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Businesses Told to Use Judgment When Applying Revenue Standard to Some Licenses

Accounting for licenses of intellectual property continues to be one of the toughest parts of the FASB and IASB’s revenue recognition standard. Members of the boards’ special Transition Resource Group (TRG) for revenue, as well as some of the members of the FASB and IASB, said businesses will have to use judgment on what is a complex area of accounting. But the two boards will try to address some of the lingering questions through small clarifications and examples.

The FASB and IASB’s advisory group for the boards’ revenue recognition standards reviewed several issues on November 9, 2015, about accounting for licenses of intellectual property.

Members of the Transition Resource Group (TRG) concluded that businesses have to use their best judgment on what is currently a complex area of accounting and will continue to have to do so once the new standards go into effect in 2018.

To try to minimize some of the more complex questions, the boards may add an illustrative example when they deliberate on their respective proposals to clarify remaining questions about accounting for licenses, FASB Vice Chairman James Kroeker said.

“I do think, regardless of this discussion, we’re going to have some level of diversity in practice unless we go through every one of those iterations” of types of contracts dealing with intellectual property, Kroeker said. “At least we have a starting point. It isn’t a wide open field… We’re still in a much better spot in licensing than we have across the board today.”

Licenses of intellectual property — which range from an entertainment outfit granting rights to a television station to air a sitcom to a software company allowing a business to download a certain number of copies of its program — can cover a wide range of transactions.

The FASB and IASB attempted to answer some of the biggest questions about the revenue standards’ treatment of licenses earlier this year with similarly worded proposed clarifications, but additional questions have cropped since the proposals were issued.

The TRG focused on differentiating between attributes of a single license versus separate licenses; how to account for renewals of time-based licenses that provide customers with a right to use the intellectual property; and accounting for a customer’s option to purchase or use additional copies of software.

FASB and IASB staff members said it was difficult to come up with a broad-based principle to cover all of the questions. Judgment inherently would be necessary, they said.

“It’s not like we as staff had any impression that writing this paper would have this unanimous Kumbaya moment,” FASB practice fellow Scott Muir said.

The FASB in June released Proposed Accounting Standards Update (ASU) No. 2015-250, Revenue from Contracts with Customers (Topic 606) Identifying Performance Obligations and Licensing. The proposed amendment was issued to draw a sharper distinction between the accounting for revenue from licenses of intellectual property that represent a promise to deliver a good or service over time versus a promise to be satisfied at a point in time. Businesses had questions about distinguishing between the two because they wanted to know when they should record the revenue.

The IASB in July issued a similar proposed clarification via Exposure Draft (ED) No. 2015-6, Clarifications to IFRS 15.

The boards want to finalize the proposed changes by the end of the year. The FASB largely finished discussing its version of the amendments in October but said it wanted more input from the TRG before issuing them in final form.

The FASB and IASB’s revenue recognition standards are the result of more than a decade of work by the two accounting boards. They were published in May 2014 as the FASB’s ASU No. 2014-09, Revenue From Contracts With Customers, and the IASB’s IFRS 15, Revenue from Contracts with Customers.

The standards erase about 180 pieces of individual, industry-specific revenue guidance in U.S. GAAP and provide a five-step, principles-based process by which businesses must calculate the top line in their income statements. Because they represent such a significant change to current accounting, the boards have been responding to many questions about the standards before they become effective in 2018. Both boards have agreed to make changes to the standards to clear up some of the biggest questions raised by businesses and auditors.

The standards originally were supposed to go into effect in 2017 for public companies, but soon after publication, the accounting boards heard pleas to give companies more time to upgrade their financial reporting systems. The requests grew louder once the FASB and IASB considered changes to the standards to answer questions about recording the revenue from licenses and identifying separate commitments in customer contracts.

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

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