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Update to U.S. GAAP Includes Technical Corrections for Revenue Standard

The FASB published a slate of technical corrections to its wide-ranging revenue standard. One of the changes offers a break on disclosures about remaining obligations to a customer for certain types of transactions, and it prompted two FASB members to dissent from the overall package of changes.

The FASB on December 21, 2016, published Accounting Standards Update (ASU) No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts With Customers , to make a limited number of revisions to several pieces of the board’s sweeping revenue recognition standard.

The update’s 13 changes to ASU No. 2014-09, Revenue From Contracts With Customers , are mostly minor revisions, with some altering wording in the standard’s illustrative examples or clarifying some of the products, such as insurance contracts, that were not intended to be covered by the revenue standard. Another amendment says casinos do not have to follow the guidance for financial derivatives to tally up revenues from slot machines, card games, and roulette tables.

Some of the changes stirred up some disagreement as the FASB debated the update. Two FASB members, Harold Schroeder and Marc Siegel, dissented from the overall update because it gives companies the option of avoiding making a disclosure about the remaining performance obligations in customer contracts in which a business does not have to estimate what is called “variable consideration” — essentially, uncertainty about payments from customers — to record revenue. In their view, the companies will be able to deprive investors of important information.

The option applies to sales- or usage-based royalties for licenses of intellectual property and the variable consideration allocated to a series of distinct goods or services. The transactions are common in the technology, entertainment, and payment card processing industries.

Under the revenue standard, businesses must disclose information about promises to customers that are incomplete or partially complete. The disclosures include the amount of money allocated to the unsatisfied performance obligations and either a numerical or narrative explanation about when the revenue can be recorded from these unfinished tasks.

The standard gave a break from these disclosures if the promises are part of a contract that has a duration of one year or less or if the business has the right to payments from customers in an amount that “corresponds directly with the value to the customer.” After the standard’s publication, businesses and auditors told the FASB that the disclosures may be difficult in some circumstances with so-called “variable consideration,” such as when pricing is tied to a market index.

The FASB in October decided to allow an additional break, or “practical expedient,” to industries that voiced the loudest complaints.

The rest of the amendments include:

Loan guarantee fees: The update clarifies that guarantee fees within the scope of Topic 460, Guarantees , are not covered by the revenue standard. It directs businesses to Topic 815, Derivatives and Hedging , for guidance on guarantees accounted for as derivatives.

Provisions for losses on construction and production contracts: The update requires that the provision for losses be determined at least at the contract level.

Clarification of scope: The update clarifies that all contracts within Topic 944, Financial Services — Insurance , are excluded from following the revenue standard.

Disclosure of Prior-Period Performance Obligations: The amendments clarify that the disclosure of revenue recognized from performance obligations satisfied in previous periods applies to all performance obligations and is not limited to performance obligations with corresponding contract balances.

A new example to illustrate contract modifications guidance: The FASB says the new example better illustrates the guidance.

Contract asset versus receivable: The update tweaks an example for presenting contract assets and receivables.

Refund liability: The amendment removes the reference to the term “contract liability” from an example on refund liability.

Advertising costs: The update reinstates the guidance on the accrual of advertising costs and moves it to Topic 720, Other Expenses .

Cost capitalization for advisors to private funds and public funds: The amendment aligns the guidance for advisors to both public and private funds.

The FASB published ASU No. 2014-09 in May 2014 after years of work with the IASB to write a converged, international accounting standard for the top line in company income statements. The standard goes into effect in 2018 for public companies. The IASB’s version is IFRS 15, Revenue From Contracts With Customers .

The standards are considered one of the most important successes to emerge from the FASB and IASB’s long-running convergence effort. 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 worldwide.

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

Additional analysis of the revenue standard can be found on Checkpoint in the Accounting and Auditing Update Service [AAUS No. 2014-18] and the SEC Accounting and Reporting Update Service [SARU No. 2014-21] (June 2014): Special Report: Comprehensive Coverage of the New U.S. GAAP Revenue Recognition Requirements .