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Proposal Issued to Clarify Biggest Questions on Revenue Standard

The FASB released for public comment a proposal to clear up how businesses account for licenses of intellectual property under the landmark revenue recognition standard. The proposal also aims to clarify how to determine separate promises, or performance obligations, in calculating revenue.

The FASB on May 12, 2015, released Proposed Accounting Standards Update (ASU) No. 2015-250, Revenue from Contracts with Customers (Topic 606) Identifying Performance Obligations and Licensing , to clear up some of the more persistent questions about the revenue recognition standard the FASB and IASB published in 2014.

The proposal calls for clarifying the distinction between 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.

The distinction is important among media companies, which must determine whether license revenue from syndicated television shows, the use of sports logos, or other sources must either be accounted for all at once or in increments over time.

Under the proposal, a license has “significant standalone functionality” if it does not include supporting or maintaining intellectual property. The license would be recognized at a point in time as opposed to over time. Functional intellectual property includes software, biological compounds or drug formulas, and media content such as films, TV shows, and music.

“Symbolic intellectual property” includes brands, team or trade names, logos, and franchise rights, the proposal states. The owners support or maintain the intellectual property over the course of a period covered by a license, and they recognize the revenue over time the life of the licensing contract.

The proposal also aims to clarify how to identify individual promises, or performance obligations, in a contract. After the FASB and IASB published the standard, they fielded questions about the need to identify promised goods or services that are “immaterial.” The boards were also asked how to determine whether goods or services are separately identifiable, and whether shipping and handling activities should be considered promised goods or services or just activities to fulfill other promises in a transaction, according to the proposal’s introduction.

In the proposal, the FASB says immaterial goods or services would not need to be included in a business’s calculation of revenue from a contract.

At a financial reporting conference in New York on May 8, FASB Vice Chairman James Kroeker said the accounting board received questions that made clear that people were confused about what the standard-setters intended. He used the example of a water bottle with a customer service number on it. He said some people asked the FASB if the sale of something like a bottle of water also included a service and, if so, should some portion of the revenue be deferred.

“It was never the board’s intent to account for things that didn’t matter in that context,” Kroeker said.

The proposal also states that a business would be permitted to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the transaction as opposed to an additional promised service.

The proposal includes examples to help businesses make the decision.

The proposal calls for the first tweaks of the standard the FASB and IASB 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 Contract with Customers .

The revenue recognition standards are the result of more than a decade of work between the two accounting boards. 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.

The standards go into effect in 2017, but both boards are considering delaying the start date by a year. The FASB on April 29 issued Proposed ASU No. 2015-240,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , to defer the standard’s effective date until 2018. The IASB is expected to issue a similar proposal in the coming weeks.

The IASB in June is expected to issue a proposal to clarify how to account for licenses and identify separate performance obligations.

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