Revenue Recognition: Implementation Update

The converged (FASB/IASB) revenue recognition standard was issued in May 2014, and a week later the Boards announced the formation of the “Joint Transition Resource Group for Revenue Recognition.” Given the pervasiveness of the new revenue recognition standard and, for U.S. constituents, migration to the unfamiliar and uncomfortable territory of “principles” over “rules,” it was apparent from the start that implementation issues would abound.

I led my September 10, 2014 post with “Now that the new revenue recognition guidance is issued, there is nothing left to do but figure out how to implement it.” How true (if not obvious)!

On February 18th, both Boards announced that they would formally explore clarifications to the guidance in the following areas:

  • Licenses of intellectual property
  • Identifying performance obligations

The Joint Transition Group has been approached about more than 40 issues to date, but more than 30 of these have not required further consideration by the Boards, based on a tabulation of the issues on the FASB’s website. The Boards do need to act in situations that would potentially lead to widespread diversity in practice based on differing interpretations.

Regarding licenses of intellectual property, issues relate to:

  • Classifying attributes of IP to determine if licenses should be recognized over time or at a single point. Both Boards agreed that an amendment to clarify is warranted but currently support different approaches.
  • When the nature of a license should be assessed when combined with another good or service. The FASB agreed to make clarifications.
  • The effect of contractual restrictions in a license. The FASB agreed to make a limited amendment to clarify.
  • How variable consideration guidance for sales-and-usage-based royalties should be applied for licenses bundled with goods or services. Both Boards agreed that they should issue a limited amendment to clarify.

In the case of performance obligations, constituents are questioning:

  • The level at which goods or services are identified and disaggregated (accounting unit). In other words, should significantly more separate performance obligations be identified under the new rules than the old rules? The FASB agreed to make clarifications.
  • How to determine whether a good or service is separately identifiable in a contract. Both Boards agreed they should clarify the guidance, including adding examples.

The FASB, alone, is also considering some practical expedients related to the presentation of sales tax, whether shipping should be a separate performance obligation, and transition related to contract modifications.

Look for a proposed Accounting Standards Update (ASU) to be issued in the second quarter of 2015 covering the Board’s positions on these issues. For more details about specific proposals covered in this post, see the FASB Summary.

Also on the table for the FASB, almost from the revenue standard’s issuance date, is potential deferral of the implementation date, but the Board will consider this issue later. Likely deferral is inevitable, if for no other reason than the answers to these transition issues remaining open, and other issues may require action by the Board. Public companies would have to know the answers by January 1, 2015 (oops!) for contemporaneous tracking of activity for the three-year restatement requirement.

To track activities by the Joint Transition Resource Group, click here

To review other Revenue Recognition blogs written by our team, click here.