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Amendments Planned for Revenue Standards’ Guidance on Licenses, Royalties

The FASB and IASB agreed to clarify some parts of their revenue recognition standards that have raised persistent questions. The boards plan draft separate proposals for public comment on accounting for licenses of intellectual property, royalties, and how to separate different performances in a contract with a customer.

The FASB and IASB said they will offer more clarity about some of the more troublesome aspects of their landmark revenue recognition standards.

The standard-setters decided on February 18, 2015, to refine the guidance for the accounting for revenues from licenses of intellectual property and royalties, and how to separate different promises in a contract with a customer.

The FASB wants to issue a proposed version of for public comment in June. The IASB also plans to issue a proposal but may add more tweaks on separate parts of the revenue standard into its proposal. The international board wants to know if other questions crop up at the March meeting of the special revenue Transition Resource Group and issue a single document with all proposed improvements.

If finalized, the amendments will alter the converged, sweeping standards the boards published in May 2014 via the FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and the IASB’s IFRS 15, Revenue from Contracts with Customers.

The boards didn’t take the decision to tweak the standards lightly and spent several hours debating the planned changes’ implications, with members of both boards saying they only were acting because the questions were serious enough to merit action.

The standards get rid of about 180 pieces of industry-specific revenue accounting guidance in U.S. GAAP and come up with a single, principles-based way in IFRS for companies to calculate the top line in their income statements. Companies must comply with the new standards in 2017, although many U.S. companies have been lobbying for an extra year. Last fall, the SEC chief accountant said the accounting boards needed to consider deferring the effective date, and the boards plan to consider a delay at an upcoming meeting.

Because the new revenue model is supposed to work for all types of businesses, it requires accountants to exercise more judgment than under current U.S. GAAP. Businesses had questions about some of the judgments they had to employ, and in some cases, they arrived at different conclusions for relatively similar accounting scenarios.

Companies overseas have had fewer questions, which made several IASB members reluctant to want to tweak IFRS 15, in part because it took the boards a decade and lengthy and repeated rounds of debate to get the standard published.

IASB Chairman Hans Hoogervorst expressed disappointment that there were calls to reexamine the standards at all. He called it a “pretty bad situation.”

“This is dysfunction of decision making again, and I’m very unhappy with it,” Hoogervorst said. “It’s an open invitation to the audit firms to make a list of all their litigation risks, and this is what you get.”

But Hoogervorst acknowledged that the IASB needed to remain converged with the FASB and suggested the standard-setters limit the changes to clarifications rather than significant changes. A majority of his board agreed.

“I think it’s imperative that it’s clarifications, it’s important that we have the same words,” IASB member Patrick Finnegan said. “I don’t buy the argument… that if you have different words but target the same outcomes, everything will be hunky-dory. This is proof we have to have the same words. We need to act together. We can’t leapfrog one another.”

The standards call for businesses to determine whether a license represents a promise to deliver a service at a point in time or over time. Entertainment companies raised many questions about how they should determine the timing.

The boards agreed that they would clarify that a business’s promise to the customer in granting a license is to provide a right to access the intellectual property when the contract requires or the customer expects the company to undertake activities that significantly affect “the utility of the intellectual property” to which the customer has rights. They said they would add guidance to determine the intellectual property’s usefulness.

The FASB also decided to offer more information about the accounting for licenses of symbolic intellectual property, such as brands or logos.

For royalties that are determined by sales volume or the rate of usage, the boards agreed they would clarify that companies don’t have to separate revenue streams for single contracts if there are portions that may be subject to the concept of “constraint.” Constraint is related to the timing of a company’s recognition of revenue from a customer contract, and it’s based on the likelihood of a company collecting revenue from a customer.

Separately, the boards agreed to add examples to the revenue standards to clarify how the identification of separate performance obligations in a customer contract. The FASB plans to address questions about identifying promised goods or services subject to separation guidance, application of what it means for a promise to be “distinct in the context of a contract,” and accounting for shipping and handling activities.

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