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Collection of Customer Payments Reopens Old Debate in Revenue Standard’s Implementation

Coming up with a way for a business to assess the odds of collecting payments from a customer was one of the toughest tasks for the FASB and IASB when they wrote their revenue recognition standards. Businesses and auditors still have questions about the collection issue, and the boards must now decide whether they need to re-open the standards to clarify what they meant.

The FASB and IASB plan to consider yet more amendments to their sweeping revenue recognition standards when they meet on March 18, 2015.

The boards are scheduled to discuss several questions that have cropped up since the May 2014 publication of the standards, which the FASB issued as Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and the IASB as IFRS 15, Revenue from Contracts with Customers.

Dubbed the “crown jewel of convergence,” the FASB and IASB’s revenue recognition standards usher in a global accounting method for businesses to calculate the top line in their income statements. The standards get rid of about 180 pieces of industry-specific accounting guidance in U.S. GAAP and call for a five-step, principles-based model that applies to most businesses.

The standards don’t go into effect until 2017, but because they’re such a significant change to current accounting practices, businesses, auditors, and investors want to make sure they understand how to apply them properly. The boards have created a special advisory panel, called the Transition Resource Group, to field questions, discuss possible answers, and forward suggestions to the boards.

The boards plan to discuss contract modifications, sales tax presentation, non-cash payments, and determining the odds of collecting payments from customers.

The collectibility question covers well-worn ground for the accounting boards. It was one of the toughest issues the FASB and IASB debated when they were developing the standards, and the boards spent several meetings debating, revising, and fine-tuning the wording before agreeing to it. But businesses and auditors still have questions about it.

The standards say companies can’t record revenue unless they believe there’s a high chance they’ll collect the payments to which they’re entitled. Some businesses and auditors told the IASB that they think many common contracts would routinely fail this probability criterion. The IASB staff is recommending that the international board perform additional work to understand the extent of contracts that may fail the collectibility threshold, according to staff memos released in advance of the meeting.

The FASB’s research staff, however, plans to recommend that the U.S. board make changes to clarify the wording and also add more illustrative examples. Such a move would require the FASB to float the changes for public comment before they became permanent updates to the revenue standard.

The FASB’s staff wrote that it believes the clarifications would reduce cost and complexity and improve consistency of application of the standard.

“The staff thinks Topic 606 and IFRS 15 would remain largely converged in this area even if the IASB decides not to make any changes to the guidance at this time,” the staff wrote.

On non-cash payments, the FASB and IASB research staffs are also recommending separate paths.

Media and entertainment companies often provide advertising space in print publications or time slots for broadcast and cable outlets in lieu of cash. The companies want to know when the fair value of non-cash payments should be measured as part of a revenue total. They also want to know how to assess variable payments.

The boards have three alternatives for timing the transactions’ valuation — when contracts are agreed to, when the advertising space is granted, or the earlier of the two dates, according to the board memos.

U.S. GAAP is used to industry-specific guidance on this issue, such as guidance on how to determine when a business enters into a transaction to provide goods or services in exchange for equity instruments, and guidance about accounting for exchanges in the media and entertainment industry for advertising time.

The IASB staff is recommending that the international board not amend its standard, even if the FASB decides to propose a change, according to the meeting memos.

“Importantly, we do not think that lack of guidance in this specific area prevents the successful implementation of IFRS 15 as a whole,” the IASB staff wrote in a memo.

The boards’ research staffs appear to agree when it comes to guidance on how companies should handle contract modifications and completed contracts when the new revenue standard becomes effective.

Businesses told the FASB and IASB that some telecommunications and cable companies may have millions of contract modifications in a month as customers increase or decrease data in a wireless plan, add or remove lines and devices from a shared plan, or add or remove cable channels. Contract modifications in other industries, such as software and aerospace and defense, may not occur as frequently, but the significance of the changes may be large.

Both the FASB and IASB staffs plan to ask the boards to add projects to their agendas to consider shortcuts to help companies apply the new standards to modified contracts.

The sales tax issue is primarily an issue for U.S. GAAP, according to the agenda papers. Step three of the revenue standard requires a business to determine the transaction price. The price is supposed to exclude amounts collected on behalf of third parties, for example, some sales taxes.

Current U.S. GAAP permits a business to make an accounting policy election to present in-scope sales taxes on either a gross basis, which would be included in revenue and costs, or a net basis, which would be excluded.

The new revenue standard doesn’t provide specific guidance on identifying amounts that are collected on behalf of third parties.

U.S. companies have asked the boards to consider a shortcut in assessing whether sales tax is collected on behalf of a third party. The IASB staff is recommending that the international board not take up the consideration of such a shortcut.

The FASB has fielded numerous requests to delay the standard’s 2017 effective date, and board officials have acknowledged the pressure they’re under. The SEC’s chief accountant, shortly after he took office in October 2014, made several public statements that a delay may be needed, although he’s not made similar statements in recent weeks. The accounting boards have yet to decide on a delay, and they don’t plan to make the decision before April.

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