer, share-based consideration payable to a customer, and accounting for government grants; and (4) remove the video “Trending Topics.”
5.2.3	Immaterial Promises	Expanded the discussion to clarify that 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 promised goods or services in the aggregate.
5.3.2.3.2.2	Identifying the Performance Obligations in Co-Branded Credit Card Arrangements	Expanded the discussion to include AICPA interpretive guidance on co-branded credit card arrangements.
5.3.2.3.4	Identifying Performance Obligations in Arrangements That Include Smart Devices, Updates, and Cloud-Based Services	Added a discussion about the potential need for an entity to consider proprietary software embedded in a smart device that has been combined with subscription services when assessing whether the functionality of the combined smart device and subscription services is transformative rather than additive.
6.6.1.2	Identifying Payments Within the Scope of the Requirements Related to Consideration Payable to a Customer	Added (1) Example 6-20A to illustrate an entity’s accounting for cash gift cards provided to a customer’s customers and (2) Example 6-20B to illustrate an entity’s accounting for (a) credits provided to an existing customer for referring a friend under a promotional program and (b) credits provided to the referred new customer.
7.5.3.1.2	Applying the Variable Consideration Allocation Exception to Stand-Ready SaaS Arrangements With Usage-Based Variable Consideration	Added Example 7-23A to illustrate the applicability of the variable consideration allocation exception to stand-ready SaaS arrangements with overage fees and minimums that increase monthly when the minimums are not substantive.
8.5.6	Subsequent Measurement of an Entity’s Measure of Progress	Added Example 8-6A to illustrate two approaches to an entity’s accounting for a change in estimate related to how long a customer is expected to require the entity to stand ready to provide services.
8.7	Repurchase Agreements	Added a cross-reference to Deloitte’s Roadmap Leases to help readers obtain information about evaluating whether an entity’s obligation or right to repurchase an asset should be accounted for as a lease.
9.2.2.2.1	Blend-and-Extend Contract Modifications in the Power and Utilities Industry	Expanded the discussion to explain how a supplier in a specific fact pattern involving a B&E contract modification would account for the modification as a separate contract for additional goods or services in accordance with ASC 606-10-25-12 (“View A”) or as the termination of an existing contract and the creation of a new contract in accordance with ASC 606-10-25-13(a) (“View B”).
11.1	In General	Updated to express Deloitte’s view (supported by discussions quoted from paragraph BC387 of ASU 2014-09 and paragraph 12 of TRG Agenda Paper 6 that compare ASC 606 with legacy revenue guidance) that a discount in a contract with a customer represents a material right under ASC 606 if it is (1) significant and (2) incremental to discounts that would be given to a potential customer (e.g., discounts that are routinely provided as a marketing offer).
12.2.1	Software in a Hosting Arrangement	Added Example 12-1A to illustrate how an entity might evaluate the existence of a significant penalty that would be incurred to take possession of software in a hosting arrangement.
12.6.4.1.2	Alternative 1B — Right of Return Model (Acceptable View)	Updated the discussion about applying the right of return model (“Alternative 1B”) to Example 12-24 to clarify that all consideration in that model is variable.
13.5.1.1	Providing for Anticipated Losses	Updated Example 13-19 to illustrate a type of fact pattern more commonly encountered in current practice.
14.6.1	Contract Assets and Contract Liabilities	Added Example 14-4A to illustrate how contract assets and contract liabilities should be presented net at the contract level but should not be presented net with other contracts.
14.7.6	Interaction Between ASC 606 and SEC Regulation S-X, Rule 5-03(b)	Expanded the discussion to note that the SEC staff has asked registrants about potential inconsistencies between (1) the disaggregation of revenue in the footnotes to the financial statements and (2) the presentation of revenue from products and services on the face of the income statement in accordance with SEC Regulation S-X, Rule 5-03(b).
15.2.4.2	Disclosure of Revenue Recognized From Past Performance	Updated Example 15-1 to clarify how satisfied performance obligations are disclosed in the interim financial statements.
18.5	AICPA Digital Assets Working Group	Added a cross-reference to Deloitte’s June 21, 2022, Accounting Spotlight to help readers obtain information and interpretative guidance on the accounting for nonfungible tokens.

	Chris Chiriatti Audit & Assurance Managing Director Deloitte & Touche LLP +1 203 761 3039 cchiriatti@deloitte.com		Kristin Bauer Audit & Assurance Partner Deloitte & Touche LLP +1 312 486 3877 kbauer@deloitte.com
	Mark Crowley Audit & Assurance Managing Director Deloitte & Touche LLP +1 203 563 2518 mcrowley@deloitte.com		Abhash Dhar Audit & Assurance Managing Director Deloitte & Touche Assurance & Enterprise Risk Services India Private Limited +1 404 836 7812 abdhar@deloitte.com
	Dennis Howell Audit & Assurance Partner Deloitte & Touche LLP +1 203 761 3478 dhowell@deloitte.com		Sean May Audit & Assurance Partner Deloitte & Touche LLP +1 415 783 6930 semay@deloitte.com
	Ignacio Perez Audit & Assurance Managing Director Deloitte & Touche LLP +1 203 761 3379 igperez@deloitte.com		Shekhar Sanwaria Audit & Assurance Managing Director Deloitte & Touche Assurance & Enterprise Risk Services India Private Limited +1 404 487 7526 ssanwaria@deloitte.com
	Aaron Shaw Audit & Assurance Partner Deloitte & Touche LLP +1 202 220 2122 aashaw@deloitte.com		Charlie Steward Audit & Assurance Partner Deloitte & Touche LLP +1 404 220 1102 csteward@deloitte.com
	Mark Strassler Audit & Assurance Managing Director Deloitte & Touche LLP +1 415 783 6120 mstrassler@deloitte.com		Stefanie Tamulis Audit & Assurance Managing Director Deloitte & Touche LLP +1 203 563 2648 stamulis@deloitte.com
	PJ Theisen Audit & Assurance Partner Deloitte & Touche LLP +1 202 220 2824 ptheisen@deloitte.com		Andrew Winters Audit & Assurance Partner Deloitte & Touche LLP +1 203 761 3355 anwinters@deloitte.com