September 2018

Summary of the September Meeting of the Emerging Issues Task Force

by Elena Cilenti, Stephen McKinney, and Bob Uhl, Deloitte & Touche LLP

This EITF Snapshot summarizes the September 27, 2018, meeting of the Emerging Issues Task Force (EITF or “Task Force”). Initial Task Force consensuses (“consensuses-for-exposure”) are exposed for public comment upon ratification by the Financial Accounting Standards Board (FASB). After the comment period, the Task Force considers comments received and redeliberates the issues at a scheduled meeting to reach a final consensus. Those final consensuses are then provided to the FASB for final ratification and, ultimately, issuance as an Accounting Standards Update (ASU).

After each meeting, the official EITF minutes, including the results of the FASB’s ratification process, will be posted to the Deloitte Accounting Research Tool (DART) and to the FASB’s Web site (note that the official EITF minutes may contain details that differ from those in this publication). EITF Issue Summaries (released before the meeting and used to frame the discussion) are also available on those sites.

Issue 18-A, “Recognition Under Topic 805 for an Assumed Liability in a Revenue Contract”

Status: Consensus-for-exposure.

Affects: Entities that assume a liability in a revenue recognition contract acquired in a business combination after the acquirer has adopted ASC 606.1

Background: ASC 805 requires the recognition of assumed liabilities in a business combination. Views differ on how an entity should apply ASC 805 when the assumed liability in a business combination is a revenue contract and the entity has adopted ASC 606. As a result, at its March 28, 2018, Board meeting, the FASB added to the EITF’s agenda a project to address how an entity recognizes a liability related to a revenue contract acquired in a business combination after adopting ASC 606.

At its June 2018 meeting, the Task Force tentatively decided that an entity should recognize the assumed liability for a contract liability from a revenue contract acquired in a business combination on the basis of whether the liability represents a performance obligation under ASC 606. The Task Force indicated that the amount of revenue recognized by the acquirer for the acquired contract should not be affected by the timing of the payment of consideration or the payment terms in the contract.

The Task Force also tentatively decided that it would not be appropriate for an acquirer to use a carry-over basis to measure an assumed contract liability in a revenue contract acquired in a business combination because doing so would be inconsistent with the fair value measurement guidance in ASC 805. In addition, the Task Force tentatively decided that the acquirer’s measurement of the assumed liability’s fair value would take into account the other assets and liabilities in the acquired set.

However, after the Task Force reached a consensus-for-exposure on this Issue, it identified potential unintended consequences of applying the tentative decisions reached and recommended that those concerns be discussed at the September 27, 2018, EITF meeting.

Summary: At this meeting, the Task Force discussed whether (1) payment terms in an acquired contract would have an effect on the subsequent amount of revenue recognized after a business combination and (2) costs of activities involved in fulfilling a performance obligation used in the acquirer’s measurement of the assumed liability’s fair value and whether that measurement should take into account the other assets and liabilities in the acquired set.

The Task Force decided that additional research is needed before decisions are made regarding the two discussion topics, since there may be greater implications related to measuring assumed contract liabilities in a revenue contract acquired in a business combination. As a result, the Task Force decided to issue for public comment a discussion paper summarizing the issues and soliciting input on (1) whether and, if so, how payment terms affect the amount of revenue recognized after a business combination and (2) measuring the fair value of an assumed contract liability for a revenue contract accounted for under ASC 805.

The Task Force reached a consensus-for-exposure to issue a proposed ASU on the tentative decision it reached at its June 2018 meeting that an entity should recognize the assumed contract liability resulting from a revenue contract acquired in a business combination on the basis of whether the liability represents a performance obligation under ASC 606.

The proposed ASU and discussion paper will be issued for public feedback in conjunction with each other.

Effective Date and Transition: The Task Force decided that an entity would apply a prospective transition method when adopting the final guidance. The effective date will be discussed at a future meeting.

Next Steps: The FASB staff will draft and issue a proposed ASU and discussion paper for public comment on the basis of the decisions made at the EITF meeting.

Issue 18-B, “Improvements to Accounting for Episodic Television Series”

Status: Consensus-for-exposure.

Affects: Entities that account for film costs under ASC 926-20 and license agreements under ASC 920-350.

Background: ASC 926-20 provides guidance on accounting for film costs in the media and entertainment industry. The capitalization model for costs related to episodic television series in ASC 926-20 differs from that for film costs. An entity fully capitalizes film costs, while the capitalization of costs related to episodic content is subject to a constraint based on contracted revenues. Because there have been changes in how media is produced and distributed over the Internet, the differentiation between film and episodic series has become blurred. The Board added a project to the EITF’s agenda to reconsider whether the cost capitalization model for episodic television series in ASC 926-20 is still relevant or whether it should be the same as the model applied to films. The scope of the project also includes consideration of whether any amendments to the cost capitalization guidance would require changes to the amortization, impairment, presentation, and disclosure requirements in ASC 926-20. The FASB staff established an industry working group to advise the Task Force.

At its June 7, 2018, meeting, the Task Force tentatively decided the following with respect to cost capitalization for episodic television series:

The cost capitalization guidance related to episodic content will be aligned with the guidance for films by removing the content distinction.
The amortization guidance in ASC 926-20 does not need to be amended to provide more prescriptive guidance on viewership and to require the use of amortization curves.

The Task Force also discussed a number of other issues related to the capitalization of costs associated with episodic television series but did not reach any conclusions. As a result, the Task Force requested the FASB staff to obtain feedback from the industry working group on these issues. See Deloitte’s June 2018 EITF Snapshot for more information.

Summary: At this meeting, the Task Force revisited a number of issues related to the capitalization of costs associated with episodic television series on the basis of feedback from the industry working group.

The Task Force tentatively decided the following:

An entity would be allowed to perform film impairment tests at a group level, rather than an individual film level, when there is limited to no direct contracted revenue (e.g., subscription fees).
As discussed in Issue Summary No. 1, a film group (the unit of account for impairment testing) should represent the “lowest level for which identifiable cash flows are largely independent of the cash flows of other films or license agreements.” A film group includes license agreements that are within the scope of ASC 920-350. For a film to be included in a group, the film should also be “predominantly monetized with other films and license agreements instead of predominantly monetized on its own.”
The proposed guidance would include both individual-film and group-level impairment indicators. An entity would apply the indicators depending on the unit of account applied in the impairment test (e.g., if the impairment test is performed on a group level, an entity will use the group-level impairment indicators).
The impairment model for licensed content in ASC 920-350 would be amended to align with the fair value model for produced content in ASC 926-20.
The amortization guidance in ASC 926-20 would be clarified to specify that changes in estimates of the use of a film are accounted for prospectively.

The Task Force reaffirmed its tentative decision that the amortization guidance in ASC 926-20 does not need to be amended to (1) provide more prescriptive guidance on viewership and (2) require the use of amortization curves.

The Task Force tentatively decided to align the guidance in ASC 926-20 and ASC 920-350 with respect to the presentation of film costs by eliminating the specific classification requirements in both of those subtopics. That is, the proposed ASU would eliminate the requirement to classify content assets as (1) noncurrent under ASC 926-20 and (2) current or noncurrent on the basis of the estimated time of usage under ASC 920-350. The Task Force also tentatively decided that an entity would separately present and disclose information for theatrical films and direct-to-television products. Further, an entity would be required to disclose information for impairment losses of film costs recognized. The disclosure requirements should also be applied to licensed content that is within the scope of ASC 920-350.

Effective Date and Transition: The Task Force decided that an entity would apply a prospective transition method when adopting the final guidance and that the amendments in this Issue also apply to private companies. The effective date will be discussed at a future meeting.

Next Steps: The FASB staff will draft and issue a proposed ASU for public comment on the basis of the decisions made at the EITF meeting.

Administrative Matters

The next EITF decision-making meeting is tentatively scheduled for November 15, 2018.

Footnotes

For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”