FASB Makes Tentative Decisions on Technical Corrections and Improvements to New Revenue Standard and Discusses Project on Revenue Recognition of Grants and Contracts by Not-for-Profit Entities
Technical Corrections and Improvements to New Revenue Standard
Yesterday, the FASB met to discuss the feedback it received in response to its proposed ASU1 that would amend certain aspects of the Board’s May 2014 revenue standard, ASU 2014-09.2 The amendments were proposed in response to feedback received from several sources, including the TRG3 for revenue recognition, and would clarify, rather than change, the new revenue standard’s core revenue recognition principles. Nine issues were included in the proposed ASU, which are summarized in the appendix below.
During the meeting, the Board (1) affirmed the amendments related to eight of the issues presented in the proposed ASU and (2) instructed its staff to perform further outreach and research to better understand the cost versus benefit of the proposed amendments related to disclosures of remaining performance obligations (Issue 6 of the proposed ASU).
The FASB also discussed additional potential technical corrections (the “phase two amendments”) that were not included in the proposed ASU because they were not identified until after the January 20, 2016, Board meeting on the revenue technical corrections. These items include:
- Amendments4 to clarify the scope for fees from financial guarantees in ASC 942-825-50-2 and ASC 310-10-60-4.
- Reinstatement of the guidance in ASC 340-20-25-2, which addresses the accrual of certain advertising expenses.
- Amendment to clarify Example 40 of ASU 2014-09 by removing the reference to “contract liability” to describe a refund obligation.
- Amendment of Example 38, Case B, of ASU 2014-09 to “more clearly link the analysis in that example with the receivables presentation guidance in paragraph 606-10-45-4.”
As it relates to the phase two amendments, the Board (1) tentatively agreed with the staff’s recommendations and (2) instructed the staff to bring to ballot an exposure draft on the items. Once approved for exposure by the Board, the phase two amendments will be exposed for a 15-day public comment period.
Once any stakeholder feedback has been resolved, the Board intends to combine the phase two amendments with the original revenue technical corrections and issue one final revenue technical correction ASU. The Board noted, however, that depending on the results of the outreach and research on Issue 6 of the proposed ASU, the Board may decide to address amendments related to Issue 6 in a separate ASU and issue a final technical corrections ASU to address all issues other than Issue 6.
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 2015-14,5 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 December 15, 2018. Early adoption is permitted only as of annual reporting periods, and interim periods therein, beginning after December 15, 2016.
For more information on the proposed amendments, refer to Deloitte’s May 19, 2016, journal entry and the FASB meeting handout.
Revenue Recognition of Grants and Contracts by Not-for-Profit Entities
The FASB also discussed its project to clarify the existing guidance on revenue recognition of grants and similar contracts by not-for-profit entities (NFPs). The project focuses on two issues: (1) whether to characterize grants and similar contracts with governmental agencies and others as (a) reciprocal transactions (exchanges) or (b) nonreciprocal transactions (contributions) and (2) how to distinguish between conditions and restrictions for nonreciprocal transactions. The Board directed the staff to consider results of the discussion and update the possible solutions for discussion at a future meeting. No decisions were made at the meeting.
Key provisions of the proposed amendments on technical corrections and improvements to the new revenue standard are summarized in the table below, which was reproduced from the proposed ASU. The table also includes the tentative decisions made by the Board at yesterday’s meeting.
Area for Correction or Improvement
Summary of Proposed Amendments
Tentative Decision Reached
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 decided to retain the guidance in ASC 340-10-25-2, which prescribes the accounting treatment for capitalization of molds, tools, and dies that a supplier will not own that will be used in producing the products under a long-term supply arrangement.
All other amendments affirmed.
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.
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.
The Board directed its staff to perform further outreach and research on the proposed amendments.
The Board specifically requested that the staff meet with users and prepare examples of the types of disclosures that may be required for different types of revenue streams for discussion at a future Board meeting.
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.
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 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.
These corrections were also discussed at the April 18, 2016, TRG meeting; see Deloitte’s April 20, 2016, TRG Snapshot for additional information.
FASB Accounting Standards Update No. 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date.