FASB Approves Technical Corrections and Improvements to New Revenue Standard
On May 18, 2016, the FASB issued a proposed ASU1 (the “May proposed ASU”) that would amend certain aspects of the Board’s new revenue standard, ASU 2014-09.2 On August 31, 2016, the FASB met to discuss the feedback received in response to the nine issues included in the May proposed ASU.3 The FASB also discussed additional potential technical corrections (the “phase two amendments”) and subsequently issued an additional proposed ASU4 on September 19, 2016 (the “September proposed ASU”). Comments on the September proposed ASU were due October 4, 2016.5
All the amendments being proposed are in response to feedback received from several sources, including the TRG6 for revenue recognition. The proposed amendments would clarify, rather than change, the new revenue standard’s core revenue recognition principles.
On October 19, 2016, the Board met to (1) discuss the feedback received on the September proposed ASU and (2) redeliberate two of the original technical corrections previously discussed at the August 31, 2016, meeting. A summary of all the technical corrections and the decisions reached by the Board on each of the issues is included in the appendix below.
The Board decided to issue one final ASU containing all but one of the amendments from both the May proposed ASU and the September proposed ASU; the Board instructed its staff to proceed drafting one ASU for the 12 issues it has approved.
Effective Date and Transition Requirements
The effective date and transition requirements under the proposed ASU would be the same as those in the new revenue standard.
Editor’s Note: In August 2015, the FASB issued ASU 2015-14,7 which deferred for one year the effective date of the new revenue standard for public and nonpublic entities reporting under U.S. GAAP. For public business entities, as well as certain nonprofit entities and employee benefit plans, the effective date is annual reporting periods, and interim periods therein, beginning after December 15, 2017. The effective date for all other entities is one year later (i.e., December 15, 2018). Early adoption is permitted only as of annual reporting periods, and interim periods therein, beginning after December 15, 2016.
Key provisions of the amendments within the May proposed ASU and the September proposed ASU are summarized in the table below, which is reproduced from the proposed ASUs. The table also includes the tentative decisions made by the Board at the August 31, 2016, and October 19, 2016, meetings.
Area for Correction or Improvement
Summary of Proposed Amendments
Original Technical Corrections
Issue 1: Preproduction Costs Related to Long-Term Supply Arrangements
New cost guidance within Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, was issued as part of Update 2014-09. Stakeholders have indicated that it is not clear what contracts are within the scope of the new guidance versus the scope of existing guidance in Subtopic 340-10, Other Assets and Deferred Costs—Overall.
The amendments in this proposed Update would supersede the guidance on preproduction costs related to long-term supply arrangements in Subtopic 340-10. As a consequence, if the costs previously within the scope of Subtopic 340-10 relate to a contract with a customer, an entity would apply the guidance in Subtopic 340-40 upon the adoption of Update 2014-09.
The Board directed its staff to perform additional research before finalizing the amendment. Therefore, the amendment will not be finalized with the other twelve listed below.8
Issue 2: Contract Costs—Impairment Testing
Subtopic 340-40 includes impairment guidance for costs capitalized in accordance with the recognition provisions of that Subtopic. Stakeholders have raised some questions about the impairment testing of those capitalized costs.
The amendments in this proposed Update would 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 the entity expects to receive in the future.
Amendments affirmed. However, in response to feedback received, one Board member requested that the staff, when drafting the Basis for Conclusions, clarify that it was not the Board’s intention to significantly change current practice as it relates to the timing of the recognition of a receivable.
Issue 3: Contract Costs—Interaction of Impairment Testing with Guidance in Other Topics
Some stakeholders have raised questions about the interaction of the impairment testing in Subtopic 340-40 with guidance in other Topics.
The amendments in this proposed Update would clarify that impairment testing first should be performed on assets outside the scope of Topic 340 (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, Property, Plant, and Equipment, and Topic 350, Intangibles—Goodwill and Other.
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 have indicated that this amendment, in some circumstances, may require an entity to perform the loss assessment at a lower level than current practice despite the Board’s decision not to change practice in this area.
The amendments in this proposed Update would require that the provision for losses be determined at least at the contract level. However, the proposed amendments would 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 amendment in this proposed Update would 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 practical expedients to 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 have requested that the Board consider whether specific practical expedients could be added to the guidance for contracts in which an entity does not need to estimate variable consideration in order to recognize revenue.
The amendments in this proposed Update would provide practical expedients to the disclosure requirement for remaining performance obligations for specific situations in which an entity need not estimate variable consideration in order to recognize revenue.
The amendments in this proposed Update also would expand the information disclosed when an entity applies one of the practical expedients.
Issue 7: Contract Modifications Example
Example 7 in Topic 606 illustrates the application of the guidance on contract modifications. Some stakeholders have perceived some minor inconsistencies with the contract modifications guidance in Topic 606.
The amendments in this proposed Update would improve the alignment of Example 7 and the principles in Topic 606.
Issue 8: Fixed-Odds Wagering Contracts in the Casino Industry
Subtopic 924-605, Entertainment—Casinos—Revenue Recognition, currently includes explicit guidance that identifies 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 have 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, Derivatives and Hedging.
The amendments in this proposed Update would (a) create a new Subtopic 924-815, Entertainment—Casinos—Derivatives and Hedging, which would include a scope exception from derivatives guidance for fixed-odds wagering contracts and (b) include a scope exception within Topic 815, Derivatives and Hedging, for fixed odds wagering contracts issued by casino entities.
Issue 9: Cost Capitalization for Advisors to Private and Public Funds
A consequential amendment included in Update 2014-09 relocated 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 that was made in Update 2014-09 could result in inconsistent accounting for offering costs among advisors to public and private funds.
The amendments in this proposed Update would align the cost-capitalization guidance for advisors to both public funds and private funds in Topic 946.
Additional Technical Corrections
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 consequential amendments included in Update 2014-09 are inconsistent on whether fees from financial guarantees are within the scope of Topic 606 and should be accounted for in accordance with that Topic.
The amendments in this proposed Update would clarify that guarantee fees within the scope of Topic 460 (other than product or service warranties) are not within the scope of Topic 606.
Issue 2: 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 concerns that the example indicates that an entity cannot record a receivable before its due date.
The amendments in this proposed Update would provide a better link between the analysis in Example 38, Case B and the receivables presentation guidance in Topic 606.
Issue 3: Refund Liability
Example 40 in Topic 606 illustrates the recognition of a receivable and a refund liability. Stakeholders expressed concerns that the example indicates that a refund liability should be characterized as a contract liability.
The amendments in this proposed Update would remove from the journal entry in Example 40 the reference to the term contract liability.
Issue 4: Advertising Costs
Update 2014-09 superseded 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, Other Assets and Deferred Costs— Contracts with Customers. 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 superseded by Update 2014-09.
The amendments in this proposed Update would reinstate the guidance on the accrual of advertising costs.
FASB Proposed Accounting Standards Update, Technical Corrections and Improvements to Update 2014-09, Revenue From Contracts With Customers (Topic 606).
FASB Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (Topic 606).
The nine issues, along with the decisions reached at the meeting, are summarized within Deloitte’s September 1, 2016, journal entry.
FASB Proposed Accounting Standards Update, Technical Corrections and Improvements to Update 2014-09, Revenue From Contracts With Customers (Topic 606) — Additional Corrections.
The four additional issues are summarized within Deloitte’s September 20, 2016, journal entry.
The transition resource group (TRG) for revenue recognition was established by the FASB and IASB to seek and provide feedback on potential issues related to implementation of the new revenue standard. Early this year, the IASB announced that it completed its decision-making process related to clarifying the new revenue standard and that it no longer plans to schedule TRG meetings for IFRS constituents.
FASB Accounting Standards Update No. 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date.
The staff informed the Board that it received additional feedback from stakeholders who raised operational concerns on the amendment. Specifically, stakeholders were concerned that the amendment could result in diversity in practice and significantly different accounting treatment depending on an entity’s interpretation of the guidance as proposed. Because the staff was unable to perform thorough research on the matter before the meeting, it proposed that the Board not issue the amendment, which would provide the staff with time to perform additional outreach and hold discussions with preparers and other stakeholders before finalizing an amendment to address the issue. The Board agreed with the staff’s proposal and instructed the staff to perform the additional outreach either by proposing the issue to the TRG or arranging a meeting with a targeted group of stakeholders.
The Board 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, 2016, 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, but noted the importance of monitoring adoption of the disclosure requirements to determine what information preparers are disclosing and what information investors are using to identify whether additional amendments are necessary once implementation reviews are completed.