Joint Meeting on Revenue — March 2015

The FASB and IASB staffs noted that stakeholders have expressed three views on this topic:

• View A — 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.
• View B — Regardless of whether a discount is fixed or variable, an entity would consider only the discount allocation guidance and allocate the discount accordingly.
• View C — An entity would use judgment and apply either the discount allocation guidance or the variable consideration allocation guidance depending on the facts and circumstances.

The staffs concluded that View A is the only view supported under the new revenue standard because they believed that ASC 606-10-32-41 (paragraph 86 of IFRS 15) 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).

See TRG Agenda Paper 31 for additional details.

Summary: TRG members generally supported the staffs’ recommendation.

For additional information, see TRG Agenda Paper 32.

Summary: Although the TRG generally agreed with the staffs’ analysis, conclusions, and recommendations with respect to Issues 1, 2, and 3, it primarily discussed Issue 1, specifically View A (under which a customer’s exercise of a material right would be accounted for as a change in the transaction price) and View B (under which the exercise would be accounted for as a contract modification). Many TRG members expressed a preference for View A because they believed that it (1) is consistent with current practice, (2) leads to a logical outcome, and (3) may be more practical to apply. However, TRG members did not oppose View B because they understood how it could be a viable alternative under the new revenue standard. Although TRG members acknowledged that allowing two alternatives could result in inconsistent application (e.g., from a broad policy election), they noted that any election should be consistently applied to similar types of transactions. Further, many TRG members believed that the accounting outcomes under View A would often be similar to those under View B because under either view, the underlying goods or services associated with the material right are likely to be distinct performance obligations (i.e., since they are optional under the initial contract).

Accordingly, the staffs performed an analysis of the following issues:

• Issue 1: Assessing which payments to a customer are within the scope of the guidance on consideration payable to a customer — In evaluating this issue, the staffs indicated there are three prevailing interpretations: (1) an entity should assess all consideration payable(broadly, all payments) to a customer (“Interpretation A”);16 (2) an entity should assess only consideration payable to a customer under a contract with the customer (or combined contracts) (“Interpretation B”); and (3) an entity should assess only consideration payable to a customer under a contract with the customer (or combined contracts) and consideration payable to customers in the distribution chain of the entity’s customer (“Interpretation C”). The staffs concluded that Interpretation A is the only interpretation supported under the new revenue standard because the boards acknowledge in paragraph BC257 of the standard’s basis for conclusions that the receipt of consideration from a customer and the payment of consideration to a customer can be linked even if they are unconnected events.
• Issue 2: Determining whether the guidance on consideration payable to a customer applies only to customers in the distribution chain or more broadly to any customer of an entity’s customer — In the staffs’ view, the phrase “for example” in paragraph BC255 does not indicate that the guidance on consideration payable to a customer should be applied to a customer’s customer that is not in the distribution chain. The staffs noted that “[t]hose in the distribution chain are the customer’s customers” and that “the phrase customer’s customer is a plain English way to describe the concept.”17
• Issue 3: Timing of recognition of consideration payable to a customer — The staffs expressed their belief that the variable consideration guidance under the new revenue standard does not conflict with the standard’s guidance on consideration payable to a customer. They concluded that if the consideration payable to a customer is variable, the guidance on variable consideration should be applied. Conversely, they determined that if such consideration is not variable, the guidance on consideration payable to a customer is applicable.

See TRG Agenda Paper 28 for additional information.

Summary: Issue 1 generated considerable debate among TRG members, with some members agreeing with the staffs’ recommendation of Interpretation A and others viewing Interpretation B as the appropriate conclusion. However, TRG members generally agreed that an entity should evaluate a payment to a customer (or to a customer’s customer) — particularly when no goods or services have been transferred — to determine the commercial substance of the payment and whether the payment is linked (economically) to a revenue contract with the customer. Accordingly, TRG members generally agreed that the FASB staff should seek to reconcile the Issue 1 views articulated in TRG Agenda Paper 28 rather than recommend amendments to the new revenue standard.

On Issues 2 and 3, the TRG did not agree, and FASB members indicated that the Board and its staff should evaluate feedback from TRG members to determine next steps (most likely at a future TRG meeting), including whether “workable solutions” are possible under the new revenue standard or whether a change to the standard is required. Concerns about Issue 2 were primarily related to the identification of a customer, particularly for an agent that may have more than one customer (i.e., the principal and end customer in a revenue transaction); but TRG members generally agreed that an entity should evaluate a payment to a customer to determine whether the payment should be linked to a contract (as they did with respect to Issue 1). For Issue 3, the crux of the TRG’s debate was whether the appropriate timing for recognition of an adjustment to the transaction price is (1) the communication date (e.g., when a customer is informed of a planned “coupon drop”), (2) the management approval date (e.g., when management with relevant authority approves a planned coupon drop), or (3) determined in accordance with the guidance on constraining variable consideration.

The staffs noted that stakeholders have identified two issues with respect to pre-CED activities:

• Issue 1: How to recognize revenue from pre-CED activities — Once the criteria in step 1 have been met, stakeholders have suggested that entities should recognize revenue for pre-CED activities either (1) on a cumulative catch-up basis (i.e., record revenue as of the CED for all satisfied or partially satisfied performance obligations) or (2) prospectively (i.e., record revenue for performance that occurred before the CED as the remaining performance obligations are satisfied). The staffs recommended the first alternative because they believe that it is more consistent with the new revenue standard’s core principle.
• Issue 2: How to account for certain fulfillment costs incurred before the CED — The staffs noted three potential alternatives identified by stakeholders:19
  (a) Alternative A. Such costs are capitalised as costs to fulfil an anticipated contract. These costs would be expensed immediately at the CED if they relate to progress made to date because the goods or services constituting a performance obligation have already been transferred to the customer. The remaining asset would be amortised over the period over which the goods or services to which the asset relates will be transferred to the customer.

  (b)Alternative B. Such costs are capitalised as costs to fulfil an anticipated contract and amortised as the entity transfers the remaining goods or services under the contract, ie on a prospective basis.

  (c)Alternative C. Such costs cannot be capitalised as costs to fulfil an anticipated contract because they relate to progress made prior to obtaining the contract and not to satisfying performance obligations in the future. Therefore, such costs should be expensed as incurred unless they qualify for capitalisation under other guidance (eg inventory guidance).

The staffs noted that they did not consider Alternative B for prospective treatment because they did not recommend prospective accounting for Issue 1. The staffs recommended Alternative A because this “would result in the same cumulative recognition of costs and hence margin at the CED and in future periods as a contract that had met the criteria [for being a contract] from the inception of the contract. The two contracts will be identical and hence economically equivalent from the CED.”20

For more information, see TRG Agenda Paper 33.

Summary: TRG members generally agreed with the staffs’ recommendations.

Questions continually arise about how an entity would determine whether a product warranty that is not separately priced is a performance obligation (i.e., whether the warranty represents a service rather than a guarantee of the product’s intended functionality). For illustrative purposes, the FASB and IASB staffs discussed an example in which a luggage company provides a lifetime warranty to repair any damage to the luggage free of charge and noted that such a warranty would be a separate performance obligation because the company agreed to fix repairs for any damage (i.e., repairs extend beyond those that fix defects preventing the luggage from functioning as intended).

The staffs noted that the luggage example “illustrates a relatively [straightforward] set of facts and circumstances that demonstrate an instance of when a warranty provides a service”23 and further observed that the conclusion for other warranty arrangements may be less clear. Accordingly, the staffs reiterated that an entity will need to assess the substance of the promises in a warranty arrangement and exercise judgment on the basis of the entity’s specific facts and circumstances.

For additional details, see TRG Agenda Paper 29.

Summary: TRG members generally agreed with the staffs’ conclusion for the fact pattern presented in TRG Agenda Paper 29. Some of the discussion focused on the duration of the warranty (i.e., the lifetime warranty in the luggage company example), but FASB staff members reiterated that while duration may be an indicator of whether a warranty is a separate performance obligation, it is not determinative. The FASB staff further reiterated that the paper’s main purpose was educational — that is, its primary aim was to counter the claim made by some stakeholders that “nothing has changed from current practice” and to demonstrate that an entity would need to use judgment in determining whether there are additional performance obligations to which the transaction price should be allocated.

For more information, see TRG Agenda Paper 30.

Summary: TRG members generally agreed with the staffs’ analysis of all issues noted in TRG Agenda Paper 30 but focused their discussion on the first two issues, regarding which they noted that “bright lines” were not intended in the application of the guidance. That is, TRG members agreed that the guidance should not contain a rebuttable presumption that an entity would need to overcome (e.g., regarding the existence or nonexistence of a significant financing component); rather, an entity should be allowed to use judgment to evaluate the facts and circumstances of a transaction. TRG members also agreed that these two issues (1) seem more closely related to advance payments than to payments made in arrears and (2) apply to other types of advance payments (i.e., not only activation fees cited in the example in TRG Agenda Paper 30). The FASB and its staff agreed to make related interpretive clarifications in the March 2015 TRG meeting summary and to clarify paragraph 26 of TRG Agenda Paper 30. This update to paragraph 26 is intended to convey the notion that while an entity’s list price may equal the cash consideration, the list price may not reflect the cash selling price and if such a difference exists, it would need to be evaluated.

In addition, some TRG members debated the fourth issue (regarding the application of the practical expedient to a single payment stream comprising multiple performance obligations). Of the TRG members who participated in the discussion, most believed View B to be the appropriate conclusion; but some argued that View A is also acceptable, and some suggested following the contractual terms if stated.

See TRG Agenda Paper 26 for more information.

Summary: TRG members generally agreed that nonreciprocal contributions are not within the scope of the new revenue standard; however, TRG members noted that if a not-for-profit entity transfers a good or service for part or all of a contribution (i.e., a reciprocal transfer), such a reciprocal transfer should be accounted for under ASC 606. TRG members in the United States also agreed with FASB board and staff members not to amend ASC 606 to add another scope exception and agreed with a FASB board member’s suggestion that the AICPA could evaluate whether to include an interpretive clarification in its nonauthoritative industry guidance.

The FASB and IASB staffs noted that an entity may determine that goods and services constitute a single performance obligation if (1) they are “bundled” together because they are not distinct or (2) they are distinct but meet the criteria that require the entity to account for them as a series (and thus as a single performance obligation). The staffs further noted that a single performance obligation that comprises a series of distinct goods or services rather than a bundle of goods or services that are not distinct affects (1) how variable consideration is allocated, (2) whether contract modifications are accounted for on a cumulative catch-up or prospective basis, and (3) how changes in the transaction price are treated. Because of the potential implications associated with whether goods or services are determined to be a series, stakeholders have raised questions about:

• Whether goods must be delivered (or services must be performed) consecutively for an entity to apply the series provision — The staffs indicated that an entity should look to the series provision criteria in ASC 606-10-25-15 (paragraph 23 of IFRS 15) to determine whether the goods or services are a series of distinct goods or services for which the entity is not explicitly required to identify a consecutive pattern of performance. Further, while the term “consecutively” is used in the new revenue standard’s basis for conclusions, the staffs noted that they “do not think whether or not the pattern of performance is consecutive is determinative [of] whether the series provision applies.”35 That is, goods or services do not need to be transferred consecutively to qualify as a series of distinct goods or services under the new revenue standard.
• Whether the accounting result for the series of distinct goods or services as a single performance obligation needs to be the same as if each underlying good or service were accounted for as a separate performance obligation — The staffs noted that they do not believe that the accounting result needs to be “substantially the same.”36 Further, the staffs stated that “[s]uch a requirement would almost certainly make it more difficult for entities to meet the requirement, and since the series provision is not optional, it likely would require entities to undertake a ’with and without’ type analysis in a large number of circumstances to prove whether the series provision applies or not.”37

See TRG Agenda Paper 27 for additional information.

Summary: TRG members generally agreed with the staffs’ conclusions in TRG Agenda Paper 27. However, TRG members discussed a seeming contradiction that while the series literature was meant to simplify accounting (akin to a practical expedient), it is mandatory if an entity meets the criteria. Treating performance obligations as a series may result in different accounting (as noted in the background discussion above). As a result, certain TRG members questioned whether the guidance should be mandatory or whether it may be better to have a practical expedient. While the FASB did not commit to amending the standard for a practical expedient, it noted that it was open to gathering more information on the issue.