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Amendments to Revenue Standard Address Some Limited Improvements, Corrections

The FASB’s latest amendments to its revenue recognition standard clarify the assessment of the likelihood that revenue will be collected from a contract and provide a limited number of other changes. The changes are the result of the continuing work of the advisory panel the FASB and IASB formed after issuing their standards, the Transition Resource Group, to help with the standards’ adoption.

The FASB on May 9, 2016, published Accounting Standards Update (ASU) No. 2016-12, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, to provide a limited number of changes to its revenue recognition standard.

The amendments clarify the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The amendments provide what the FASB calls a practical expedient, or shortcut, for recognizing revenue from contracts that have been modified prior to the transition period to the new standard. ASU No. 2016-12 also says a contract should be considered complete if all, or substantially all, of its revenue has been collected prior to making the transition to the new standard.

In addition, the update clarifies the disclosure requirements for businesses and other organizations that make the transition to the new standard by adjusting amounts from prior reporting periods via what is called retrospective application by the accounting board. The effect of the accounting change does not have to be disclosed for the period in which the standard is adopted, the FASB said. But the effects do have to be disclosed for prior periods that were adjusted.

The amendments in ASU No. 2016-12 become effective at the same time as the rest of Topic 606, Revenue From Contracts With Customers , the FASB said. For public companies, some not-for-profit organizations, and some employee benefit plans, Topic 606 becomes effective for fiscal years that start after December 15, 2017. For private companies and other organizations, the standard becomes effective for fiscal years that start after December 15, 2018.

With the collectibility threshold, the FASB said it is clarifying the criterion for collectibility in the first step — identifying a customer contract — of the five-step process for recognizing revenue in Topic 606. ASU No. 2016-12 adds a criterion to ASC 606-10-25-7, Revenue From Contracts With Customers — Overall — Recognition, to clarify when to recognize revenue from a contract that does not meet the first step’s criteria.

Revenue is recognized if “the entity has transferred control of the goods or services to which the consideration that has been received relates, the entity has stopped transferring goods or services to the customer, if applicable, and has no obligation under the contract to transfer additional goods or services, and the consideration received from the customer is nonrefundable,” the FASB said.

ASU No. 2016-12 also permits excluding sales taxes or similar taxes from the amount reported for the transaction price.

With noncash consideration, which often applies to customer payments made through goods, such as materials or equipment, or services, the amendments say the noncash payments should be measured at the start of the contract.

The amendments in ASU No. 2016-12 also say an entity should reflect the aggregate effect of all contract modifications that took place before the earliest period presented in a financial statement.

The amendments in ASU No. 2016-12 arise from the FASB’s continuing efforts to refine the guidance in ASU No. 2014-09, Revenue From Contracts With Customers (Topic 606), which was issued jointly with the IASB’s IFRS 15, Revenue From Contracts With Customers. After the accounting boards released the converged standards, they formed the Transition Resource Group (TRG) to address issues that arose with the standards’ implementation, and the TRG’s deliberations have, in a handful of instances, prompted the boards to clarify the revenue guidance.

For in-depth analysis of the FASB’s revenue recognition standard, please see Catalyst: U.S. GAAP — Revenue Recognition, also on Checkpoint.

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