Six proposed, small-scale changes have been added to the list of updates to ASU 2014-09, Revenue from Contract with Customers (Topic 606). The exposure draft of the changes, released by the Financial Accounting Standards Board (FASB), does not materially change the five-step process for revenue recognition put in place by ASU 2014-09. The changes are designed to address six areas of implementation concern raised by the Transition Resource Group (TRG).
Collectibility Criterion
The first step in the new revenue recognition process is to identify the contract with the customer. There are five criteria a contract meets in order to be considered a revenue contract. One of the criteria is that the contract has a collectible price.
First, the proposed changes would clarify the definition of collectibility so that an entity would consider a contract to have a collectible price if the customer has the ability and intention to pay the entity the promised consideration in exchange for the transfer of goods and services. This change is intended to qualify more agreements as revenue contracts under the first step of Topic 606.
In addition, the proposed amendment would allow entities to recognize revenue on contracts that have failed step 1 when:
- the customer has received control of the goods or services;
- the entity has stopped transferring goods and services to the customer and has no obligation to transfer additional goods or services, and
- the consideration paid to the entity is considered nonrefundable.
Presentation of Taxes Collected from the Customer
Absent the proposed amendment, Topic 606 requires the entity to include sales taxes in the calculation of the transaction price under step 3 when it is the primary obligor of the specific tax. The TRG expressed concern that determining the sales taxes and other amounts collected on behalf of third parties would be costly to implement, as it would require entities to consider all the federal, state and local jurisdiction tax laws that may apply to the contract and also who was obligated to pay those taxes (the customer or the entity). The amendment would permit entities to make an accounting policy election to exclude all sales taxes (and other similar taxes) from the calculation of the transaction price under step 3 of Topic 606.
Noncash Considerations
ASU 2014-09 asks that entities measure noncash consideration at fair value, but the original language did not specify the measurement date to be used for the fair value analysis. Stakeholders also questioned how the constraint on variable consideration should be applied when the fair value of the noncash consideration varies.
The proposed amendments specify that fair value measurement date should be the date of the contract's inception. They also clarify that the variable consideration guidance applies when the fair value of the noncash consideration varies for reasons other than the form of the noncash consideration.
Contract Modifications at Transition
The proposed amendment creates a practical expedient where entities can elect to determine and allocate the transaction price of all satisfied and unsatisfied performance obligations in a modified contract beginning at the earliest period presented. This would save the entity from evaluating each modified contract for the period prior to initial application and allow for the benefit of hindsight.
Completed Contracts at Transition
The exposure draft clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy US GAAP before the date of initial application. Elements of the contract that do not affect revenue under legacy US GAAP will not have to be considered in evaluating a contract's level of completion. Additionally, entities will be allowed to apply the modified retrospective transition approach to either all their contracts or completed contracts only.
Technical Correction to Transition Guidance
Stakeholders raised concerns about needing to disclose the impact of former US GAAP in the year of adoption in accordance with required disclosures pertaining to accounting changes when the retrospective method has been applied. The amendment clarifies that an entity would still need to disclose the effect of the changes on any prior periods retrospectively adjusted but would not have to disclose the effect of the accounting change for the period of adoption when the retrospective method has been applied.
Developments Continue
As part of the exposure draft, the FASB agreed to add items related to the adoption and transition to the new revenue recognition guidance to its technical agenda. Further implementation concerns and issues will likely arise before the guidance starts to roll out in 2018, and we will keep you up-to-date as these changes occur.
For More Information
If you have specific comments, questions or concerns about the new revenue recognition guidance, please reach out to your CBIZ Tofias & Mayer Hoffmann McCann advisor, or you can reach us at TheBottomLine@cbiztofias.com or by visiting the Contact Us page.
