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Questions on Revenue Standards’ Application Mount Up

The FASB and IASB continue to field questions on how to use their landmark revenue recognition standards, which become effective in 2017. The standard-setters plan to examine ways to fine-tune the guidance on contract modifications, discounts like coupons and vouchers, the threshold at which a supplier can recognize the revenue from a sale, and payments that aren’t in cash.

The follow-on work the FASB and IASB have agreed to do eight months after publishing their landmark revenue recognition standards is taking on the dimensions of a significant standard-setting project.

At a January 26, 2015, meeting of the Transition Resource Group, an advisory panel to help companies properly apply the accounting changes, the boards agreed to examine ways to fine-tune the guidance for the threshold at which a supplier can recognize the revenue from a sale, payments that aren’t in cash, contract modifications, and discounts like coupons and vouchers.

“Those are the ones I had on my list where it seemed useful to provide greater guidance,” FASB Vice Chairman James Kroeker said. The accounting boards’ research staffs will study the issues, and the boards will decide if they want to do more work.

The boards are also committed to in-depth reviews that will begin in February of the accounting for licenses and identification of the separate parts of a business’s performance obligations. (See Implementation of Revenue Standards to Get Formal Vetting in the January 27, 2015 edition of Accounting & Compliance Alert. )

In May 2014, the FASB published Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, and the IASB released IFRS 15, Revenue from Contracts with Customers. The wide-ranging standards erase about 180 pieces of individual, industry-specific revenue guidance in U.S. GAAP and outline a principles-based process by which all businesses must calculate the top line in their income statements. Because the standards represent such a change from current accounting practice in U.S. GAAP and IFRS, the standard-setters have been accepting questions in an attempt to resolve them before the January 2017 effective date.

In addition, the FASB is also under pressure to delay the effective date. Many domestic companies say the extra time is warranted, given the delays in the publication of the standards, which were supposed to be released in 2013. The FASB said it will vote on a delay early in the second quarter of the year.

The core principle of the new revenue standards is that a business should recognize revenue “to depict the transfer of promised goods or services to customers” in an amount that reflects the money to which the business expects to be entitled.

One of the criterion is that “collectibility” must be reasonably assured before a supplier recognizes the sale. The standard-setters had a hard time writing the requirement when they were drafting the new standards and spent months fine-tuning it. The January 26 discussion revealed that the FASB and IASB may have to do more tweaking to make sure businesses understand this threshold and apply it the way the boards intended.

Businesses had questions on how to account for a group of monthly customers, such as cell phone customers, where historical evidence suggested there was a chance that a small portion would be late on their payments. They also wondered when they should reassess chances of collection and how they should determine whether a supplier has made a concession on a contract’s price.

The boards also want to explore providing more guidance on noncash payments, such as stock options, shares, and advertising.

The issue is important because one of the steps to calculate revenue involves determining the transaction price of a contract. In straightforward buying and selling arrangements, this number is usually a fixed amount. More complex deals could involve fluctuating payments or payments that don’t involve cash.

Businesses also told the boards that they had questions about long-term, multi-year contracts with customers that may change over time. While they said the standards were clear on how to account for contract modifications, they wanted more guidance on modifications made before the new accounting standards come into effect in 2017.

Finally, the boards plan to examine accounting for what the standard-setters call cash amounts that a business pays to a customer — discounts and price reductions. The standards don’t say whether the cash to customers should be accounted for at the individual contract level or to the entire customer relationship.

The Transition Resource Group was set up to field questions from businesses and auditors about applying the revenue standards. It includes representatives from investment groups, audit firms, and large businesses and reviews questions that have been submitted to the FASB and IASB. The panel then advises the boards on the issues that need to be formally addressed.

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