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Implementation of Revenue Standards to Get Formal Vetting

The FASB and IASB plan to meet jointly in February and consider providing more guidance for their revenue recognition standards.The boards have fielded numerous questions about the accounting for different types of licenses and determining the different promises in contracts to customers.Businesses have told the boards they need more information about the two topics before they comply with the standards in 2017.

The FASB and IASB may fine-tune their wide-ranging revenue recognition standards and provide more guidance on two areas that have caused confusion — identification of the separate parts of a supplier’s performance obligations and the accounting for licenses.

Questions on both topics have come up repeatedly since the FASB and IASB published their landmark accounting standards, and the boards plan to formally consider tweaks to the standards in February, FASB research staff members said during a January 26, 2015, meeting of the Transition Resource Group.The advisory panel was formed shortly after the boards issued 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,in May 2014.

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 all businesses must calculate the top line in their income statements.

One of the steps — identifying separate parts of a company’s performance obligations — has confused many businesses, especially for bundled services, such as an automobile manufacturer offering free maintenance with the purchase of a new car.Businesses have told the boards that it’s difficult under the new standards to determine whether a promised good or service is distinct in the context of the contract.

The boards’ research staffs are considering proposing simplifications related to presentation of sales tax and more guidance about how to treat shipment of a product.Companies and auditors want to know if a product’s shipment should be treated as a separate performance obligation.

The boards also want to clarify how to determine whether a license of intellectual property is satisfied at a specific time versus a period of time, as well as issues related to accounting for sales- and usage-based royalties.

Under the standards, the accounting for a license of intellectual property depends on the transaction’s timing.The timing issue affects many types of business transactions, from software companies that sell customers the licenses to use their products, to entertainment companies that offer licenses for TV stations to air sitcom reruns.

The boards want businesses to recognize licenses as a right transferred to a customer in some circumstances, and access to their intellectual property in others.Revenue for some licenses should be recorded for a specific period, while revenue for others is supposed to be recorded steadily over time.Many businesses still have questions, however, over how to differentiate between the types of license arrangements.

If the boards agree to revise the revenue standard, they’d have to subject the changes to their regular due process and publish a draft of the changes for a public comment period, according to staff papers prepared for the meeting.The proposal and comment period could drag out the amendment process and lead to further changes.

The Transition Resource Group was set up to field questions from businesses and auditors about applying the new revenue standards, which are scheduled to come into effect in January 2017.

The group of representatives from investment groups, audit firms, and large businesses, reviews questions, discusses the questions that have been submitted and makes suggestions to the FASB and IASB, which have the final say on whether the questions need to be formally addressed.

The accounting boards and the advisory panels have heard numerous complaints related to the standards’ effective date.

The FASB has received many requests, most significantly from SEC Chief Accountant James Schnurr, to delay the 2017 effective date.

FASB members and staff accountants have been meeting privately with businesses to discuss their concerns, and the FASB is prepared to meet early in this year’s second quarter to formally consider delaying the effective date.

The IASB hasn’t heard as many requests for delays or concerns about the key accounting issues, an IASB staff member said.But it has received questions about the standard’s implementation.

Public companies don’t have to apply the changes until their first-quarter 2017 financial statements, but U.S. businesses have to start compiling information in 2015 under the new standard if they want to present three years of comparable revenue figures when the standard goes live.

This transition method, called “restrospective” application, isn’t required, but many U.S. companies expect to follow it because investors will want clear comparisons of revenue from year to year.

The standards are the culmination of a dozen years of work and are expected to usher in major changes for reporting revenue, the top line in company income statements and one of the most important measurements of a company’s financial performance.

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