Proposed Accounting Standards Update (Revised)
Issued: November 14, 2011 and January 4, 2012
Comments Due: March 13, 2012
Revenue Recognition (Topic 605)
Revenue from Contracts with Customers
(including proposed amendments to the
®
FASB Accounting Standards Codification )
Revision of Exposure Draft
Issued June 24, 2010
This revised Exposure Draft of a proposed Accounting Standards Update of Topic 605
is issued by the Board for public comment. Comments can be provided using the electronic
feedback form available on the FASB website. Written comments should be addressed to:
Technical Director
File Reference No. 2011-230
®
The FASB Accounting Standards Codification is the source of authoritative
generally accepted accounting principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities. An Accounting Standards Update is not
authoritative; rather, it is a document that communicates how the Accounting
Standards Codification is being amended. It also provides other information to
help a user of GAAP understand how and why GAAP is changing and when the
changes will be effective.
Notice to Recipients of This Exposure Draft of a Proposed Accounting
Standards Update
The Board invites comments on all matters in this Exposure Draft and is
requesting comments by March 13, 2012. Interested parties may submit
comments in one of three following ways:
•
•
•
Using the electronic feedback form available on the FASB website at
Exposure Documents Open for Comment
Emailing a written letter to director@fasb.org, File Reference No. 2011230
Sending written comments to “Technical Director, File Reference No.
2011-230, FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 068565116.”
Do not send responses by fax.
All comments received are part of the FASB’s public file. The FASB will make all
comments publicly available by posting them to the online public reference room
portion of its website.
An electronic copy of this Exposure Draft is available on the FASB website.
Copyright © 2011 by Financial Accounting Foundation. All rights reserved.
Permission is granted to make copies of this work provided that such copies
are for personal or intraorganizational use only and are not sold or
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reserved. Used by permission.”
Financial Accounting Standards Board
of the Financial Accounting Foundation
401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116
Proposed Accounting Standards Update (Revised)
Revenue Recognition (Topic 605)
Revenue from Contracts with Customers
(including proposed amendments to the FASB Accounting
Standards Codification®)
November 14, 2011 and January 4, 2012
Comment Deadline: March 13, 2012
CONTENTS
Page
Numbers
Summary and Questions for Respondents......................................................1–10
Proposed Guidance.......................................................................................11–42
Proposed Implementation Guidance and Illustrations ...................................43–85
Background Information, Basis for Conclusions, and
Alternative View..................................................................................... …86–209
®
Amendments to the FASB Accounting Standards Codification ...............210–441
Amendments to the XBRL Taxonomy ...............................................................442
Appendix A: Glossary ........................................................................................443
Appendix B: Summary of Changes from the 2010 Exposure
Draft ........................................................................................................444–448
Summary and Questions for Respondents
Why Is the FASB Issuing This Proposed Update?
Revenue is a crucial number to users of financial statements in assessing an
entity’s financial performance and position. However, revenue recognition
requirements in U.S. generally accepted accounting principles (GAAP) differ from
those in International Financial Reporting Standards (IFRSs), and both sets of
requirements need improvement. U.S. GAAP comprises broad revenue
recognition concepts and numerous requirements for particular industries or
transactions that can result in different accounting for economically similar
transactions. Although IFRSs have fewer requirements on revenue recognition,
the two main revenue recognition standards, IAS 18, Revenue, and IAS 11,
Construction Contracts, can be difficult to understand and apply. In addition, IAS
18 provides limited guidance on important topics such as revenue recognition for
multiple-element arrangements.
Accordingly, the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) initiated a joint project to clarify
the principles for recognizing revenue and to develop a common revenue
standard for U.S. GAAP and IFRSs that would:
1. Remove inconsistencies and weaknesses in existing revenue
requirements.
2. Provide a more robust framework for addressing revenue issues.
3. Improve comparability of revenue recognition practices across entities,
industries, jurisdictions, and capital markets.
4. Provide more useful information to users of financial statements through
improved disclosure requirements.
5. Simplify the preparation of financial statements by reducing the number of
requirements to which an entity must refer.
To meet those objectives, the FASB and the IASB are proposing amendments to
the FASB Accounting Standards Codification® and to IFRSs, respectively.
In December 2008, the Boards published the Discussion Paper, Preliminary
Views on Revenue Recognition in Contracts with Customers. The Discussion
Paper explained the Boards’ initial views on revenue, including some of the
principles that they proposed as the basis of a future standard. After considering
feedback received on the Discussion Paper, the Boards developed those
principles into a draft standard.
In June 2010, the Boards issued the Exposure Draft, Revenue from Contracts
with Customers. (The FASB’s version was a proposed Accounting Standards
Update.) The Boards received nearly 1,000 comment letters on the 2010
1
proposed Update and, in response, have revised various aspects of the June
2010 proposals. (Appendix B of this proposed Update summarizes those
revisions.) Although those revisions did not necessitate reexposure for public
comment in accordance with the Boards’ due process procedures, the Boards
decided to reexpose the proposals because of the importance to all entities of the
financial reporting of revenue and the desire to avoid unintended consequences
of the final standard.
Who Would Be Affected by the Amendments in This
Proposed Update?
The guidance in this proposed Update would affect any entity that enters into
contracts with customers unless those contracts are in the scope of other
standards (for example, insurance contracts or lease contracts).
In U.S. GAAP, the guidance in this proposed Update would supersede most of
the revenue recognition requirements in Topic 605 (and related guidance). In
IFRSs, the guidance in this proposed Update would supersede IASs 11 and 18
(and related Interpretations).
In addition, the existing requirements for the recognition of a gain or loss on the
transfer of some nonfinancial assets that are not an output of an entity’s ordinary
activities (for example, property, plant, and equipment within the scope of Topic
360, IAS 16, Property, Plant and Equipment, or IAS 40, Investment Property)
would be amended to be consistent with the proposed recognition and
measurement guidance in this proposed Update.
What Are the Main Provisions?
The core principle of this proposed guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services.
To achieve that core principle, an entity would apply all of the following steps:
1.
2.
3.
4.
Step 1: Identify the contract with a customer.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the separate performance
obligations in the contract.
5. Step 5: Recognize revenue when (or as) the entity satisfies a performance
obligation.
2
Step 1: Identify the contract with a customer
A contract is an agreement between two or more parties that creates enforceable
rights and obligations. Contracts can be written, oral, or implied by an entity’s
customary business practices. An entity would apply the proposed revenue
guidance to each contract with a customer unless specified criteria are met for
the combination of contracts.
Step 2: Identify the separate performance obligations in the
contract
A performance obligation is a promise in a contract with a customer to transfer a
good or service to the customer. If an entity promises to transfer more than one
good or service, the entity would account for each promised good or service as a
separate performance obligation only if it is distinct. If a promised good or service
is not distinct, an entity would combine that good or service with other promised
goods or services until the entity identifies a bundle of goods or services that is
distinct. In some cases, that would result in an entity accounting for all the goods
or services promised in a contract as a single performance obligation.
A good or service is distinct if either of the following criteria is met:
1. The entity regularly sells the good or service separately.
2. The customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer.
Notwithstanding those criteria, a good or service in a bundle of promised goods
or services is not distinct and, therefore, the entity would account for the bundle
as a single performance obligation, if both of the following criteria are met:
1. The goods or services in the bundle are highly interrelated and transferring
them to the customer requires that the entity also provide a significant
service of integrating the goods or services into the combined item(s) for
which the customer has contracted.
2. The bundle of goods or services is significantly modified or customized to
fulfill the contract.
The proposed guidance also includes implementation guidance to help an entity
to appropriately identify the performance obligations in specified situations (for
example, when other parties are involved in providing goods to an entity’s
customer and the entity must determine whether its performance obligation is to
provide the goods, by acting as a principal, or to provide the service of arranging
for another party to provide the goods by acting as an agent).
Step 3: Determine the transaction price
The transaction price is the amount of consideration to which an entity expects to
be entitled in exchange for transferring promised goods or services to a
3
customer, excluding amounts collected on behalf of third parties (for example,
sales taxes). When determining the transaction price, an entity would consider
the effects of all of the following:
1. Variable consideration—If the promised amount of consideration in a
contract is variable, an entity would estimate the transaction price by using
either the expected value (that is, probability-weighted amount) or the most
likely amount, depending on which method the entity expects to better
predict the amount of consideration to which it will be entitled.
2. The time value of money—An entity would adjust the promised amount of
consideration to reflect the time value of money if the contract has a
financing component that is significant to the contract. An entity would
consider various factors in assessing whether a financing component is
significant to a contract. As a practical expedient, an entity need not adjust
the promised amount of consideration to reflect the time value of money if
the entity expects at contract inception that the period between payment by
the customer and the transfer of the promised goods or services to the
customer will be one year or less.
3. Noncash consideration—If a customer promises consideration in a form
other than cash, an entity would measure the noncash consideration (or
promise of noncash consideration) at fair value. If an entity cannot
reasonably estimate the fair value of the noncash consideration, it would
measure the consideration indirectly by reference to the standalone selling
price of the goods or services promised to the customer in exchange for the
consideration.
4. Consideration payable to the customer—If an entity pays, or expects to
pay, consideration to a customer (or to other parties that purchase the
entity’s goods or services from the customer) in the form of cash, credit, or
other items that the customer can apply against amounts owed to the
entity, the entity would account for the consideration payable to the
customer as a reduction of the transaction price unless the payment is in
exchange for a distinct good or service.
An entity would not consider the effects of customer credit risk (that is,
collectibility) when determining the transaction price but, instead, would account
for those effects by applying the guidance in Topic 310 on receivables or IFRS 9,
Financial Instruments. Any corresponding amounts recognized in profit or loss
would be presented both initially and subsequently as a separate line item
adjacent to the revenue line item.
Step 4: Allocate the transaction price to the separate
performance obligations in the contract
For a contract that has more than one separate performance obligation, an entity
would allocate the transaction price to each separate performance obligation in
4
an amount that depicts the amount of consideration to which the entity expects to
be entitled in exchange for satisfying each separate performance obligation.
To allocate an appropriate amount of consideration to each separate
performance obligation, an entity would determine the standalone selling price at
contract inception of the good or service underlying each separate performance
obligation and allocate the transaction price on a relative standalone selling price
basis. If a standalone selling price is not observable, an entity would estimate it.
The proposed guidance specifies the circumstances in which an entity would
allocate a discount or a contingent amount entirely to one (or some) distinct
goods or services promised in a contract rather than to all promised goods or
services in the contract.
An entity would allocate to the separate performance obligations in a contract
any subsequent changes in the transaction price on the same basis as at
contract inception. Amounts allocated to a satisfied performance obligation would
be recognized as revenue, or as a reduction of revenue, in the period in which
the transaction price changes.
Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation
An entity would recognize revenue when (or as) it satisfies a performance
obligation by transferring a promised good or service to a customer. A good or
service is transferred when (or as) the customer obtains control of that good or
service.
For each separate performance obligation, an entity would determine whether
the entity satisfies the performance obligation over time by transferring control of
a good or service over time. If the entity does not satisfy a performance
obligation over time, the performance obligation is satisfied at a point in time.
An entity transfers control of a good or service over time and, hence, satisfies a
performance obligation and recognizes revenue over time if at least one of the
following two criteria is met:
1. The entity’s performance creates or enhances an asset (for example, work
in process) that the customer controls as the asset is created or enhanced.
2. The entity’s performance does not create an asset with an alternative use
to the entity and at least one of the following criteria is met:
(a) The customer simultaneously receives and consumes the benefits of
the entity’s performance as the entity performs.
(b) Another entity would not need to substantially reperform the work the
entity has completed to date if that other entity were to fulfill the
remaining obligation to the customer.
(c) The entity has a right to payment for performance completed to date
and it expects to fulfill the contract as promised.
5
For each separate performance obligation that an entity satisfies over time, the
entity would recognize revenue over time by consistently applying a method of
measuring the progress toward complete satisfaction of that performance
obligation. Appropriate methods of measuring progress include output methods
and input methods. As circumstances change over time, an entity would update
its measure of progress to depict the entity’s performance completed to date.
If a performance obligation is not satisfied over time, an entity satisfies the
performance obligation at a point in time. To determine the point in time when a
customer obtains control of a promised asset and an entity satisfies a
performance obligation, the entity would consider indicators of the transfer of
control that include, but are not limited to, the following:
1.
2.
3.
4.
The entity has a present right to payment for the asset.
The customer has legal title to the asset.
The entity has transferred physical possession of the asset.
The customer has the significant risks and rewards of ownership of the
asset.
5. The customer has accepted the asset.
In addition, the proposed guidance includes implementation guidance on
specified topics (for example, repurchase agreements, consignment
arrangements, and bill-and-hold arrangements) to help an entity determine when
control of a promised good or service is transferred to a customer.
Constraint on the cumulative amount of revenue recognized
If the amount of consideration to which an entity will be entitled is variable, the
cumulative amount of revenue the entity recognizes to date would not exceed the
amount to which it is reasonably assured to be entitled. An entity is reasonably
assured to be entitled to the amount of consideration allocated to satisfied
performance obligations only if both of the following criteria are met:
1. The entity has experience with similar types of performance obligations (or
has other evidence such as access to the experience of other entities).
2. The entity’s experience (or other evidence) is predictive of the amount of
consideration to which the entity will be entitled in exchange for satisfying
those performance obligations.
An entity would be required to consider various factors when determining
whether the entity’s experience (or other evidence) is predictive of the amount of
consideration to which the entity will be entitled.
Onerous performance obligations
For a performance obligation that an entity satisfies over time and that the entity
expects at contract inception to satisfy over a period of time greater than one
6
year, an entity would recognize a liability and a corresponding expense if the
performance obligation is onerous.
A performance obligation is onerous if the lowest cost of settling the performance
obligation exceeds the amount of the transaction price allocated to that
performance obligation. The proposed guidance specifies how an entity would
determine the lowest cost of settling the performance obligation.
Contract costs
The proposed guidance also specifies the accounting for some costs of obtaining
or fulfilling a contract with a customer. An entity would recognize as an asset the
incremental costs of obtaining a contract if the entity expects to recover those
costs. To account for the costs of fulfilling a contract with a customer, an entity
would apply the requirements of other standards (for example, Topic 330 on
inventory or IAS 2, Inventories; Topic 360 or IAS 16; and Topic 985 on software
or IAS 38, Intangible Assets), if applicable. Otherwise, an entity would recognize
an asset from the costs to fulfill a contract only if those costs meet all of the
following criteria:
1. The costs relate directly to a contract (or a specific anticipated contract).
2. The costs generate or enhance resources of the entity that will be used in
satisfying performance obligations in the future.
3. The costs are expected to be recovered.
Disclosures
The proposed guidance specifies various disclosure requirements that would
enable users of financial statements to understand the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts with customers.
To achieve that objective, an entity would disclose qualitative and quantitative
information about all of the following:
1. Its contracts with customers (including a reconciliation of contract balances)
2. The significant judgments, and changes in judgments, made in applying the
proposed guidance to those contracts
3. Any assets recognized from the costs to obtain or fulfill a contract with a
customer.
In addition, the Boards propose amending Topic 270 on interim reporting and
IAS 34, Interim Financial Reporting, to require some information to be disclosed
for interim reporting periods.
A nonpublic entity may elect not to provide some of the proposed disclosures (for
example, a reconciliation of contract balances).
7
When Would the Provisions Be Effective?
The Boards decided that on the basis of their current timetable for the project, a
final revenue standard would not be effective earlier than for annual reporting
periods beginning on or after January 1, 2015. That timing would ensure that for
an entity providing two years of comparative annual financial information (in
addition to information for the current year), the standard would be issued before
the beginning of the earliest comparative annual period presented. The FASB
decided that early application would not be permitted. The IASB decided that
early application would be permitted.
Questions for Respondents
Much of the guidance in this proposed Update is similar to the guidance in the
2010 proposed Update on which the Boards have received extensive feedback.
Hence, the Boards are not seeking specific comments on all matters in this
proposed Update. Instead, the Boards invite individuals and organizations to
comment on whether the proposed guidance is clear and can be applied in a way
that effectively communicates to users of financial statements the economic
substance of an entity’s contracts with customers. If a proposed requirement is
not clear, the Boards invite suggestions on how to clarify the drafting of the
proposed requirement. The Boards also invite comments on the specific
questions below. Respondents need not comment on all of the questions.
Comments are requested from both those who agree with the proposed guidance
and those who do not agree. Comments are most helpful if they identify and
clearly explain the issue or question to which they relate. Those who disagree
with a proposal are asked to describe their suggested alternative(s), supported
by specific reasoning.
Respondents should submit one comment letter to either the FASB or the IASB.
The Boards will share and jointly consider all comment letters received.
Question 1: Paragraphs 35 and 36 specify when an entity transfers control of a
good or service over time and, hence, when an entity satisfies a performance
obligation and recognizes revenue over time. Do you agree with that proposal? If
not, what alternative do you recommend for determining when a good or service
is transferred over time and why?
Question 2: Paragraphs 68 and 69 state that an entity would apply Topic 310 (or
IFRS 9, if applicable) to account for amounts of promised consideration that the
entity assesses to be uncollectible because of a customer’s credit risk. The
corresponding amounts in profit or loss would be presented as a separate line
item adjacent to the revenue line item. Do you agree with those proposals? If not,
what alternative do you recommend to account for the effects of a customer’s
credit risk and why?
8
Question 3: Paragraph 81 states that if the amount of consideration to which an
entity will be entitled is variable, the cumulative amount of revenue the entity
recognizes to date should not exceed the amount to which the entity is
reasonably assured to be entitled. An entity is reasonably assured to be entitled
to the amount allocated to satisfied performance obligations only if the entity has
experience with similar performance obligations and that experience is predictive
of the amount of consideration to which the entity will be entitled. Paragraph 82
lists indicators of when an entity’s experience may not be predictive of the
amount of consideration to which the entity will be entitled in exchange for
satisfying those performance obligations. Do you agree with the proposed
constraint on the amount of revenue that an entity would recognize for satisfied
performance obligations? If not, what alternative constraint do you recommend
and why?
Question 4: For a performance obligation that an entity satisfies over time and
expects at contract inception to satisfy over a period of time greater than one
year, paragraph 86 states that the entity should recognize a liability and a
corresponding expense if the performance obligation is onerous. Do you agree
with the proposed scope of the onerous test? If not, what alternative scope do
you recommend and why?
Question 5: The Boards propose to amend Topic 270 and IAS 34 to specify the
disclosures about revenue and contracts with customers that an entity should
include in its interim financial statements. The disclosures that would be required
(if material) are:
1. The disaggregation of revenue (paragraphs 114–116)
2. A tabular reconciliation of the movements in the aggregate balance of
contract assets and contract liabilities for the current reporting period
(paragraph 117)
3. An analysis of the entity’s remaining performance obligations (paragraphs
119–121)
4. Information on onerous performance obligations and a tabular reconciliation
of the movements in the corresponding onerous liability for the current
reporting period (paragraphs 122 and 123)
5. A tabular reconciliation of the movements of the assets recognized from the
costs to obtain or fulfill a contract with a customer (paragraph 128).
Do you agree that an entity should be required to provide each of those
disclosures in its interim financial statements? In your response, please comment
on whether those proposed disclosures achieve an appropriate balance between
the benefits to users of having that information and the costs to entities to
prepare and audit that information. If you think that the proposed disclosures do
not appropriately balance those benefits and costs, please identify the
disclosures that an entity should be required to include in its interim financial
statements.
9
Question 6: For the transfer of a nonfinancial asset that is not an output of an
entity’s ordinary activities (for example, property, plant, and equipment within the
scope of Topic 360, IAS 16, or IAS 40), the Boards propose amending other
standards to require that an entity apply (a) the proposed guidance on control to
determine when to derecognize the asset and (b) the proposed measurement
guidance to determine the amount of gain or loss to recognize upon
derecognition of the asset. Do you agree that an entity should apply the
proposed control and measurement guidance to account for the transfer of
nonfinancial assets that are not an output of an entity’s ordinary activities? If not,
what alternative do you recommend and why?
Questions for Respondents—Proposed Amendments to the
FASB Accounting Standards Codification®
The proposed consequential amendments reflect changes to the Codification as
of the issuance of Accounting Standards Update No. 2011-07, Health Care
Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue,
Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain
Health Care Entities. These proposed amendments would not supersede the
proposed amendments to Subtopics 946-605 and 973-605 from proposed
Updates, Financial Services—Investment Companies (Topic 946): Amendments
to the Scope, Measurement, and Disclosure Requirements, and Real Estate—
Investment Property Entities (Topic 973).
Question A1: Do you agree that the proposed amendments that codify the
guidance in the proposed Update on revenue recognition have been codified
correctly? If not, what alternative amendment(s) do you recommend and why?
Question A2: Do you agree that the proposed consequential amendments that
would result from the proposals in the proposed Update on revenue recognition
have been appropriately reflected? If not, what alternative amendment(s) do you
recommend and why?
10
Proposed Guidance
Introduction
1.
In accordance with FASB Concepts Statement No. 6, Elements of
Financial Statements, revenues are inflows or other enhancements of
assets of an entity or settlements of its liabilities (or a combination of
both) from delivering or producing goods, rendering services, or other
activities that constitute the entity’s ongoing major or central operations.
The assets increased by revenues may be of various kinds, for example,
cash, claims against customers, inventory, or other assets.
2.
This proposed guidance specifies the accounting for revenue arising
from contracts with customers. It does not address revenue arising from
other transactions or activities (for example, revenues arising from
changes in the value of some biological or agricultural assets).
3.
The core principle of this proposed guidance is that an entity shall
recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.
4.
To achieve that core principle, an entity shall apply all of the following
steps:
(a)
(b)
(c)
(d)
(e)
Identify the contract with a customer.
Identify the separate performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to the separate performance
obligations in the contract.
Recognize revenue when (or as) the entity satisfies a
performance obligation.
5.
An entity shall consider the terms of the contract and all related facts
and circumstances when using judgment in applying this proposed
guidance. An entity shall apply this proposed guidance consistently to
contracts with similar characteristics and in similar circumstances.
6.
This proposed guidance specifies the accounting for an individual
contract with a customer. However, as a practical expedient, an entity
may apply this proposed guidance to a portfolio of contracts (or
performance obligations) with similar characteristics if the entity
reasonably expects that the result of doing so would not differ materially
from the result of applying this proposed guidance to the individual
contracts (or performance obligations).
11
7.
This proposed guidance uses the terms in Appendix A with the specified
meanings. Terms defined in Appendix A (the glossary) are in bold type
the first time they appear. Paragraphs in bold type state the main
principles. (Glossary terms that appear for the first time in a principle
paragraph are in plain type.)
Objective
8.
The objective of this proposed guidance is to establish the principles that
an entity shall apply to report useful information to users of financial
statements about the nature, amount, timing, and uncertainty of revenue
and cash flows arising from a contract with a customer.
Scope
9.
An entity shall apply this proposed guidance to all contracts with
customers, except the following:
(a)
(b)
(c)
(d)
(e)
10.
12
Lease contracts within the scope of Topic 840 on leases
Insurance contracts within the scope of Topic 944 on insurance
Contractual rights or obligations within the scope of the following
Topics:
(i)
Topic 310 on receivables
(ii)
Topic 320 on debt and equity securities
(iii)
Topic 405 on liabilities
(iv)
Topic 470 on debt
(v)
Topic 815 on derivatives and hedging
(vi)
Topic 825 on financial instruments
(vii) Topic 860 on transfers and servicing.
Guarantees (other than product or service warranties) within the
scope of Topic 460 on guarantees
Nonmonetary exchanges between entities in the same line of
business to facilitate sales to customers, or to potential
customers, other than the parties to the exchange (for example,
an exchange of oil to fulfill demand on a timely basis in a
specified location).
A customer is a party that has contracted with an entity to obtain goods
or services that are an output of the entity’s ordinary activities. An entity
shall apply this proposed guidance to a contract (other than a contract
listed in paragraph 9) only if the counterparty to the contract is a
customer. For some contracts, the counterparty to the contract might not
be a customer but rather a collaborator or a partner that shares with the
entity the risks and benefits of developing a product to be marketed.
Such contracts are not in the scope of this proposed guidance.
11.
A contract with a customer may be partially within the scope of this
proposed guidance and partially within the scope of other standards.
(a)
(b)
If the other standards specify how to separate and/or initially
measure one or more parts of the contract, then an entity shall
first apply those separation and/or measurement requirements.
If the other standards do not specify how to separate and/or
initially measure one or more parts of the contract, then the entity
shall apply this proposed guidance to separate and/or initially
measure the part(s) of the contract.
Recognition of revenue
Identifying the contract
12.
An entity shall apply this proposed guidance to each contract
identified in accordance with paragraphs 13–22.
13.
A contract is an agreement between two or more parties that creates
enforceable rights and obligations. Enforceability is a matter of law.
Contracts can be written, oral, or implied by an entity’s customary
business practices. The practices and processes for establishing
contracts with customers vary across legal jurisdictions, industries, and
entities. Additionally, they may vary within an entity (for example, they
may depend on the class of customer or the nature of the promised
goods or services). An entity shall consider those practices and
processes in determining when an agreement with a customer creates
enforceable rights and obligations of the entity.
14.
An entity shall apply the proposed revenue guidance to a contract with a
customer only if all of the following criteria are met:
(a)
(b)
(c)
(d)
15.
The contract has commercial substance (that is, the risk, timing,
or amount of the entity’s future cash flows is expected to change
as a result of the contract).
The parties to the contract have approved the contract (in writing,
orally, or in accordance with other customary business practices)
and are committed to perform their respective obligations.
The entity can identify each party’s rights regarding the goods or
services to be transferred.
The entity can identify the payment terms for the goods or
services to be transferred.
For the purpose of applying the proposed revenue guidance, a contract
does not exist if each party to the contract has the unilateral enforceable
right to terminate a wholly unperformed contract without compensating
13
the other party (parties). A contract is wholly unperformed if both of the
following criteria are met:
(a)
(b)
The entity has not yet transferred any promised goods or services
to the customer.
The entity has not yet received, and is not yet entitled to receive,
any consideration in exchange for promised goods or services.
Combination of contracts
16.
An entity shall apply this proposed guidance to each contract with a
customer except as specified in paragraphs 6 and 17.
17.
An entity shall combine two or more contracts entered into at or near the
same time with the same customer (or related parties) and account for
the contracts as a single contract if one or more of the following criteria
are met:
(a)
(b)
(c)
The contracts are negotiated as a package with a single
commercial objective.
The amount of consideration to be paid in one contract depends
on the price or performance of the other contract.
The goods or services promised in the contracts (or some goods
or services promised in the contracts) are a single performance
obligation in accordance with paragraphs 27–30.
Contract modifications (see paragraph IG61)
18.
A contract modification exists when the parties to a contract approve a
change in the scope or price of a contract (or both). If a contract
modification has not been approved by the parties to a contract, an
entity shall continue to apply the proposed revenue guidance to the
existing contract until the contract modification is approved.
19.
If the parties to a contract have approved a change in the scope of the
contract but have not yet determined the corresponding change in price,
an entity shall apply the proposed revenue guidance to the modified
contract when the entity has an expectation that the price of the
modification will be approved. To estimate the transaction price in such
cases, an entity shall apply the proposed guidance in paragraphs 50–67.
20.
If a contract modification results only in a change to the transaction
price, an entity shall account for the modification as a change in the
transaction price in accordance with paragraphs 77–80.
21.
An entity shall account for a contract modification as a separate contract
if the contract modification results in the addition to the contract of both
of the following:
14
(a)
(b)
22.
Promised goods or services that are distinct in accordance with
paragraphs 27–30
An entity’s right to receive an amount of consideration that
reflects the entity’s standalone selling price of the promised
good(s) or service(s) and any appropriate adjustments to that
price to reflect the circumstances of the particular contract. For
example, an entity would adjust the standalone selling price for a
discount that the customer receives because it is not necessary
for the entity to incur the selling-related costs that it would incur
when selling a similar good or service to a new customer.
For a contract modification that is not a separate contract in accordance
with paragraph 21, an entity shall evaluate the remaining goods or
services in the modified contract (that is, the promised goods or services
not yet transferred at the date of the contract modification) and shall
account for the modified contract in whichever of the following ways is
applicable:
(a)
(b)
(c)
If the remaining goods or services are distinct from the goods or
services transferred on or before the date of the contract
modification, then the entity shall allocate to the remaining
separate performance obligations the amount of consideration
received from the customer but not yet recognized as revenue
plus the amount of any remaining consideration that the customer
has promised to pay. In effect, an entity shall account for the
contract modification as a termination of the original contract and
the creation of a new contract.
If the remaining goods or services are not distinct and are part of
a single performance obligation that is partially satisfied at the
date of the contract modification, then the entity shall update the
transaction price and the measure of progress toward complete
satisfaction of the performance obligation. The entity shall
recognize the effect of the contract modification as revenue (or as
a reduction of revenue) at the date of the contract modification on
a cumulative catch-up basis. In effect, the entity shall account for
the contract modification as if it were a part of the original
contract.
If the remaining goods or services are a combination of items (a)
and (b), then the entity shall allocate to the unsatisfied (including
partially unsatisfied) separate performance obligations the
amount of consideration received from the customer but not yet
recognized as revenue plus the amount of any remaining
consideration that the customer has promised to pay. For a
performance obligation satisfied over time, an entity shall update
the transaction price and the measure of progress toward
complete satisfaction of the performance obligation. An entity
15
shall not reallocate consideration to, and adjust the amount of
revenue recognized for, separate performance obligations that
are completely satisfied on or before the date of the contract
modification.
Identifying separate performance obligations (see paragraphs
IG16, IG20, and IG62)
23.
An entity shall evaluate the goods or services promised in a
contract and shall identify which goods or services (or which
bundles of goods or services) are distinct and, hence, that the
entity shall account for as a separate performance obligation.
24.
A performance obligation is a promise in a contract with a customer to
transfer a good or service to the customer. Performance obligations
include promises that are implied by an entity’s customary business
practices, published policies, or specific statements if those promises
create a valid expectation of the customer that the entity will transfer a
good or service.
25.
Performance obligations do not include activities that an entity must
undertake to fulfill a contract unless the entity transfers a good or service
to the customer as those activities occur. For example, a services
provider may need to perform various administrative tasks to set up a
contract. The performance of those tasks does not transfer a service to
the customer as the tasks are performed. Hence, those promised setup
activities are not a performance obligation.
26.
Depending on the contract, promised goods or services may include, but
are not limited to, the following:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
16
Goods produced by an entity for sale (for example, inventory of a
manufacturer)
Goods purchased by an entity for resale (for example,
merchandise of a retailer)
Providing a service of arranging for another party to transfer
goods or services to the customer (for example, acting as an
agent of another party as discussed in paragraphs IG16–IG19)
Standing ready to provide goods or services (for example, whenand-if-available software products)
Constructing, manufacturing, or developing an asset on behalf of
a customer
Granting licenses or rights to use intangible assets
Granting options to purchase additional goods or services (when
those options provide the customer with a material right as
discussed in paragraphs IG20–IG22)
(h)
Performing a contractually agreed-upon task (or tasks) for a
customer.
27.
If an entity promises to transfer more than one good or service, the entity
shall account for each promised good or service as a separate
performance obligation only if it is distinct. If a promised good or service
is not distinct, an entity shall combine that good or service with other
promised goods or services until the entity identifies a bundle of goods
or services that is distinct. In some cases, that would result in an entity
accounting for all the goods or services promised in a contract as a
single performance obligation.
28.
Except as specified in paragraph 29, a good or service is distinct if either
of the following criteria is met:
(a)
(b)
29.
Notwithstanding the requirements in paragraph 28, a good or service in
a bundle of promised goods or services is not distinct and, therefore, the
entity shall account for the bundle as a single performance obligation if
both of the following criteria are met:
(a)
(b)
30.
The entity regularly sells the good or service separately.
The customer can benefit from the good or service either on its
own or together with other resources that are readily available to
the customer. Readily available resources are goods or services
that are sold separately (by the entity or by another entity) or
resources that the customer already has obtained (from the entity
or from other transactions or events).
The goods or services in the bundle are highly interrelated and
transferring them to the customer requires that the entity also
provide a significant service of integrating the goods or services
into the combined item(s) for which the customer has contracted.
The bundle of goods or services is significantly modified or
customized to fulfill the contract.
As a practical expedient, an entity may account for two or more distinct
goods or services promised in a contract as a single performance
obligation if those goods or services have the same pattern of transfer to
the customer. For example, if an entity promises to transfer two or more
distinct services to a customer over the same period of time, the entity
could account for those promises as one performance obligation if
applying one method of measuring progress (as discussed in
paragraphs 38–48) would faithfully depict the pattern of transfer of those
services to the customer.
17
Satisfaction of performance obligations (see paragraphs IG63
and IG64)
31.
An entity shall recognize revenue when (or as) the entity satisfies a
performance obligation by transferring a promised good or service
(that is, an asset) to a customer. An asset is transferred when (or
as) the customer obtains control of that asset.
32.
Goods and services are assets, even if only momentarily, when they are
received and used (as in the case of many services). Control of an asset
refers to the ability to direct the use of and obtain substantially all of the
remaining benefits from the asset. Control includes the ability to prevent
other entities from directing the use of and obtaining the benefits from an
asset. The benefits of an asset are the potential cash flows that can be
obtained directly or indirectly in many ways, such as by:
(a)
(b)
(c)
(d)
(e)
(f)
Using the asset to produce goods or provide services (including
public services)
Using the asset to enhance the value of other assets
Using the asset to settle liabilities or reduce expenses
Selling or exchanging the asset
Pledging the asset to secure a loan
Holding the asset.
33.
When evaluating whether a customer obtains control of an asset, an
entity shall consider any agreement to repurchase the promised asset or
a component of the promised asset. (See the implementation guidance
on repurchase agreements in paragraphs IG38–IG48.)
34.
For each separate performance obligation identified in paragraphs 23–
30, an entity shall apply the guidance in paragraphs 35 and 36 to
determine at contract inception whether the entity satisfies the
performance obligation over time by transferring control of a promised
good or service over time. If an entity does not satisfy a performance
obligation over time, the performance obligation is satisfied at a point in
time.
Performance obligations satisfied over time
35.
An entity transfers control of a good or service over time and, hence,
satisfies a performance obligation and recognizes revenue over time if at
least one of the following two criteria is met:
(a)
18
The entity’s performance creates or enhances an asset (for
example, work in process) that the customer controls as the asset
is created or enhanced. An entity shall apply the proposed
guidance on control in paragraphs 31–33 and paragraph 37 to
(b)
36.
determine whether the customer controls an asset as it is created
or enhanced.
The entity’s performance does not create an asset with an
alternative use to the entity (see paragraph 36) and at least one
of the following criteria is met:
(i)
The customer simultaneously receives and consumes the
benefits of the entity’s performance as the entity performs.
(ii)
Another entity would not need to substantially reperform
the work the entity has completed to date if that other
entity were to fulfill the remaining obligation to the
customer. In evaluating this criterion, the entity shall
presume that another entity fulfilling the remainder of the
contract would not have the benefit of any asset (for
example, work in process) presently controlled by the
entity. In addition, an entity shall disregard potential
limitations (contractual or practical) that would prevent it
from transferring a remaining performance obligation to
another entity.
(iii)
The entity has a right to payment for performance
completed to date, and it expects to fulfill the contract as
promised. The right to payment for performance
completed to date does not need to be for a fixed amount.
However, the entity must be entitled to an amount that is
intended to at least compensate the entity for performance
completed to date even if the customer can terminate the
contract for reasons other than the entity’s failure to
perform as promised. Compensation for performance
completed to date includes payment that approximates the
selling price of the goods or services transferred to date
(for example, recovery of the entity’s costs plus a
reasonable profit margin) rather than compensation for
only the entity’s potential loss of profit if the contract is
terminated.
When evaluating whether an asset has an alternative use to the entity,
an entity shall consider at contract inception the effects of contractual
and practical limitations on the entity’s ability to readily direct the
promised asset to another customer. A promised asset would not have
an alternative use to an entity if the entity is unable, either contractually
or practically, to readily direct the asset to another customer. For
example, an asset would have an alternative use to an entity if the asset
is largely interchangeable with other assets that the entity could transfer
to the customer without breaching the contract and without incurring
significant costs that otherwise would not have been incurred in relation
to that contract. Conversely, the asset would not have an alternative use
if the contract has substantive terms that preclude the entity from
19
directing the asset to another customer or if the entity would incur
significant costs (for example, costs to rework the asset) to direct the
asset to another customer.
Performance obligations satisfied at a point in time (see
paragraphs IG38–IG58)
37.
If a performance obligation is not satisfied over time in accordance with
paragraphs 35 and 36, an entity satisfies the performance obligation at a
point in time. To determine the point in time when a customer obtains
control of a promised asset and an entity satisfies a performance
obligation, the entity shall consider the guidance on control in
paragraphs 31–33. In addition, an entity shall consider indicators of the
transfer of control, which include, but are not limited to, the following:
(a)
(b)
(c)
(d)
20
The entity has a present right to payment for the asset—If a
customer presently is obliged to pay for an asset, then that
indicates that the customer has obtained control of the asset in
exchange.
The customer has legal title to the asset—Legal title often
indicates which party to a contract has the ability to direct the use
of and obtain the benefits from an asset or to restrict the access
of other entities to those benefits. Hence, the transfer of legal title
of an asset indicates that the customer has obtained control of
the asset. If an entity retains legal title solely as protection against
the customer’s failure to pay, those rights of the entity are
protective rights and do not preclude a customer from obtaining
control of an asset.
The entity has transferred physical possession of the asset—The
customer’s physical possession of an asset indicates that the
customer has the ability to direct the use of and obtain the
benefits from the asset or to restrict the access of other entities to
those benefits. However, physical possession may not coincide
with control of an asset. For example, in some repurchase
agreements and in some consignment arrangements, a customer
or consignee may have physical possession of an asset that the
entity controls. Conversely, in some bill-and-hold arrangements,
the entity may have physical possession of an asset that the
customer controls. To account for a repurchase, consignment, or
bill-and-hold arrangement, an entity shall apply the
implementation guidance in paragraphs IG38–IG54.
The customer has the significant risks and rewards of ownership
of the asset—The transfer of the significant risks and rewards of
ownership of an asset to the customer indicates that control of
the asset has been transferred. However, when evaluating the
risks and rewards of ownership of a promised asset, an entity
(e)
shall consider any risks that may give rise to a separate
performance obligation in addition to the performance obligation
to transfer the asset. For example, an entity may have transferred
control of an asset to a customer but not yet satisfied an
additional separate performance obligation to provide
maintenance services related to the transferred asset.
The customer has accepted the asset—The customer’s
acceptance of an asset indicates that it has obtained the ability to
direct the use of and obtain the benefits from the asset. To
evaluate the effect of a contractual customer acceptance clause
on when control of an asset is transferred, an entity shall consider
the implementation guidance in paragraphs IG55–IG58.
Measuring progress toward complete satisfaction of a
performance obligation (see paragraph IG65)
38.
For each separate performance obligation that an entity satisfies over
time in accordance with paragraphs 35 and 36, an entity shall recognize
revenue over time by measuring the progress toward complete
satisfaction of that performance obligation. The objective when
measuring progress is to depict the transfer of control of goods or
services to the customer—that is, to depict an entity’s performance. As
circumstances change over time, an entity shall update its measure of
progress to depict the entity’s performance completed to date. Such
changes shall be accounted for as a change in accounting estimate in
accordance with Subtopic 250-10 on accounting changes and error
corrections.
39.
In accordance with the objective of measuring progress, an entity shall
exclude from a measure of progress any goods or services for which the
entity does not transfer control to the customer. Conversely, an entity
shall include in the measure of progress any goods or services for which
the entity does transfer control to the customer.
40.
For each separate performance obligation satisfied over time, an entity
shall apply a method of measuring progress that is consistent with the
objective in paragraph 38 and shall apply that method consistently to
similar performance obligations and in similar circumstances.
Appropriate methods of measuring progress include output methods and
input methods.
Output methods
41.
Output methods recognize revenue on the basis of direct measurements
of the value to the customer of the goods or services transferred to date
21
(for example, surveys of performance completed to date, appraisals of
results achieved, milestones reached, or units produced) and can be the
most faithful depiction of the entity’s performance.
42.
If an entity has a right to invoice a customer in an amount that
corresponds directly with the value to the customer of the entity’s
performance completed to date (for example, a services contract in
which an entity bills a fixed amount for each hour of service provided),
the entity shall recognize revenue in the amount to which the entity has
a right to invoice.
43.
A disadvantage of output methods is that they often are not directly
observable and the information required to apply them may not be
available to the entity without undue cost. Hence, an input method may
be necessary.
Input methods
44.
Input methods recognize revenue on the basis of the entity’s efforts or
inputs to the satisfaction of a performance obligation (for example,
resources consumed, labor hours expended, costs incurred, time
lapsed, or machine hours used) relative to the total expected inputs to
the satisfaction of that performance obligation. If the entity’s efforts or
inputs are expended evenly throughout the performance period, it may
be appropriate for an entity to recognize revenue on a straight-line basis.
45.
A shortcoming of input methods is that there may not be a direct
relationship between the entity’s inputs and the transfer of control of
goods or services to the customer because of inefficiencies in the
entity’s performance or other factors. Hence, when using an input
method, an entity shall exclude the effects of any inputs that do not
depict the transfer of control of goods or services to the customer (for
example, the costs of wasted materials, labor, or other resources to fulfill
the contract that were not reflected in the price of the contract).
46.
When applying an input method to a separate performance obligation
that includes goods that the customer obtains control of significantly
before receiving services related to those goods, the best depiction of
the entity’s performance may be for the entity to recognize revenue for
the transferred goods in an amount equal to the costs of those goods if
both of the following conditions are present at contract inception:
(a)
(b)
22
The cost of the transferred goods is significant relative to the total
expected costs to completely satisfy the performance obligation.
The entity procures the goods from another entity and is not
significantly involved in designing and manufacturing the goods
(but the entity is acting as a principal in accordance with
paragraphs IG16–IG19).
Reasonable measures of progress
47.
An entity shall recognize revenue for a performance obligation satisfied
over time only if the entity can reasonably measure its progress toward
complete satisfaction of the performance obligation. An entity would not
be able to reasonably measure its progress toward complete satisfaction
of a performance obligation if it lacks reliable information that would be
required to apply an appropriate method of measuring progress.
48.
In some circumstances (for example, in the early stages of a contract),
an entity may not be able to reasonably measure the outcome of a
performance obligation, but the entity expects to recover the costs
incurred in satisfying the performance obligation. In those
circumstances, the entity shall recognize revenue only to the extent of
the costs incurred until such time that it can reasonably measure the
outcome of the performance obligation or until the performance
obligation becomes onerous.
Measurement of revenue
49.
When (or as) a performance obligation is satisfied, an entity shall
recognize as revenue the amount of the transaction price allocated
to that performance obligation. If the amount of consideration to
which an entity expects to be entitled is variable, the cumulative
amount of revenue an entity recognizes to date shall not exceed
the amount to which the entity is reasonably assured to be entitled.
Determining the transaction price
50.
An entity shall consider the terms of the contract and its customary
business practices to determine the transaction price. The transaction
price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties (for
example, sales taxes). The transaction price does not include the effects
of the customer’s credit risk as discussed in paragraphs 68 and 69.
51.
For the purpose of determining the transaction price, an entity shall
assume that the goods or services will be transferred to the customer as
promised in accordance with the existing contract and that the contract
will not be cancelled, renewed, or modified.
23
52.
When determining the transaction price, an entity shall consider the
effects of all of the following:
(a)
(b)
(c)
(d)
Variable consideration
The time value of money
Noncash consideration
Consideration payable to a customer.
Variable consideration (see paragraphs IG2–IG9)
53.
The promised amount of consideration in a contract can vary because of
discounts, rebates, refunds, credits, incentives, performance bonuses,
penalties, contingencies, price concessions, or other similar items.
54.
If the promised amount of consideration in a contract is variable, an
entity shall estimate the total amount to which the entity will be entitled in
exchange for transferring the promised goods or services to a customer.
An entity shall update the estimated transaction price at each reporting
date to represent faithfully the circumstances present at the reporting
date and the changes in circumstances during the reporting period. An
entity shall account for changes in the transaction price in accordance
with paragraphs 77–80.
55.
To estimate the transaction price, an entity shall use either of the
following methods, depending on which method the entity expects to
better predict the amount of consideration to which it will be entitled:
(a)
(b)
56.
24
The expected value—The expected value is the sum of
probability-weighted amounts in a range of possible consideration
amounts. An expected value may be an appropriate estimate of
the transaction price if an entity has a large number of contracts
with similar characteristics.
The most likely amount—The most likely amount is the single
most likely amount in a range of possible consideration amounts
(that is, the single most likely outcome of the contract). The most
likely amount may be an appropriate estimate of the transaction
price if the contract has only two possible outcomes (for example,
an entity either achieves a performance bonus or does not).
When estimating the transaction price, an entity shall apply one method
consistently throughout the contract. In addition, an entity shall consider
all the information (historical, current, and forecasted) that is reasonably
available to the entity and shall identify a reasonable number of possible
consideration amounts. The information that an entity uses to determine
the transaction price typically would be similar to the information that
management of the entity uses during the bid and proposal process and
in establishing prices for promised goods or services.
57.
If an entity receives consideration from a customer and expects to
refund some or all of that consideration to the customer, the entity shall
recognize as a refund liability the amount of consideration that the entity
reasonably expects to refund to the customer. The refund liability (and
corresponding change in the transaction price) shall be updated at each
reporting period for changes in circumstances. To account for a refund
liability relating to a sale with a right of return, an entity shall apply the
proposed guidance in paragraphs IG2–IG9.
The time value of money (see paragraph IG66)
58.
In determining the transaction price, an entity shall adjust the promised
amount of consideration to reflect the time value of money if the contract
has a financing component that is significant to the contract. The
objective when adjusting the promised amount of consideration to reflect
the time value of money is for an entity to recognize revenue at an
amount that reflects what the cash selling price would have been if the
customer had paid cash for the promised goods or services at the point
that they are transferred to the customer. If the promised amount of
consideration differs from the cash selling price of the promised goods or
services, then the contract also has a financing component (that is,
interest either to or from the customer) that may be significant to the
contract.
59.
In assessing whether a financing component is significant to a contract,
an entity shall consider various factors including, but not limited to, the
following:
(a)
(b)
(c)
The expected length of time between when the entity transfers
the promised goods or services to the customer and when the
customer pays for those goods or services
Whether the amount of consideration would differ substantially if
the customer paid in cash promptly in accordance with typical
credit terms in the industry and jurisdiction
The interest rate in the contract and prevailing interest rates in
the relevant market.
60.
As a practical expedient, an entity need not adjust the promised amount
of consideration to reflect the time value of money if the entity expects at
contract inception that the period between payment by the customer of
all or substantially all of the promised consideration and the transfer of
the promised goods or services to the customer will be one year or less.
61.
To adjust the promised amount of consideration to reflect the time value
of money, an entity shall use the discount rate that would be reflected in
a separate financing transaction between the entity and its customer at
contract inception. That rate would reflect the credit characteristics of the
25
party receiving financing in the contract as well as any collateral or
security provided by the customer or the entity, which might include
assets transferred in the contract. An entity may be able to determine
that rate by identifying the rate that discounts the nominal amount of the
promised consideration to the cash selling price of the good or service.
After contract inception, an entity shall not update the discount rate for
changes in circumstances or interest rates.
62.
An entity shall present the effects of financing separately from revenue
(as interest expense or interest income) in the statement of
comprehensive income.
Noncash consideration
63.
To determine the transaction price for contracts in which the customer
promises consideration in a form other than cash, an entity shall
measure the noncash consideration (or promise of noncash
consideration) at fair value. If an entity cannot reasonably estimate the
fair value of the noncash consideration, it shall measure the
consideration indirectly by reference to the standalone selling price of
the goods or services promised to the customer (or class of customer) in
exchange for the consideration.
64.
If a customer contributes goods or services (for example, materials,
equipment, or labor) to facilitate an entity’s fulfillment of the contract, the
entity shall assess whether it obtains control of those contributed goods
or services. If so, the entity shall account for the contributed goods or
services as noncash consideration received from the customer.
Consideration payable to a customer (see paragraph IG67)
65.
Consideration payable to a customer includes amounts that an entity
pays, or expects to pay, to a customer (or to other parties that purchase
the entity’s goods or services from the customer) in the form of cash,
credit, or other items that the customer can apply against amounts owed
to the entity. An entity shall account for consideration payable to a
customer as a reduction of the transaction price and, hence, of revenue
unless the payment to the customer is in exchange for a distinct good or
service (as described in paragraphs 28 and 29) that the customer
transfers to the entity.
66.
If the consideration payable to a customer is a payment for a distinct
good or service from the customer, then the entity shall account for the
purchase of the good or service in the same way that it accounts for
other purchases from suppliers. If the amount of consideration payable
to the customer exceeds the fair value of the distinct good or service that
26
the entity receives from the customer, then the entity shall account for
such excess as a reduction of the transaction price. If the entity cannot
reasonably estimate the fair value of the good or service received from
the customer, the entity shall account for all of the consideration payable
to the customer as a reduction of the transaction price.
67.
Accordingly, if consideration payable to a customer is a reduction of the
transaction price, an entity shall recognize the reduction of revenue
when (or as) the later of either of the following occurs:
(a)
(b)
The entity recognizes revenue for the transfer of the related
goods or services to the customer.
The entity pays or promises to pay the consideration (even if the
payment is conditional on a future event). That promise might be
implied by the entity’s customary business practices.
Collectibility
68.
Collectibility refers to a customer’s credit risk—that is, the risk that an
entity will be unable to collect from the customer the amount of
consideration to which the entity is entitled in accordance with the
contract. For an unconditional right to consideration (that is, a
receivable), an entity shall account for the receivable in accordance with
Topic 310 except as specified in paragraph 69. An entity similarly shall
account for the effects of a customer’s credit risk on a contract asset
(see paragraph 106).
69.
Upon initial recognition of the receivable, any difference between the
measurement of the receivable in accordance with Topic 310 and the
corresponding amount of revenue recognized shall be presented in profit
or loss as a separate line item adjacent to the revenue line item. If the
contract does not have a significant financing component in accordance
with paragraph 58, an entity shall present any impairment of the
receivable (or change in the measurement of an impairment) in profit or
loss as a separate line item adjacent to the revenue line item.
Allocating the transaction price to separate performance
obligations (see paragraphs IG68 and IG69)
70.
For a contract that has more than one separate performance
obligation, an entity shall allocate the transaction price to each
separate performance obligation in an amount that depicts the
amount of consideration to which the entity expects to be entitled
in exchange for satisfying each separate performance obligation.
71.
To allocate an appropriate amount of consideration to each separate
performance obligation, an entity shall determine the standalone selling
price at contract inception of the good or service underlying each
27
separate performance obligation and allocate the transaction price on a
relative standalone selling price basis. The standalone selling price is
the price at which an entity would sell a promised good or service
separately to a customer.
72.
The best evidence of a standalone selling price is the observable price
of a good or service when the entity sells that good or service separately
in similar circumstances and to similar customers. A contractually stated
price or a list price for a good or service may be (but shall not be
presumed to be) the standalone selling price of that good or service.
73.
If a standalone selling price is not directly observable, an entity shall
estimate it. When estimating a standalone selling price, an entity shall
consider all information (including market conditions, entity-specific
factors, and information about the customer or class of customer) that is
reasonably available to the entity. In addition, an entity shall maximize
the use of observable inputs and shall apply estimation methods
consistently in similar circumstances. Suitable estimation methods
include, but are not limited to, the following:
(a)
(b)
(c)
74.
28
Adjusted market assessment approach—An entity could evaluate
the market in which it sells goods or services and estimate the
price that customers in that market would be willing to pay for
those goods or services. That approach also might include
referring to prices from the entity’s competitors for similar goods
or services and adjusting those prices as necessary to reflect the
entity’s costs and margins.
Expected cost plus a margin approach—An entity could forecast
its expected costs of satisfying a performance obligation and then
add an appropriate margin for that good or service.
Residual approach—If the standalone selling price of a good or
service is highly variable or uncertain, then an entity may
estimate the standalone selling price by reference to the total
transaction price less the sum of the observable standalone
selling prices of other goods or services promised in the contract.
A selling price is highly variable when an entity sells the same
good or service to different customers (at or near the same time)
for a broad range of amounts. A selling price is uncertain when
an entity has not yet established a price for a good or service and
the good or service has not previously been sold.
If the sum of the standalone selling prices of the promised goods or
services in the contract exceeds the transaction price (that is, if a
customer receives a discount for purchasing a bundle of goods or
services), an entity shall allocate that discount to all separate
performance obligations on a relative standalone selling price basis
except as specified in paragraphs 75 and 76.
75.
An entity shall allocate a discount entirely to one (or some) separate
performance obligation(s) in the contract if both of the following criteria
are met:
(a)
(b)
76.
The entity regularly sells each good or service (or each bundle of
goods or services) in the contract on a standalone basis.
The observable selling prices from those standalone sales
provide evidence of the performance obligation(s) to which the
entire discount in the contract belongs.
If the transaction price includes an amount of consideration that is
contingent on a future event or circumstance (for example, an entity’s
performance or a specific outcome of the entity’s performance), the
entity shall allocate that contingent amount (and subsequent changes to
the amount) entirely to a distinct good or service if both of the following
criteria are met:
(a)
(b)
The contingent payment terms for the distinct good or service
relate specifically to the entity’s efforts to transfer that good or
service (or to a specific outcome from transferring that good or
service).
Allocating the contingent amount of consideration entirely to the
distinct good or service is consistent with the allocation principle
in paragraph 70 when considering all of the performance
obligations and payment terms in the contract.
Changes in the transaction price
77.
After contract inception, the transaction price can change for various
reasons, including the resolution of uncertain events or other changes in
circumstances that change the amount of consideration to which the
entity expects to be entitled in exchange for the promised goods or
services.
78.
An entity shall allocate to the separate performance obligations in the
contract any subsequent changes in the transaction price on the same
basis as at contract inception. Amounts allocated to a satisfied
performance obligation shall be recognized as revenue, or as a
reduction of revenue, in the period in which the transaction price
changes.
79.
An entity shall allocate a change in the transaction price entirely to one
or more distinct goods or services only if the criteria in paragraph 76 are
met.
80.
An entity shall not reallocate the transaction price to reflect changes in
standalone selling prices after contract inception.
29
Constraining the cumulative amount of revenue recognized (see
paragraphs IG69–IG71)
81.
If the amount of consideration to which an entity expects to be
entitled is variable, the cumulative amount of revenue the entity
recognizes to date shall not exceed the amount to which the entity
is reasonably assured to be entitled. An entity is reasonably
assured to be entitled to the amount of consideration allocated to
satisfied performance obligations only if both of the following
criteria are met:
(a)
(b)
82.
The entity has experience with similar types of performance
obligations (or has other evidence such as access to the
experience of other entities).
The entity’s experience (or other evidence) is predictive of
the amount of consideration to which the entity will be
entitled in exchange for satisfying those performance
obligations.
Indicators that an entity’s experience (or other evidence) is not predictive
of the amount of consideration to which the entity will be entitled include,
but are not limited to, the following:
(a)
(b)
(c)
(d)
The amount of consideration is highly susceptible to factors
outside the entity’s influence. Those factors include volatility in a
market, the judgment of third parties, weather conditions, and a
high risk of obsolescence of the promised good or service.
The uncertainty about the amount of consideration is not
expected to be resolved for a long period of time.
The entity’s experience (or other evidence) with similar types of
performance obligations is limited.
The contract has a large number and broad range of possible
consideration amounts.
83.
An entity shall use judgment and consider all facts and circumstances
when evaluating whether the entity’s experience is predictive of the
amount of consideration to which it will be entitled. The presence of any
one of the indicators in paragraph 82 does not necessarily mean that the
entity is not reasonably assured to be entitled to an amount of
consideration.
84.
If an entity is not reasonably assured to be entitled to the amount of the
transaction price allocated to satisfied performance obligations, the
cumulative amount of revenue recognized as of the reporting date is
limited to the amount of the transaction price to which the entity is
reasonably assured to be entitled.
30
85.
Notwithstanding the requirements in paragraphs 81–83, if an entity
licenses intellectual property (see paragraph IG33) to a customer and
the customer promises to pay an additional amount of consideration that
varies on the basis of the customer’s subsequent sales of a good or
service (for example, a sales-based royalty), the entity is not reasonably
assured to be entitled to the additional amount of consideration until the
uncertainty is resolved (that is, when the customer’s subsequent sales
occur).
Onerous performance obligations
86.
For a performance obligation that an entity satisfies over time (see
paragraphs 35 and 36) and that the entity expects at contract
inception to satisfy over a period of time greater than one year, an
entity shall recognize a liability and a corresponding expense if the
performance obligation is onerous.
87.
A performance obligation is onerous if the lowest cost of settling the
performance obligation exceeds the amount of the transaction price
allocated to that performance obligation. The lowest cost of settling a
performance obligation is the lower of the following amounts:
(a)
(b)
The costs that relate directly to satisfying the performance
obligation by transferring the promised goods or services (those
costs are described in paragraph 92)
The amount that the entity would pay to exit the performance
obligation if the entity is permitted to do so other than by
transferring the promised goods or services.
88.
An entity initially shall measure the liability for an onerous performance
obligation at the amount by which the lowest cost of settling the
remaining performance obligation exceeds the amount of the transaction
price allocated to that remaining performance obligation. At each
reporting date, an entity shall update the measurement of the liability for
an onerous performance obligation for changes in circumstances. An
entity shall recognize changes in the measurement of that liability as an
expense or as a reduction of an expense. When an entity satisfies an
onerous performance obligation, the entity shall derecognize the related
liability.
89.
Before an entity recognizes a liability for an onerous performance
obligation, the entity shall apply the requirements in paragraphs 100–
103 to test for impairment of an asset recognized from the costs incurred
to obtain or fulfill a contract with a customer.
31
90.
A not-for-profit entity shall not recognize a liability for an onerous
performance obligation if the purpose of the contract is to provide a
social or charitable benefit.
Contract costs
Costs to fulfill a contract (see paragraph IG72)
91.
If the costs incurred in fulfilling a contract with a customer are in
the scope of another Topic (for example, Topic 330 on inventory,
Topic 360 on property, plant, and equipment, or Topic 985 on
software), an entity shall account for those costs in accordance
with those other Topics. Otherwise, an entity shall recognize an
asset from the costs to fulfill a contract only if those costs meet all
of the following criteria:
(a)
(b)
(c)
92.
Costs that relate directly to a contract (or a specific anticipated contract)
include the following:
(a)
(b)
(c)
(d)
(e)
32
The costs relate directly to a contract (or a specific
anticipated contract).
The costs generate or enhance resources of the entity that
will be used in satisfying performance obligations in the
future.
The costs are expected to be recovered.
Direct labor (for example, salaries and wages of employees who
provide services directly to the customer)
Direct materials (for example, supplies used in providing services
to the customer)
Allocations of costs that relate directly to the contract or to
contract activities (for example, costs of contract management
and supervision, insurance, and depreciation of tools and
equipment used in fulfilling the contract)
Costs that are explicitly chargeable to the customer under the
contract
Other costs that are incurred only because the entity entered into
the contract (for example, payments to subcontractors).
93.
An entity shall recognize the following costs as expenses when incurred:
(a)
(b)
(c)
(d)
General and administrative costs (unless those costs are
explicitly chargeable to the customer under the contract, in which
case an entity shall evaluate those costs in accordance with the
criteria in paragraph 91)
Costs of wasted materials, labor, or other resources to fulfill the
contract that were not reflected in the price of the contract
Costs that relate to satisfied performance obligations (or partially
satisfied performance obligations) in the contract (that is, costs
that relate to past performance)
Costs that relate to remaining performance obligations but that
the entity cannot distinguish from costs that relate to satisfied
performance obligations.
Incremental costs of obtaining a contract
94.
An entity shall recognize as an asset the incremental costs of
obtaining a contract with a customer if the entity expects to recover
those costs, subject to the practical expedient in paragraph 97.
95.
The incremental costs of obtaining a contract are those costs that an
entity incurs in its efforts to obtain a contract with a customer and that it
would not have incurred if the contract had not been obtained (for
example, a sales commission).
96.
Costs to obtain a contract that would have been incurred regardless of
whether the contract was obtained shall be recognized as an expense
when incurred, unless those costs are explicitly chargeable to the
customer regardless of whether the contract is obtained.
97.
As a practical expedient, an entity may recognize the incremental costs
of obtaining a contract as an expense when incurred if the amortization
period of the asset that the entity otherwise would have recognized is
one year or less.
Amortization and impairment (see paragraph IG73)
98.
An asset recognized in accordance with paragraph 91 or 94 shall be
amortized on a systematic basis consistent with the pattern of transfer of
the goods or services to which the asset relates. The asset may relate to
goods or services to be transferred under an anticipated contract that
the entity can identify specifically (for example, services to be provided
under renewal of an existing contract or costs of designing an asset to
be transferred under a specific contract that has not yet been approved).
99.
An entity shall update the amortization to reflect a significant change in
the entity’s expected pattern of transfer of the goods or services to which
33
the asset relates. Such a change shall be accounted for as a change in
accounting estimate in accordance with Subtopic 250-10.
100.
An entity shall recognize an impairment loss in profit or loss to the extent
that the carrying amount of an asset recognized in accordance with
paragraph 91 or 94 exceeds:
(a)
(b)
The remaining amount of consideration to which an entity expects
to be entitled in exchange for the goods or services to which the
asset relates, less
The costs that relate directly to providing those goods or services
(as described in paragraph 92).
101.
To determine the amount to which an entity expects to be entitled, an
entity shall use the principles for determining the transaction price.
102.
Before an entity recognizes an impairment loss for an asset recognized
in accordance with paragraph 91 or 94, the entity shall recognize any
impairment loss for assets related to the contract that are recognized in
accordance with another Topic (for example, Topic 330), except for
impairment losses of asset groups recognized in accordance with Topic
360 on property, plant, and equipment, and impairments of goodwill and
intangible assets recognized in accordance with Topic 350 on goodwill
and other intangibles.
103.
An entity shall not recognize a reversal of an impairment loss previously
recognized.
Presentation (see paragraph IG74)
104.
When either party to a contract has performed, an entity shall
present the contract in the statement of financial position as a
contract liability, a contract asset, or a receivable depending on the
relationship between the entity’s performance and the customer’s
payment.
105.
If a customer pays consideration or an amount of consideration is due
before an entity performs by transferring a good or service, the entity
shall present the contract as a contract liability. A contract liability is an
entity’s obligation to transfer goods or services to a customer for which
the entity has received consideration from the customer.
34
106.
If an entity performs by transferring goods or services to a customer
before the customer pays consideration, the entity shall present the
contract as either a contract asset or as a receivable depending on the
nature of the entity’s right to consideration for its performance.
(a)
(b)
A contract asset is an entity’s right to consideration in exchange
for goods or services that the entity has transferred to a
customer, when that right is conditioned on something other than
the passage of time (for example, the entity’s future
performance).
A receivable is an entity’s right to consideration that is
unconditional. A right to consideration is unconditional if nothing
other than the passage of time is required before payment of that
consideration is due. An entity shall account for a receivable in
accordance with Topic 310.
107.
This proposed guidance uses the terms contract asset and contract
liability but does not prohibit an entity from using alternative
descriptions in the statement of financial position for those items. If an
entity uses an alternative description for a contract asset, the entity shall
provide sufficient information for a user of the financial statements to
distinguish between unconditional rights to consideration (that is,
receivables) and conditional rights to consideration (that is, contract
assets).
108.
An entity shall present a liability for onerous performance obligations (in
accordance with paragraph 86) separately from contract assets or
contract liabilities.
Disclosure
[Note: As noted in Question 5 in the Summary and Questions for Respondents
section, the Board proposes to amend Topic 270 to specify the disclosures
about revenue and contracts with customers that an entity should include in its
interim financial statements.]
109.
The objective of the proposed disclosure requirements is to enable
users of financial statements to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from
contracts with customers. To achieve that objective, an entity shall
disclose qualitative and quantitative information about all of the
following:
(a)
(b)
Its contracts with customers (paragraphs 113–123)
The significant judgments, and changes in the judgments,
made in applying the proposed guidance to those contracts
(paragraphs 124–127)
35
(c)
Any assets recognized from the costs to obtain or fulfill a
contract with a customer in accordance with paragraphs 91
and 94 (paragraphs 128 and 129).
110.
An entity shall consider the level of detail necessary to satisfy the
disclosure objective and how much emphasis to place on each of the
various requirements. An entity shall aggregate or disaggregate
disclosures so that useful information is not obscured by either the
inclusion of a large amount of insignificant detail or the aggregation of
items that have substantially different characteristics.
111.
Amounts disclosed are for each period for which a statement of
comprehensive income is presented and as of each period for which a
statement of financial position is presented, as applicable, unless
otherwise stated.
112.
An entity need not disclose information in accordance with this proposed
guidance if it has provided the information in accordance with another
Topic.
Contracts with customers
113.
An entity shall disclose information about its contracts with customers,
including all of the following:
(a)
(b)
(c)
A disaggregation of revenue for the period (paragraphs 114–116)
A reconciliation from the opening to the closing aggregate
balance of contract assets and contract liabilities (paragraph 117)
Information about the entity’s performance obligations
(paragraphs 118–121), including additional information about any
onerous performance obligations (paragraphs 122 and 123).
Disaggregation of revenue
114.
An entity shall disaggregate revenue from contracts with customers
(excluding amounts presented for customers’ credit risk) into the primary
categories that depict how the nature, amount, timing, and uncertainty of
revenue and cash flows are affected by economic factors. To meet the
disclosure objective in paragraph 109, an entity may need to use more
than one type of category to disaggregate revenue.
115.
Examples of categories that might be appropriate include, but are not
limited to, the following:
(a)
(b)
(c)
36
Type of good or service (for example, major product lines)
Geography (for example, country or region)
Market or type of customer (for example, government and
nongovernment customers)
(d)
Type of contract (for example, fixed-price and time-and-materials
contracts)
(e)
Contract duration (for example, short-term and long-term
contracts)
Timing of transfer of goods or services (for example, revenue
from goods or services transferred to customers at a point in time
and revenue from goods or services transferred over time)
Sales channels (for example, goods sold directly to consumers
and goods sold through intermediaries).
(f)
(g)
116.
A nonpublic entity need not apply the proposals in paragraphs 114 and
115. Rather, a nonpublic entity shall disclose qualitative information
about how economic factors (such as type of customer, geographical
location of customers, and type of contract) affect the nature, amount,
timing, and uncertainty of revenue and cash flows. A nonpublic entity
shall disaggregate revenue in accordance with the timing of transfer of
goods or services (for example, revenue from goods or services
transferred to customers at a point in time and revenue from goods or
services transferred over time).
Reconciliation of contract balances (see paragraph IG75)
117.
An entity shall disclose in tabular format a reconciliation from the
opening to the closing aggregate balance of contract assets and contract
liabilities. The reconciliation shall disclose each of the following, if
applicable:
(a)
(b)
(c)
(d)
(e)
(f)
The amount(s) recognized in the statement of comprehensive
income arising from either of the following:
(i)
Revenue from performance obligations satisfied during the
reporting period
(ii) Revenue from allocating changes in the transaction price to
performance obligations satisfied in previous reporting
periods.
Cash received
Amounts transferred to receivables
Noncash consideration received
Effects of business combinations
Any additional line items that may be needed to understand the
change in the contract assets and contract liabilities.
Performance obligations
118.
An entity shall disclose information about its performance obligations in
contracts with customers, including a description of all of the following:
37
(a)
(b)
(c)
(d)
(e)
119.
When the entity typically satisfies its performance obligations (for
example, upon shipment, upon delivery, as services are
rendered, or upon completion of service)
The significant payment terms (for example, when payment
typically is due, whether the consideration amount is variable,
and whether the contract has a significant financing component)
The nature of the goods or services that the entity has promised
to transfer, highlighting any performance obligations to arrange
for another party to transfer goods or services (that is, if the entity
is acting as an agent)
Obligations for returns, refunds, and other similar obligations
Types of warranties and related obligations.
For contracts with an original expected duration of more than one year,
an entity shall disclose the following information as of the end of the
current reporting period:
(a)
(b)
The aggregate amount of the transaction price allocated to
remaining performance obligations
An explanation of when the entity expects to recognize that
amount as revenue.
120.
An entity may disclose the information in paragraph 119 either on a
quantitative basis using the time bands that would be most appropriate
for the duration of the remaining performance obligations or by using
qualitative information.
121.
As a practical expedient, an entity need not disclose the information in
paragraph 119 for a performance obligation if the entity recognizes
revenue in accordance with paragraph 42.
Onerous performance obligations
122.
An entity shall disclose the amount of the liability recognized for onerous
performance obligations along with a description of all of the following:
(a)
(b)
(c)
123.
38
The nature and amount of the remaining performance
obligation(s) in the contract that are onerous for which the liability
has been recognized.
Why those performance obligations are onerous.
When the entity expects to satisfy those performance obligations.
An entity shall disclose in tabular format a reconciliation from the
opening to the closing balance of the liability recognized for onerous
performance obligations. The reconciliation shall include the amounts
attributable to each of the following, if applicable:
(a)
(b)
(c)
(d)
Increases in the liability from performance obligations that
became onerous during the period
Reductions of the liability from performance obligations satisfied
during the period
Changes in the measurement of the liability that occurred during
the reporting period
Any additional line items that may be needed to understand the
change in the liability recognized.
Significant judgments in the application of the proposed
guidance
124.
An entity shall disclose the judgments, and changes in the judgments,
made in applying this proposed guidance that significantly affect the
determination of the amount and timing of revenue from contracts with
customers. At a minimum, an entity shall explain the judgments, and
changes in the judgments, used in determining both of the following:
(a)
(b)
The timing of satisfaction of performance obligations (paragraphs
125 and 126)
The transaction price and the amounts allocated to performance
obligations (paragraph 127).
Determining the timing of satisfaction of performance
obligations
125.
For performance obligations that an entity satisfies over time, an entity
shall disclose both of the following:
(a)
(b)
126.
The methods used to recognize revenue (for example, a
description of the output method or input method)
An explanation of why such methods are a faithful depiction of
the transfer of goods or services.
For performance obligations satisfied at a point in time, an entity shall
disclose the significant judgments made in evaluating when the
customer obtains control of promised goods or services.
Determining the transaction price and the amounts allocated
to performance obligations
127.
An entity shall disclose information about the methods, inputs, and
assumptions used to:
(a)
(b)
Determine the transaction price.
Estimate standalone selling prices of promised goods or services.
39
(c)
(d)
Measure obligations for returns, refunds, and other similar
obligations.
Measure the amount of the liability recognized for onerous
performance obligations.
Assets recognized from the costs to obtain or fulfill a contract
with a customer
128.
An entity shall disclose a reconciliation of the opening and closing
balances of assets recognized from the costs incurred to obtain or fulfill
a contract with a customer (in accordance with paragraphs 91 and 94),
by main category of asset (for example, costs to obtain contracts with
customers, precontract costs, and setup costs). The reconciliation shall
include amounts related to each of the following, if applicable:
(a)
(b)
(c)
(d)
(e)
129.
Additions
Amortization
Impairment losses
[This subparagraph in the IASB’s Exposure Draft is not used in
the FASB’s version of the proposed guidance.]
Any additional line items that may be needed to understand the
change in the reporting period.
An entity shall describe the method it uses to determine the amortization
for each reporting period.
Nonpublic entity disclosure
130.
A nonpublic entity may elect not to provide any of the following
disclosures:
(a)
(b)
(c)
(d)
(e)
40
A reconciliation of contract balances (paragraph 117)
The amount of the transaction price allocated to remaining
performance obligations and an explanation of when the entity
expects to recognize that amount as revenue (paragraph 119)
A reconciliation of liability balances recognized from onerous
performance obligations (paragraph 123)
A reconciliation of asset balances recognized from the costs to
obtain or fulfill a contract with a customer (paragraph 128)
An explanation of the judgments, and changes in judgments,
used in determining the timing of satisfaction of performance
obligations (paragraphs 125 and 126) and in determining the
transaction price and allocating it to performance obligations
(paragraph 127).
Effective date and transition
131.
An entity shall apply this proposed guidance for annual reporting periods
beginning on or after XXX, XX, 201X. (The Boards have not yet decided
on the effective date of this proposed guidance. However, the Boards
have decided that the standard would not be effective sooner than for
annual reporting periods beginning on or after January 1, 2015. The
effective date for nonpublic entities will be a minimum of one year after
the effective date for public entities.) Earlier application is not permitted.
132.
An entity shall apply this proposed guidance retrospectively by applying
the requirements on accounting changes in paragraphs 250-10-45-5
through 45-10, subject to the expedients specified in paragraph 133. In
the period of adoption, an entity shall provide the disclosures required in
paragraphs 250-10-50-1 through 50-3.
133.
An entity may use one or more of the following practical expedients
when applying this proposed guidance. For the purposes of the
expedients, the date of initial application is the start of the reporting
period in which an entity first applies the proposed guidance.
(a)
(b)
(c)
(d)
134.
For contracts completed before the date of initial application, an
entity need not restate contracts that begin and end within the
same annual reporting period.
For contracts completed before the date of initial application and
that have variable consideration, an entity may use the
transaction price at the date the contract was completed rather
than estimating variable consideration amounts in the
comparative reporting periods.
An entity need not evaluate whether a performance obligation is
onerous before the date of initial application unless an onerous
contract liability was recognized previously for that contract in
accordance with the requirements that were effective before the
date of initial application. If an entity recognizes an onerous
contract liability at the date of initial application, the entity shall
recognize a corresponding adjustment to the opening balance of
retained earnings for that period.
For all periods presented before the date of initial application, an
entity need not disclose the amount of the transaction price
allocated to remaining performance obligations and an
explanation of when the entity expects to recognize that amount
as revenue (as specified in paragraph 119).
For any of the practical expedients in paragraph 133 that an entity uses,
the entity shall apply that expedient consistently to all reporting periods
presented. In addition, the entity shall disclose the following information:
41
(a)
(b)
42
The expedients that have been used
To the extent reasonably possible, a qualitative assessment of
the estimated effect of applying each of those expedients.
Proposed Implementation Guidance and
Illustrations
Implementation guidance
IG1.
The following implementation guidance is an integral part of the
proposed guidance.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
Sale with a right of return (paragraphs IG2–IG9)
Warranties (paragraphs IG10–IG15)
Principal versus agent considerations (paragraphs IG16–IG19)
Customer options for additional goods or services (paragraphs
IG20–IG24)
Customers’ unexercised rights (paragraphs IG25–IG28)
Nonrefundable upfront fees (paragraphs IG29–IG32)
Licensing and rights to use (paragraphs IG33–IG37)
Repurchase agreements (paragraphs IG38–IG48)
Consignment arrangements (paragraphs IG49 and IG50)
Bill-and-hold arrangements (paragraphs IG51–IG54)
Customer acceptance (paragraphs IG55–IG58).
Sale with a right of return (see paragraphs 53–57 and
paragraph IG76)
IG2.
In some contracts, an entity transfers control of a product to a customer
and also grants the customer the right to return the product for various
reasons (such as dissatisfaction with the product) and receive any
combination of the following:
(a)
(b)
(c)
IG3.
A full or partial refund of any consideration paid
A credit that can be applied against amounts owed, or that will be
owed, to the entity
Another product in exchange.
To account for the transfer of products with a right of return (and for
some services that are provided subject to a refund), an entity should
recognize all of the following:
(a)
(b)
Revenue for the transferred products in the amount of
consideration to which the entity is reasonably assured to be
entitled (considering the products expected to be returned)
A refund liability
43
(c)
An asset (and corresponding adjustment to cost of sales) for its
right to recover products from customers on settling the refund
liability.
IG4.
An entity’s promise to stand ready to accept a returned product during
the return period should not be accounted for as a separate performance
obligation in addition to the obligation to provide a refund.
IG5.
An entity should apply the proposed guidance in paragraphs 81–83 to
determine the amount of consideration to which the entity is reasonably
assured to be entitled (considering the products expected to be
returned). For any amounts to which an entity is not reasonably assured
to be entitled, the entity should not recognize revenue when it transfers
products to customers but should recognize any consideration received
as a refund liability. Subsequently, the entity should update its
assessment of amounts to which the entity is reasonably assured to be
entitled in exchange for the transferred products and should recognize
corresponding adjustments to the amount of revenue recognized.
IG6.
An entity should update the measurement of the refund liability at the
end of each reporting period for changes in expectations about the
amount of refunds. An entity should recognize corresponding
adjustments as revenue (or reductions of revenue).
IG7.
An asset recognized for an entity’s right to recover products from a
customer on settling a refund liability initially should be measured by
reference to the former carrying amount of the inventory less any
expected costs to recover those products (including potential decreases
in the value to the entity of returned products). Subsequently, an entity
should update the measurement of the asset to correspond with
changes in the measurement of the refund liability. An entity should
present the asset separately from the refund liability.
IG8.
Exchanges by customers of one product for another of the same type,
quality, condition, and price (for example, one color or size for another)
are not considered returns for the purposes of applying the proposed
guidance.
IG9.
Contracts in which a customer may return a defective product in
exchange for a functioning product should be evaluated in accordance
with the guidance on warranties in paragraphs IG10–IG15.
Warranties (see paragraph IG77)
IG10. It is common for an entity to provide (in accordance with the contract, the
entity’s customary business practices, or the law) a warranty in
connection with the sale of a product (whether a good or service). The
nature of a warranty can vary significantly across industries and
44
contracts. Some warranties provide a customer with assurance that the
related product complies with agreed-upon specifications. Other
warranties provide the customer with a service in addition to the
assurance that the product complies with agreed-upon specifications.
IG11. If a customer has the option to purchase a warranty separately (for
example, because the warranty is priced or negotiated separately), an
entity should account for the promised warranty as a separate
performance obligation because the entity promises to provide a service
to the customer in addition to the product. Hence, the entity should
allocate a portion of the transaction price to the performance obligation
for the service in accordance with paragraphs 70–80.
IG12. If a customer does not have the option to purchase a warranty
separately, the entity should account for the warranty in accordance with
the guidance on product warranties in Subtopic 460-10 unless the
promised warranty, or a part of the promised warranty, provides the
customer with a service in addition to the assurance that the product
complies with agreed-upon specifications.
IG13. In assessing whether a warranty provides a customer with a service in
addition to the assurance that the product complies with agreed-upon
specifications, an entity should consider factors such as:
(a)
(b)
(c)
Whether the warranty is required by law—If the entity is required
by law to provide a warranty, the existence of that law indicates
that the warranty is not a performance obligation, because such
requirements typically exist to protect customers from the risk of
purchasing defective products.
The length of the warranty coverage period—The longer the
coverage period, the more likely that the warranty is a
performance obligation because it is more likely to provide a
service in addition to the assurance that the product complies
with agreed-upon specifications.
The nature of the tasks that the entity promises to perform—If it is
necessary for an entity to perform specified tasks to provide the
assurance that a product complies with agreed-upon
specifications (for example, a return shipping service for a
defective product), then those tasks likely do not give rise to a
performance obligation.
IG14. If a warranty, or a part of a warranty, provides the customer with a
service in addition to the assurance that the product complies with
agreed-upon specifications, that promised service is a separate
performance obligation. Hence, an entity should allocate the transaction
price to the product and the service. If an entity promises both an
assurance and a service-type warranty but cannot reasonably account
45
for them separately, the entity should account for both of the warranties
together as a single performance obligation.
IG15. A law that requires an entity to pay compensation if its products cause
harm or damage does not give rise to a performance obligation. For
example, a manufacturer might sell products in a jurisdiction in which the
law holds the manufacturer liable for any damages (for example, to
personal property) that might be caused by a consumer using a product
for its intended purpose. Similarly, an entity’s promise to indemnify the
customer for liabilities and damages arising from claims of patent,
copyright, trademark, or other infringement by the entity’s products does
not give rise to a performance obligation. The entity should account for
such obligations in accordance with the requirements on loss
contingencies in Subtopic 450-20.
Principal versus agent considerations
IG16. When other parties are involved in providing goods or services to an
entity’s customer, the entity should determine whether its performance
obligation is to provide the specified goods or services itself (that is, the
entity is a principal) or to arrange for another party to provide those
goods or services (that is, the entity is an agent). That determination
affects whether the entity recognizes revenue in the gross amount of
consideration to which the entity is entitled in exchange for those goods
or services (if a principal) or in the amount of any fee or commission
received in exchange for arranging for the other party to provide its
goods or services (if an agent). An entity’s fee or commission might be
the net amount of consideration that the entity retains after paying other
parties for providing their goods or services to the customer.
IG17. If an entity obtains control of the goods or services of another party
before it transfers those goods or services to the customer, the entity’s
performance obligation is to provide the goods or services itself. Hence,
the entity is acting as a principal and should recognize revenue in the
gross amount to which it is entitled. If an entity obtains legal title of a
product only momentarily before legal title is transferred to the customer,
the entity is not necessarily acting as a principal.
46
IG18. Indicators that the entity’s performance obligation is to arrange for the
provision of goods or services by another party (that is, that the entity is
an agent and should recognize revenue in the net amount) include the
following:
(a)
(b)
(c)
(d)
(e)
The other party is primarily responsible for fulfilling the contract.
The entity does not have inventory risk before or after the
customer order, during shipping, or on return.
The entity does not have latitude in establishing prices for the
other party’s goods or services and, hence, the benefit that the
entity can receive from those goods or services is constrained.
The entity’s consideration is in the form of a commission.
The entity does not have customer credit risk for the amount
receivable in exchange for the other party’s goods or services.
IG19. If another party assumes an entity’s performance obligation so that the
entity is no longer obliged to provide the promised good or service to the
customer (that is, the entity is no longer acting as the principal), the
entity should not recognize revenue for that performance obligation.
Instead, the entity should evaluate whether to recognize revenue for
satisfying a performance obligation to obtain a contract for the other
party (that is, whether the entity is acting as an agent).
Customer options for additional goods or services (see
paragraphs 70–76 and IG78–IG80)
IG20. Customer options to acquire additional goods or services for free or at a
discount come in many forms, including sales incentives, customer
award credits (or points), contract renewal options, or other discounts on
future goods or services.
IG21. If in a contract with more than one performance obligation an entity
grants a customer the option to acquire additional goods or services,
that option gives rise to a separate performance obligation in the
contract only if the option provides a material right to the customer that it
would not receive without entering into that contract (for example, a
discount that is incremental to the range of discounts typically given for
those goods or services to that class of customer in that geographical
area or market). If the option provides a material right to the customer,
the customer in effect pays the entity in advance for future goods or
services and the entity recognizes revenue when those future goods or
services are transferred or when the option expires.
IG22. If a customer has the option to acquire an additional good or service at a
price that would reflect the standalone selling price for that good or
service, that option does not provide the customer with a material right
even if the option can be exercised only because of entering into a
47
previous contract. In those cases, the entity has merely made a
marketing offer that it should account for in accordance with the
proposed revenue guidance only when the customer exercises the
option to purchase the additional goods or services.
IG23. Paragraph 71 requires an entity to allocate the transaction price to
separate performance obligations on a relative standalone selling price
basis. If the standalone selling price for a customer’s option to acquire
additional goods or services is not directly observable, an entity should
estimate it. That estimate should reflect the discount the customer would
obtain when exercising the option, adjusted for both of the following:
(a)
(b)
Any discount that the customer could receive without exercising
the option
The likelihood that the option will be exercised.
IG24. If a customer has a material right to acquire future goods or services and
those goods or services are similar to the original goods or services in
the contract and are provided in accordance with the terms of the
original contract, then an entity may, as a practical alternative to
estimating the standalone selling price of the option, allocate the
transaction price to the optional goods or services by reference to the
goods or services expected to be provided and the corresponding
expected consideration. Typically, those types of options are for contract
renewals.
Customers’ unexercised rights (breakage)
IG25. In accordance with paragraph 105, upon receipt of a prepayment from a
customer, an entity should recognize a contract liability for its
performance obligation to transfer, or to stand ready to transfer, goods
or services in the future. An entity should derecognize that contract
liability (and recognize revenue) when it transfers those goods or
services and, hence, satisfies its performance obligation.
IG26. A customer’s nonrefundable prepayment to an entity gives the customer
a right to receive a good or service in the future (and obliges the entity to
stand ready to transfer a good or service). However, customers may not
exercise all of their contractual rights. Those unexercised rights often are
referred to as breakage.
IG27. If an entity is reasonably assured of a breakage amount in a contract
liability, the entity should recognize the expected breakage amount as
revenue in proportion to the pattern of rights exercised by the customer.
If an entity is not reasonably assured of a breakage amount, the entity
should recognize the expected breakage amount as revenue when the
likelihood of the customer exercising its remaining rights becomes
remote. To determine whether an entity is reasonably assured of a
48
breakage amount, the entity should consider the proposed guidance in
paragraphs 81–83.
IG28. An entity should recognize a liability (and not revenue) for any customer
balances for which the entity may be required to remit the funds to a
government entity in accordance with applicable unclaimed property
laws.
Nonrefundable upfront fees (and some related costs)
IG29. In some contracts, an entity charges a customer a nonrefundable upfront
fee at or near contract inception. Examples include joining fees in health
club membership contracts, activation fees in telecommunication
contracts, setup fees in some services contracts, and initial fees in some
supply contracts.
IG30. To identify performance obligations in such contracts, an entity should
assess whether the fee relates to the transfer of a promised good or
service. In many cases, even though a nonrefundable upfront fee relates
to an activity that the entity is required to undertake at or near contract
inception to fulfill the contract, that activity does not result in the transfer
of a promised good or service to the customer (see paragraph 25).
Instead, the upfront fee is an advance payment for future goods or
services and, hence, would be recognized as revenue when those future
goods or services are provided. The revenue recognition period would
extend beyond the initial contractual period if the entity grants the
customer the option to renew the contract and that option provides the
customer with a material right as specified in paragraph IG21.
IG31. If the nonrefundable upfront fee relates to a performance obligation, the
entity should evaluate whether to account for that performance
obligation separately in accordance with paragraphs 23–30.
IG32. An entity may charge a nonrefundable fee in part as compensation for
costs incurred in setting up a contract (or other administrative tasks as
specified in paragraph 25). If those setup activities do not satisfy a
performance obligation, the entity should disregard those activities (and
related costs) when measuring progress in accordance with paragraph
45. That is because the costs of setup activities do not depict the
transfer of services to the customer. The entity should evaluate whether
costs incurred in setting up a contract have resulted in an asset that
should be recognized in accordance with paragraph 91.
Licensing and rights to use (see paragraph IG81)
IG33. Licensing refers to an entity’s granting a customer the right to use, but
not own, intellectual property of the entity. Rights to use can vary by
49
time, geography, or form of distribution. Examples of intellectual property
include all of the following:
(a)
(b)
(c)
(d)
Software and technology
Motion pictures, music, and other forms of media and
entertainment
Franchises
Patents, trademarks, and copyrights.
IG34. If an entity grants to a customer a license or other rights to use
intellectual property of the entity, those promised rights give rise to a
performance obligation that the entity satisfies at the point in time when
the customer obtains control of the rights. Control of rights to use
intellectual property cannot be transferred before the beginning of the
period during which the customer can use and benefit from the licensed
intellectual property. For example, if a software license period begins
before the customer obtains an access code that enables the customer
to use the software, an entity should not recognize revenue before the
entity provides the access code.
IG35. To determine the amount of revenue recognized for transferring a
license to a customer, the entity should apply the proposed guidance on
determining and allocating the transaction price (including paragraph 85
on constraining the amount of revenue recognized to amounts that are
reasonably assured).
IG36. If an entity has other performance obligations in the contract, the entity
should apply the criteria in paragraphs 23–30 to determine whether the
promised rights are a separate performance obligation or whether the
performance obligation for the rights should be combined with those
other performance obligations in the contract. For example, if an entity
grants a license that is not distinct because the customer cannot benefit
from the license without an additional service that the entity promises to
provide, the entity should account for the combined license and service
as a single performance obligation satisfied over time.
IG37. If an entity has a patent to intellectual property that it licenses to
customers, the entity may represent and guarantee to its customers that
it has a valid patent and that it will defend and maintain that patent. That
promise to maintain and defend patent rights is not a performance
obligation because it does not transfer a good or service to the
customer. Defending a patent protects the value of the entity’s
intellectual property assets.
50
Repurchase agreements (see paragraph 37)
IG38. A repurchase agreement is a contract in which an entity sells an asset
and also promises or has the option (either in the same contract or in
another contract) to repurchase the asset. The repurchased asset may
be the asset that was originally sold to the customer, an asset that is
substantially the same as that asset, or another asset of which the asset
that was originally sold is a component.
IG39. Repurchase agreements generally come in three forms:
(a)
(b)
(c)
An entity’s unconditional obligation to repurchase the asset (a
forward)
An entity’s unconditional right to repurchase the asset (a call
option)
An entity’s unconditional obligation to repurchase the asset at the
customer’s request (a put option).
A forward or a call option
IG40. If an entity has an unconditional obligation or unconditional right to
repurchase the asset (a forward or a call option), the customer does not
obtain control of the asset because the customer is limited in its ability to
direct the use of and obtain substantially all of the remaining benefits
from the asset (even though the customer may have physical
possession of the asset). Consequently, the entity should account for the
contract as either of the following:
(a)
(b)
A lease in accordance with Topic 840, if the entity can
repurchase the asset for an amount that is less than the original
selling price of the asset
A financing arrangement in accordance with paragraph IG42, if
the entity can repurchase the asset for an amount that is equal to
or more than the original selling price of the asset.
IG41. When comparing the repurchase price with the selling price, an entity
should consider the effects of the time value of money.
IG42. If the repurchase agreement is a financing arrangement, the entity
should continue to recognize the asset and also recognize a financial
liability for any consideration received from the customer. The entity
should recognize the difference between the amount of consideration
received from the customer and the amount of consideration to be paid
to the customer as interest and, if applicable, holding costs (for example,
insurance). If the option lapses unexercised, an entity should
derecognize the liability and recognize revenue.
51
A put option
IG43. If an entity has an unconditional obligation to repurchase the asset at the
customer’s request (a put option) at a price that is lower than the original
selling price of the asset, the entity should consider at contract inception
whether a customer has a significant economic incentive to exercise that
right. The customer’s exercising of that right results in the customer
effectively paying the entity consideration for the right to use a specified
asset for a period of time. Hence, if the customer has a significant
economic incentive to exercise that right, the entity should account for
the agreement as a lease in accordance with Topic 840.
IG44. To determine whether a customer has a significant economic incentive
to exercise its right, an entity should consider various factors, including
the relationship of the repurchase price to the expected market value of
the asset at the date of repurchase and the amount of time until the right
expires. If the repurchase price is expected to significantly exceed the
market value of the asset, the customer has an economic incentive to
exercise the put option.
IG45. If the customer does not have a significant economic incentive to
exercise its right, the entity should account for the agreement similar to
the sale of a product with a right of return as discussed in paragraphs
IG2–IG9.
IG46. If the repurchase price of the asset exceeds the original selling price and
is more than the expected market value of the asset, the contract is in
effect a financing arrangement. Hence, an entity should:
(a)
(b)
Continue to recognize the asset.
Recognize a liability that initially should be measured at the
amount of the original selling price of the asset.
IG47. When comparing the repurchase price with the selling price, an entity
should consider the effects of the time value of money.
IG48. If the option lapses unexercised, an entity should derecognize the
liability and recognize revenue.
Consignment arrangements (see paragraph 37)
IG49. When an entity delivers a product to another party (such as a dealer or a
distributor) for sale to end customers, the entity should evaluate whether
that other party has obtained control of the product at that point in time.
IG50. Inventory on consignment typically is controlled by the entity until a
specified event occurs, such as the sale of the product to a customer of
the dealer, or until a specified period expires. Until that point, the entity
52
typically is able to require the return of the products or transfer them to
another dealer. Moreover, the dealer typically does not have an
unconditional obligation to pay for the products (although it might be
required to pay a deposit). Accordingly, in those circumstances, the
entity would not recognize revenue upon delivery of the products to the
dealer.
Bill-and-hold arrangements (see paragraph 37)
IG51. A bill-and-hold arrangement is a contract under which an entity bills a
customer for a product but the entity retains physical possession of the
product until it is transferred to the customer at a point in time in the
future. A customer may request an entity to enter into such a contract
because of the customer’s lack of available space for the product or
because of delays in the customer’s production schedules.
IG52. An entity should determine when it has satisfied its performance
obligation to transfer a product by evaluating when the customer obtains
control of that product. For some contracts, control is transferred either
when the product is delivered to the customer’s site or when the product
is shipped, depending on the terms of the contract (including delivery
and shipping terms). However, for some contracts, a customer may
obtain control of a product even though that product remains in the
physical possession of the entity. In such cases, the customer has the
ability to direct the use of and obtain substantially all of the remaining
benefits from the product even though it has decided not to exercise its
right to take physical possession of that product. Consequently, the
entity does not control the product. Instead, the entity provides custodial
services to the customer over the customer’s asset.
IG53. For a customer to have obtained control of a product in a bill-and-hold
arrangement, all of the following criteria should be met:
(a)
(b)
(c)
(d)
The reason for the bill-and-hold arrangement must be
substantive.
The product must be identified separately as belonging to the
customer.
The product currently must be ready for physical transfer to the
customer.
The entity cannot have the ability to use the product or to direct it
to another customer.
IG54. If an entity recognizes revenue for the sale of a product on a bill-andhold basis, the entity should consider whether it has remaining separate
performance obligations (for example, for custodial services) in
accordance with paragraphs 23–30 to which the entity should allocate a
portion of the transaction price in accordance with paragraphs 70–80.
53
Customer acceptance (see paragraph 37)
IG55. In accordance with paragraph 37(e), a customer’s acceptance of an
asset indicates that the customer has obtained control of the asset.
Customer acceptance clauses allow the customer to cancel a contract or
require an entity to take remedial action if a good or service does not
meet agreed-upon specifications. An entity should consider such
clauses when evaluating when a customer obtains control of a good or
service.
IG56. If an entity can objectively determine that control of a good or service
has been transferred to the customer in accordance with the agreedupon specifications in the contract, then customer acceptance is a
formality that would not affect an entity’s determination of when the
customer has obtained control of the good or service. For example, if the
customer acceptance clause is based on meeting specified size and
weight characteristics, an entity would be able to determine whether
those criteria have been met before receiving confirmation of the
customer’s acceptance. The entity’s experience with contracts for similar
goods or services may provide evidence that a good or service provided
to the customer is in accordance with the agreed-upon specifications in
the contract. If revenue is recognized before customer acceptance, the
entity still must consider whether there are any remaining performance
obligations (for example, installation of equipment) and evaluate whether
to account for them separately.
IG57. However, if an entity cannot objectively determine that the good or
service provided to the customer is in accordance with the agreed-upon
specifications in the contract, then the entity would not be able to
conclude that the customer has obtained control until the entity receives
the customer’s acceptance. That is because the entity cannot determine
that the customer has the ability to direct the use of and obtain
substantially all of the remaining benefits from the good or service.
IG58. If an entity delivers products to a customer for trial or evaluation
purposes and the customer is not committed to pay any consideration
until the trial period lapses, control of the product is not transferred to the
customer until either the customer accepts the product or the trial period
lapses.
Illustrations
IG59. The following Examples are an integral part of the proposed guidance
and are intended to illustrate how an entity might apply some of the
proposed guidance to particular aspects of a contract with a customer on
the basis of the limited facts presented. Additional facts most likely
54
would be required to fully evaluate the contract. The evaluations
following each Example are not intended to represent the only manner in
which the proposed guidance could be applied.
IG60. The Examples correspond with the following topics in the proposed
guidance:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
Contract modifications (paragraph IG61)
Identifying separate performance obligations (paragraph IG62)
Satisfaction of performance obligations (paragraphs IG63 and
IG64)
Measuring progress toward complete satisfaction of a
performance obligation (paragraph IG65)
The time value of money (paragraph IG66)
Consideration payable to a customer (paragraph IG67)
Allocating the transaction price to separate performance
obligations (paragraphs IG68 and IG69)
Constraining the cumulative amount of revenue recognized
(paragraphs IG70 and IG71)
Costs to obtain and fulfill a contract (paragraph IG72)
Amortization of an asset recognized from costs to fulfill a contract
(paragraph IG73)
Presentation (paragraph IG74)
Reconciliation of contract balances (paragraph IG75)
Sale with a right of return (paragraph IG76)
Warranties (paragraph IG77)
Customer options for additional goods or services (paragraphs
IG78–IG80)
Licensing (paragraph IG81).
Contract modifications (paragraphs 18–22)
IG61. The following Examples illustrate the proposed guidance in paragraphs
18–22 on contract modifications.
55
Example 1—Separate contract for goods
An entity promises to sell 120 products to a customer for $12,000
($100 per product). The products are transferred to the customer
at various points in time over a six-month period. The contract is
modified after 60 products have been transferred, and the entity
promises to deliver an additional 30 products for an additional
$2,850 or $95 per product. The pricing for the additional products
reflects the standalone selling price of the products at the time of
the contract modification. In addition, the additional products are
distinct from the original products because the entity regularly sells
the products separately. Therefore, the contract modification for
the additional 30 products is, in effect, a new and separate
contract for future products that does not affect the accounting for
the existing contract.
If the pricing for the additional products did not reflect the
standalone selling price of the additional products, the entity would
allocate the modified transaction price (less the amounts allocated
to products transferred at or before the date of the modification) to
all remaining products to be transferred. Consequently, the
amount recognized as revenue for each of the remaining products
would be a blended price of $98.33 {[($100 × 60 products not yet
transferred under original contract) + ($95 × 30 products to be
transferred under the contract modification)] ÷ 90 remaining
products} per product.
Example 2—Modification of a services contract
An entity enters into a three-year services contract. The customer
promises to pay $100,000 at the beginning of each year. The
standalone selling price of the services at contract inception is
$100,000 per year. At the end of the second year, the contract is
modified and the fee for the third year of services is reduced to
$80,000. In addition, the customer agrees to pay an additional
$200,000 to extend the contract for 3 additional years (that is, 4
years remain after the modification). The standalone selling price
of the services at the beginning of the third year is $80,000 per
year. The entity’s standalone selling price multiplied by the
number of years is deemed to be an appropriate estimate of the
standalone selling price of the multi-year contract (that is, the
standalone selling price is 4 years × $80,000 per year =
$320,000).
56
Example 2—Modification of a services contract (continued)
At the date of modification, the entity evaluates the remaining
services to be provided and concludes that they are distinct in
accordance with paragraphs 28 and 29. However, the amount of
remaining consideration to be paid ($280,000) does not reflect the
standalone selling price of the services to be provided ($320,000).
Hence, the entity would reallocate the remaining consideration of
$280,000 to the remaining services to be provided and would
recognize revenue of $70,000 per year ($280,000 ÷ 4 years) as
the services are provided.
Example 3—Modification of an existing performance
obligation
An entity enters into a contract to construct a house for a
customer, which is considered to be a single performance
obligation. That is because in accordance with paragraph 29 the
goods or services in the bundle are highly interrelated and
providing them to the customer requires the entity also to provide
a significant service of integrating the goods or services into the
combined item (that is, the house) for which the customer has
contracted. In addition, the goods or services are significantly
modified and customized to fulfill the contract. At inception, the
entity expects the following:
Transaction price
Expected costs
Expected profit (20%)
$1,000,000
800,000
$ 200,000
By the end of the first year, the entity has satisfied 50 percent of
its performance obligation on the basis of costs incurred
($400,000) relative to total expected costs ($800,000). Hence, the
cumulative revenue and costs recognized for the first year are as
follows:
Revenue
Costs
Gross profit
$500,000
400,000
$100,000
57
Example 3—Modification of an existing performance
obligation (continued)
At the beginning of the second year, the parties to the contract
agree to change the floor plan of the house. As a result, the
contract revenue and expected costs increase by $100,000 and
$75,000, respectively. The entity concludes that the remaining
goods and services to be provided under the modified contract are
not distinct in accordance with paragraphs 28 and 29 because the
entity provides a significant service of integrating the highly
interrelated goods and services into the combined item (the
house) for which the customer has contracted. In addition,
providing the house requires the entity to significantly modify the
promised goods and services.
Consequently, the entity accounts for the contract modification as
if it were part of the original contract. The entity updates its
measure of progress and estimates that it has satisfied 45.7
percent of its performance obligation ($400,000 actual costs
incurred ÷ $875,000 total expected costs). In addition, the entity
would recognize additional revenue of $2,700 (45.7% complete ×
$1,100,000 modified transaction price – $500,000 revenue
recognized to date).
Identifying separate performance obligations (paragraphs 23–
30)
IG62. The following Examples illustrate the proposed guidance in paragraphs
27–29 on determining whether to account for a bundle of goods or
services as one performance obligation.
Example 4—Significant customization of software
An entity licenses customer relationship management software to
a customer. In addition, the entity promises to provide consulting
services to significantly customize the software to the customer’s
information technology environment for total consideration of
$600,000.
58
Example 4—Significant customization of software (continued)
The entity is providing a significant service of integrating the goods
and services (the license and the consulting services) into the
combined item for which the customer has contracted. In addition,
the software is significantly customized by the entity in accordance
with the specifications negotiated with the customer. Hence, the
entity would account for the license and consulting services
together as one performance obligation. Revenue for that
performance obligation would be recognized over time by
selecting an appropriate measure of progress toward complete
satisfaction of the performance obligation (assuming the criteria in
paragraph 35 are met for satisfaction of a performance obligation
over time).
Example 5—Construction
An entity enters into a contract to design and build a hospital. The
entity is responsible for the overall management of the project and
identifies various goods and services to be provided, including
engineering, site clearance, foundation, procurement, construction
of the structure, piping and wiring, installation of equipment, and
finishing.
The entity would account for the bundle of goods and services as
a single performance obligation in accordance with paragraph 29
because the goods or services in the bundle are highly interrelated
and providing them to the customer requires the entity also to
provide a significant service of integrating the goods or services
into the combined item (that is, the hospital) for which the
customer has contracted. In addition, the goods or services are
significantly modified and customized to fulfill the contract.
Revenue for the performance obligation would be recognized over
time by selecting an appropriate measure of progress toward
complete satisfaction of the performance obligation (assuming the
criteria in paragraph 35 are met for satisfaction of a performance
obligation over time).
Satisfaction of performance obligations (paragraphs 31–37)
IG63. The following Example illustrates the proposed guidance on identifying
separate performance obligations and determining when a performance
59
obligation is satisfied if the entity retains the risk of loss during shipment
of a product.
Example 6—Shipment of a product with risk of loss
An entity enters into a contract to sell a product to a customer. The
delivery terms of the contract are free on board shipping point
(that is, legal title to the product passes to the customer when the
product is handed over to the carrier). The entity uses a third-party
carrier to deliver the product. In accordance with the entity’s past
business practices, the entity will provide the customer with a
replacement product, at no additional cost, if a product is
damaged or lost while in transit. The entity has determined that its
past business practices of replacing damaged products has
implicitly created a performance obligation.
Hence, the entity has two performance obligations: (a) to provide
the customer with a product and (b) to cover the risk of loss during
transit. The customer obtains control of the product at the point of
shipment. Although it does not have physical possession of the
product at that point, it has legal title and therefore can sell the
product to (or exchange it with) another party. The entity also is
precluded from selling the product to another customer.
In this Example, the additional performance obligation for risk
coverage does not affect when the customer obtains control of the
product. However, it does result in the customer receiving a
service from the entity while the product is in transit. Hence, the
entity has not satisfied all of its performance obligations at the
point of shipment and would not recognize all of the revenue at
that time. Instead, the entity would allocate a portion of the
transaction price to the performance obligation to provide risk
coverage and would recognize revenue as that performance
obligation is satisfied.
IG64. The following Example illustrates the proposed guidance in paragraphs
35 and 36 on determining whether an asset has an alternative use to an
entity and if one of the criteria is met for satisfaction of a performance
obligation over time.
60
Example 7—Determining whether an asset has an alternative
use to an entity
An entity is developing residential real estate and starts marketing
individual units (apartments). The entity has entered into the
minimum number of contracts that are needed to begin
construction.
A customer enters into a binding sales contract for a specified unit
that is not yet ready for occupancy. The customer pays a
nonrefundable deposit at inception of the contract and also
promises to make payments throughout the contract. Those
payments are intended to at least compensate the entity for
performance completed to date and are refundable only if the
entity fails to deliver the completed unit. The entity receives the
final payment only on completion of the contract (that is, when the
customer obtains possession of the unit).
To finance the payments, the customer borrows from a financial
institution that makes the payments directly to the entity on behalf
of the customer. The lender has full recourse against the
customer. The customer can sell his or her interest in the partially
completed unit, which would require approval of the lender but not
the entity. The customer is able to specify minor variations to the
basic design but cannot specify or alter major structural elements
of the unit’s design. The contract precludes the entity from
transferring the specified unit to another customer.
The asset (apartment) created by the entity’s performance does
not have an alternative use to the entity because the contract has
substantive terms that preclude the entity from directing the unit to
another customer. The entity concludes that it has a right to
payment for performance completed to date because the
customer is obliged to compensate the entity for its performance
rather than only a loss of profit if the contract is terminated. In
addition, the entity expects to fulfill the contract as promised.
Therefore, the terms of the contract and the surrounding facts and
circumstances indicate that the entity has a performance
obligation that it satisfies over time.
To recognize revenue for that performance obligation satisfied
over time, the entity would measure its progress toward
completion in accordance with paragraphs 38–48.
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Measuring progress toward complete satisfaction of a
performance obligation (paragraphs 38–48)
IG65. The following Example illustrates the proposed guidance in paragraph
46 on applying an input method to measure progress if the entity has a
single performance obligation that includes goods (for example,
specialized materials) that the customer obtains control of before
services related to those goods (for example, installation).
Example 8—Uninstalled materials
An entity enters into a contract with a customer to construct a
facility for $140 million over 2 years. The contract also requires the
entity to procure specialized equipment from a third party and
integrate that equipment into the facility. The entity expects to
transfer control of the specialized equipment approximately six
months from when the project begins. The installation and
integration of the equipment continue throughout the contract. The
contract is a single performance obligation in accordance with
paragraph 29 because all of the promised goods or services in the
contract are highly interrelated and the entity also provides a
significant service of integrating those goods or services into the
single facility for which the customer has contracted. In addition,
the entity significantly modifies the bundle of goods and services
to fulfill the contract. The entity measures progress toward
complete satisfaction of the performance obligation on the basis of
costs incurred relative to total costs expected to be incurred.
At contract inception, the entity expects the following:
Transaction price
Cost of the specialized equipment
Other costs
Total expected costs
$140,000,000
40,000,000
80,000,000
$120,000,000
In accordance with paragraph 46, the entity concludes that the
best depiction of the entity’s performance is to recognize revenue
for the specialized equipment in an amount equal to the cost of the
specialized equipment upon the transfer of control to the
customer. Hence, the entity would exclude the cost of the
specialized equipment from its measure of progress toward
complete satisfaction of the performance obligation on a cost-tocost basis and account for the contract as follows.
62
Example 8—Uninstalled materials (continued)
During the first 6 months, the entity incurs $20,000,000 of costs
relative to the total $80,000,000 of expected costs (excluding the
$40,000,000 cost of the specialized equipment). Hence, the entity
estimates that the performance obligation is 25 percent complete
($20,000,000 ÷ $80,000,000) and recognizes revenue of
$25,000,000 [25% × ($140,000,000 total transaction price –
$40,000,000 revenue for the specialized equipment)].
Upon transfer of control of the specialized equipment, the entity
recognizes revenue and costs of $40,000,000.
Subsequently, the entity continues to recognize revenue on the
basis of costs incurred relative to total expected costs (excluding
the revenue and cost of the specialized equipment).
The time value of money (paragraphs 58–62)
IG66. The following Example illustrates how an entity would apply the
proposed guidance in paragraphs 58–62 to account for the effects of the
time value of money.
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Example 9—Time value of money in a multiple-element
arrangement
An entity enters into a contract to sell Product A and Product B for
an upfront cash payment of $150,000. Product A will be delivered
in two years and Product B will be delivered in five years. The
entity allocates the $150,000 to Products A and B on a relative
standalone selling price basis as follows:
Product A
Product B
Total
Standalone
Selling Prices
$ 40,000
120,000
$160,000
Percent
Allocated
25%
75%
Allocated
Amounts
$ 37,500
112,500
$150,000
The entity uses a financing rate of 6 percent, which is the entity’s
incremental borrowing rate.
The following journal entries illustrate how an entity would account
for the effects of the time value of money.
(a) Recognize the contract liability for the $150,000 payment at
contract inception.
Cash
Contract liability
$150,000
$150,000
(b) During the 2 years from contract inception until the transfer of
Product A, recognize the interest expense on $150,000 at 6
percent for 2 years.
Interest expense
Contract liability
a
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$18,540
a
b
$18,540
$18,540 = $150,000 contract liability × (1.062 – 1).
Example 9—Time value of money in a multiple-element
arrangement (continued)
(c) Recognize revenue for the transfer of Product A.
Contract liability
Revenue
$42,135
b
b
$42,135
b
$42,135 = $37,500 initial allocation to Product A + $4,635, which
is Product A’s portion (25 percent) of the $18,540 interest for the
first 2 years of the contract.
(d) Recognize the interest expense for 3 years on the remaining
c
contract liability of $126,405.
Interest expense
Contract liability
$24,145
d
b
$24,145
c
$126,405 = $150,000 initial contract liability + $18,540 interest for
2 years – $42,135 derecognized from the transfer of Product A.
d
$24,145 = $126,405 contract liability balance after 2 years ×
(1.063 – 1).
(e) Recognize revenue for the transfer of Product B.
Contract liability
Revenue
$150,550
e
b
$150,550
e
$150,550 = $126,405 contract liability balance after 2 years
+ $24,145 interest for 3 years.
Consideration payable to a customer (paragraphs 65–67)
IG67. The following Example illustrates the proposed guidance in paragraph
67 on consideration payable to the customer.
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Example 10—Volume discount incentive
An entity enters into a contract with a customer to sell Product A
for $100 per unit. If the customer purchases more than 1,000 units
of Product A in a calendar year, the price per unit is retroactively
reduced to $90 per unit. The entity’s experience is predictive of the
amount of consideration to which the entity will be entitled.
For the first quarter ended March 31, the entity sells 90 units of
Product A to the customer, and the entity estimates that the
customer’s purchases will not exceed the 1,000 units threshold
required for the volume discount in the calendar year. Hence, the
entity recognizes revenue of $9,000 (90 units × $100 per unit) for
the period ended March 31. The entity is reasonably assured to be
entitled to that amount.
In June, the entity’s customer acquires another company. As a
result, the entity estimates that the customer’s purchases will
exceed the 1,000 units threshold for the calendar year. For the
second quarter ended June 30, the entity sells an additional 500
units of Product A to the customer. Hence, the entity recognizes
revenue of $44,100 for the period ended June 30. That amount
equals $45,000 for the sale of 500 units (500 units × $90 per unit)
less $900 (90 units × $10 price reduction) for the reduction of
revenue relating to units sold for the quarter ended March 31. The
entity is reasonably assured to be entitled to that amount.
Allocating the transaction price to separate performance
obligations (paragraphs 70–85)
IG68. The following Example illustrates the proposed guidance in paragraph
75 on allocating a discount to only one performance obligation in a
contract rather than to all separate performance obligations in the
contract.
66
Example 11—Allocating a discount
An entity enters into a contract with a customer to sell Products A,
B, and C for a total transaction price of $36. The entity regularly
sells Products A, B, and C on a standalone basis for the following
prices:
Standalone
Selling Prices
Product A
Product B
Product C
Total
$ 9
11
20
$40
The customer receives a $4 discount ($40 sum of standalone
selling prices – $36 transaction price) for buying the bundle of 3
products. Because Products A and B are transferred at the same
time, the entity accounts for only two separate performance
obligations in accordance with paragraph 30: one for Products A
and B combined and another for Product C. The entity regularly
sells Products A and B as a bundle for $16 (that is, at a $4
discount). Because the entity regularly sells Products A and B
together for $16 and regularly sells Product C for $20, the entity
has observable prices as evidence that the $4 discount in the
contract should be allocated only to Products A and B. Hence, the
entity allocates the transaction price of $36 as follows:
Allocated
Amounts
Products A and B
Product C
Total
$ 16
20
$ 36
IG69. The following Example illustrates the proposed guidance in paragraphs
70–76 on allocating the transaction price in a contract with contingent
consideration and paragraphs 81–85 on constraining the cumulative
amount of revenue when the promised amount of consideration is
variable.
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Example 12—Multiple performance obligations and
contingent consideration
Scenario 1
An entity enters into a contract with a customer for two intellectual
property licenses (License A and License B), which are two
separate performance obligations. The stated price for License A
is a fixed amount of $800, and for License B the price is 3 percent
of the customer’s future sales of products that use License B. The
entity’s estimate of the transaction price is $1,700 (which includes
$900 of estimated royalties for License B). The estimated
standalone selling prices of Licenses A and B are $800 and
$1,000, respectively.
Applying the criteria in paragraph 76, the entity would allocate the
contingent royalty payment of $900 entirely to License B because
that contingent payment relates specifically to an outcome from
the performance obligation to transfer License B (that is, the
customer’s subsequent sales of products that use License B). In
addition, allocating the expected royalty amounts of $900 entirely
to License B is consistent with the allocation principle in paragraph
70 when considering the other payment terms and performance
obligations in the contract.
The entity transfers License B at inception of the contract and
transfers License A one month later. Upon transfer of License B,
the entity recognizes as revenue only the amount to which it is
reasonably assured to be entitled. Because the expected royalty
amount of $900 varies entirely on the basis of the customer’s
subsequent sales of products that use License B, the entity is not
reasonably assured to receive that amount until the customer’s
subsequent sales occur (in accordance with paragraph 85).
Therefore, the entity would not recognize revenue at the $900
allocated amount until the customer sells the products that use
License B.
When License A is transferred, the entity would recognize as
revenue the $800 allocated to License A.
68
Example 12—Multiple performance obligations and
contingent consideration (continued)
Scenario 2
An entity enters into a contract with a customer for two intellectual
property licenses (License A and License B), which are two
separate performance obligations. The stated price for License A
is $300, and for License B the price is 5 percent of the customer’s
future sales of products using License B. The entity’s estimate of
the transaction price is $1,800 (which includes $1,500 of royalties
for License B). The estimated standalone selling prices of
Licenses A and B are $800 and $1,000, respectively.
Applying the criteria in paragraph 76, the entity concludes that
even though the contingent payment relates to subsequent sales
of License B, allocating that amount entirely to License B would
not be consistent with the principle for allocating the transaction
price because the contingent payment does not reflect the amount
to which the entity expects to be entitled in exchange for License
B when considering the other payment terms and performance
obligations in the contract. Hence, the entity would allocate the
total transaction price of $1,800 ($300 fixed payment + $1,500
contingent payment) to Licenses A and B on a relative standalone
selling price basis of $800 and $1,000, respectively.
The entity transfers License A at the inception of the contract and
transfers License B one month later. Upon transfer of License A,
the entity recognizes as revenue only the amount to which it is
reasonably assured to be entitled. Because the $1,500 varies
entirely on the basis of the customer’s subsequent sales of
products that use License B, the entity is not reasonably assured
to receive that amount until the customer’s subsequent sales
occur (in accordance with paragraph 85). Therefore, the amount of
revenue recognized for License A is limited to $300 at the time of
transfer of License A to the customer.
Any contingent payments relating to License B would be
recognized as revenue as the customer sells the products that use
License B.
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Constraining the cumulative amount of revenue recognized
(paragraphs 81–85)
IG70. The following Example illustrates the proposed guidance in paragraphs
81–85 on constraining cumulative revenue to amounts that are
reasonably assured.
Example 13—Management fees
On January 1, an entity enters into a contract with a client to
provide asset management services for one year. The entity
receives a quarterly management fee based on a percentage of
the client’s assets under management at the end of each quarter.
In addition, the entity receives a performance-based incentive fee
of 20 percent of the fund’s return in excess of the return of an
observable index at the end of the year.
Although each increment of service is distinct in accordance with
paragraphs 28 and 29, the entity accounts for the contract as a
single performance obligation to provide investment management
services for one year because the services have the same pattern
of transfer to the customer (see paragraph 30).
To recognize revenue for satisfying the performance obligation
over time, the entity selects an output method of measuring
progress toward complete satisfaction of the performance
obligation.
The entity concludes that it is not reasonably assured to be
entitled to the incentive fee until the end of the year. Although the
entity has experience with similar contracts, that experience is not
predictive of the outcome of the current contract because the
amount of consideration is highly susceptible to volatility in the
market. In addition, the incentive fee has a large number and high
variability of possible consideration amounts.
70
Example 13—Management fees (continued)
Because the entity is not yet reasonably assured to be entitled to
the incentive fee, the cumulative amount of revenue recognized
during the year is limited to the quarterly management fees.
Therefore, in accordance with paragraph 42, the entity directly
measures the value of the services provided to the customer to
date by reference to the quarterly management fees for which the
entity has a right to invoice. In other words, the quarterly
management fee is an appropriate depiction of the amount of
consideration to which the entity expects to be entitled in
exchange for the services provided each quarter.
IG71. The following Example illustrates how an entity would apply the
proposed guidance in paragraphs 81–85 to a situation in which an entity
has experience with similar types of contracts and that experience is
predictive of the amount of consideration to which the entity will be
entitled. This Example does not consider potential effects of the time
value of money.
Example 14—Trailing commission
An entity sells an insurance policy on behalf of an insurance
company for a commission of $100. In addition, the entity will
receive an additional commission of $10 each year for as long as
the policyholder does not cancel its policy. After selling the policy,
the entity does not have any remaining performance obligations.
The entity has significant experience with similar types of
contracts and customers. The entity’s experience is predictive of
the amount of consideration to which the entity will be entitled
because it has reliable data from past contracts about the likely
level of policyholder terminations and has no evidence to suggest
that previous policyholder behavior will change.
The entity determines that the transaction price is $145 (because
on average, customers renew for 4.5 years) and allocates that
amount to the performance obligation. When the entity satisfies its
performance obligation by selling the insurance policy to the
customer, it recognizes revenue of $145 because it determines
that it is reasonably assured to be entitled to that amount. The
71
Example 14—Trailing commission (continued)
entity concludes that its past experience is predictive, even though
the total amount of commission that the entity ultimately will
receive depends on the actions of a third party (that is,
policyholder behavior). As circumstances change, the entity
updates its estimate of the transaction price and recognizes
revenue (or a reduction of revenue) for those changes in
circumstances.
Incremental costs of obtaining a contract and costs to fulfill a
contract (paragraphs 91–97)
IG72. The following Example illustrates the proposed guidance in paragraphs
91–97 on accounting for costs incurred to obtain and fulfill a contract that
do not give rise to an asset eligible for recognition in accordance with
another Topic (for example, inventory; property, plant, and equipment; or
capitalized software).
Example 15—Costs that give rise to an asset
An entity enters into a contract to outsource a customer’s
information technology data center for five years. The entity incurs
selling commission costs of $10,000 to obtain the contract. Before
providing the services, the entity designs and builds a technology
platform that interfaces with the customer’s systems. That platform
is not transferred to the customer.
The customer promises to pay a fixed fee of $20,000 per month.
The $10,000 incremental costs of obtaining the contract are
recognized as an asset in accordance with paragraph 94. The
asset is amortized over the term of the contract.
The initial costs incurred to set up the technology platform are as
follows:
Design services
Hardware
Software
Migration and testing of datacenter
Total costs
72
$ 40,000
120,000
90,000
100,000
$350,000
Example 15—Costs that give rise to an asset (continued)
The initial setup costs relate primarily to activities to fulfill the
contract but do not transfer goods or services to the customer.
The entity would account for the initial setup costs as follows:
(a) Hardware costs—accounted for in accordance with Topic 360
on property, plant, and equipment
(b) Software costs—accounted for in accordance with Topic 350
(c) Costs of the design, migration, and testing of the datacenter—
considered for capitalization in accordance with paragraph
91. Any resulting asset would be amortized on a systematic
basis over five years as the entity provides the services
outsourced by the customer.
Amortization of an asset recognized from costs to fulfill a
contract (paragraphs 98–103)
IG73. The following Example illustrates the proposed guidance in paragraph
98 on amortizing an asset recognized from the costs to fulfill a contract
when that asset relates to goods or services to be provided under future
contracts with the same customer.
Example 16—Amortization
An entity enters into a contract with a customer for one year of
transaction-processing services. The entity charges the customer
a nonrefundable upfront fee in part as compensation for the initial
activities of setting up the customer on the entity’s systems and
processes. The customer can renew the contract each year
without paying the initial fee.
The entity’s setup activities do not transfer any service to the
customer and, hence, do not give rise to a performance obligation.
Therefore, the entity recognizes as revenue the initial fee over the
period that it expects to provide services to the customer, which
may exceed the one year of the initial contract term.
73
Example 16—Amortization (continued)
The incurred setup costs enhance resources of the entity that will
be used in satisfying performance obligations in the future, and
those costs are expected to be recovered. Therefore, the entity
would recognize the setup costs as an asset, which would be
amortized over the period that the entity expects to provide
services to the customer (consistent with the pattern of revenue
recognition), which may exceed the one year of the initial contract
term.
Presentation (paragraphs 104–108)
IG74. The following Examples illustrate the proposed presentation guidance in
paragraphs 104–106.
Example 17—Contract liability and receivable
On January 1, an entity enters into a contract to transfer a product
to a customer on March 31. The contract requires the customer to
pay the consideration of $1,000 in advance on January 31. The
customer pays the consideration on March 1. The contract is
noncancellable. The entity transfers the product on March 31.
When the amount of consideration is due on January 31:
Receivable
Contract liability
$1,000
$1,000
On receiving the cash on March 1:
Cash
Receivable
$1,000
$1,000
On satisfying the performance obligation on March 31:
Contract liability
Revenue
74
$1,000
$1,000
Example 17—Contract liability and receivable (continued)
If the contract were cancellable, the entity would not make the
above accounting entry on January 31 because it would not have
a receivable. Instead, it would recognize the cash and contract
liability on March 1.
Example 18—Contract asset and receivable
On January 1, an entity enters into a contract to transfer Products
X and Y to a customer in exchange for $1,000. The contract
requires delivery of Product X first and states that payment for the
delivery of Product X is contingent on the delivery of Product Y. In
other words, the consideration of $1,000 is due only after the
entity has transferred both Products X and Y to the customer.
Hence, the entity does not have an unconditional right to
consideration (a receivable) until both Products X and Y are
transferred to the customer.
The entity identifies separate performance obligations for Products
X and Y and allocates $400 to Product X and $600 to Product Y,
on the basis of their standalone selling prices.
On satisfying the performance obligation to transfer Product X:
Contract asset
Revenue
$400
$400
On satisfying the performance obligation to transfer Product Y:
Receivable
Contract asset
Revenue
$1,000
$400
$600
Reconciliation of contract balances (paragraph 117)
IG75. The following Example illustrates the proposed requirement in paragraph
117 to disclose a reconciliation of contract assets and contract liabilities:
75
Example 19—Reconciliation of contract assets and contract
liabilities
An entity has two main business units: a services business and a
retail business. Customers of the services business typically pay a
portion of the promised consideration in advance of receiving the
services and the remaining amount upon completion of the
services. The service contracts do not include a significant
financing component. Customers of the retail business typically
pay in cash at the time of transfer of the promised goods.
During 20X1, the entity recognized revenue of $18,500 from
contracts with customers ($1,000 of which was cash sales from
the entity’s retail business). The entity received $3,500 payments
in advance.
Included in the transaction price of one of the entity’s services
contracts is a performance bonus that the entity will receive only if
it meets a specified milestone by a specified date. The entity
includes that performance bonus in the transaction price and
recognizes revenue over time using an appropriate method of
measuring progress. As of December 31, 20X0, the entity was not
reasonably assured to be entitled to the cumulative amount of
consideration that was allocated to the entity’s past performance
at that date. However, during 20X1 the entity became reasonably
assured to be entitled to the performance bonus. Consequently,
the entity recognized a contract asset and revenue of $500 for the
portion of the bonus relating to the entity’s performance in the
previous reporting period.
As a result of a business combination on December 31, 20X1, the
entity’s contract assets increased by $4,000 and its contract
liabilities increased by $1,900.
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Example 19—Reconciliation of contract assets and contract
liabilities (continued)
Contract assets
Contract liabilities
Net contracts at December 31, 20X0
$
Revenue from contracts with customers
Performance obligations satisfied during the reporting
period
Amounts allocated to performance obligations satisfied
in previous periods
Amounts recognized as receivables
Payments in advance
Cash sales
Effects of a business combination
Increase of contract assets
Increase of contract liabilities
Net contracts at December 31, 20X1
Contract assets
Contract liabilities
(2,000)
(2,000)
18,000
500
18,500
(14,000)
(3,500)
(1,000)
$
$
4,000
(1,900)
100
4,500
(4,400)
Sale with a right of return (paragraphs IG2–IG9)
IG76. The following Example illustrates the proposed guidance in paragraphs
IG2–IG9 on accounting for the sale of products with a right of return.
Example 20—Right of return
An entity sells 100 products for $100 each. The entity’s customary
business practice is to allow a customer to return any unused
product within 30 days and receive a full refund. The cost of each
product is $60. To determine the transaction price, the entity
decides that the approach that is most predictive of the amount of
consideration to which the entity will be entitled is the most likely
amount. Using the most likely amount, the entity estimates that
three products will be returned. The entity’s experience is
predictive of the amount of consideration to which the entity will be
entitled.
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Example 20—Right of return (continued)
The entity estimates that the costs of recovering the products will
be immaterial and expects that the returned products can be
resold at a profit.
Upon transfer of control of the products, the entity would not
recognize revenue for the three products that it expects to be
returned. Consequently, the entity would recognize:
(a) Revenue of $9,700 ($100 × 97 products expected not to be
returned)
(b) A refund liability for $300 ($100 refund × 3 products expected
to be returned)
(c) An asset of $180 ($60 × 3 products) for its right to recover
products from customers on settling the refund liability.
Hence, the amount recognized in cost of sales for 97
products is $5,820 ($60 × 97).
Warranties (paragraphs IG10–IG15)
IG77. The following Example illustrates the proposed guidance in paragraphs
IG10–IG15 on accounting for the sale of a product with a warranty.
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Example 21—Separate performance obligation for service
A manufacturer grants its customers a warranty with the purchase
of a product. The warranty provides a customer with assurance
that the product complies with agreed-upon specifications and will
operate as promised for three years from the date of purchase.
The warranty also gives customers a right of up to 20 hours of
training services on how to operate the product. The training
services are included with the warranty (that is, the customer does
not have the option to accept the warranty without the training
services).
To account for the warranty, the entity must determine whether
any of the warranty should be accounted for as a separate
performance obligation. Because the warranty includes the
training services that are a service to the customer in addition to
assurance that the product complies with agreed-upon
specifications, the entity would account for the training services as
a separate performance obligation. Hence, the entity would
allocate a portion of the total transaction price to that performance
obligation. In addition, the entity would account for the assurancetype warranty in accordance with the requirements on product
warranties in Subtopic 460-10.
Customer options for additional goods or services (paragraphs
IG20–IG24)
IG78. The following Examples illustrate the proposed guidance in paragraphs
IG20–IG22 on determining whether an option provides a customer with a
material right.
Example 22—Option that provides the customer with a
material right
An entity enters into a contract for the sale of Product A for $100.
As part of the contract, the entity gives the customer a 40 percent
discount voucher for any future purchases in the next 30 days up
to $100. The entity intends to offer a 10 percent discount on all
sales during the next 30 days as part of a seasonal promotion.
79
Example 22—Option that provides the customer with a
material right (continued)
All customers will receive a 10 percent discount on purchases
during the next 30 days. Hence, the discount that provides the
customer with a material right is only the discount that is
incremental to that 10 percent (that is, the additional 30 percent
discount). The entity would account for the incremental discount
as a separate performance obligation in the contract for the sale of
Product A.
To allocate a portion of the transaction price to the separate
performance obligation for the discount voucher, the entity
estimates an 80 percent likelihood that a customer will redeem the
voucher and that a customer will, on average, purchase $50 of
additional products. Because the entity intends to offer a 10
percent discount to all customers as part of a seasonal promotion,
the 40 percent discount that the customer would obtain when
exercising the voucher needs to be reduced by 10 percentage
points to 30 percent to reflect the incremental value of the discount
to the customer. Hence, the entity’s estimated standalone selling
price of the discount voucher is $12 ($50 average purchase of
additional products × 30% incremental discount × 80% likelihood
of exercising the option).
If the standalone selling price of Product A is $100, the entity
allocates $10.7 {$100 × [12 ÷ (12 + 100)]} of the $100 transaction
price to the discount voucher.
Example 23—Option that does not provide the customer with
a material right
A telecommunications entity enters into a contract with a customer
to provide up to 600 call minutes and 100 text messages each
month for a fixed monthly fee. The contract specifies the price for
any additional call minutes or texts that the customer may opt to
purchase in any month.
The entity determines that the customer’s fixed monthly payments
do not include a prepayment for future services because the
prices of the additional call minutes and texts reflect the
standalone selling prices for those services.
80
Example 23—Option that does not provide the customer with
a material right (continued)
Consequently, even though the customer can exercise the option
for any additional call minutes and text messages only because it
entered into a contract, the option does not grant the customer a
material right and, therefore, is not a performance obligation in the
contract. Hence, the entity would recognize revenue for additional
call minutes and texts only if and when the customer receives
those additional services.
IG79. The following Example illustrates the proposed guidance in paragraph
IG23 on determining the amount of the transaction price to allocate to an
option as part of a customer loyalty program.
Example 24—Customer loyalty program
An entity has a customer loyalty program that rewards a customer
with 1 customer loyalty point for every $10 of purchases. Each
point is redeemable for a $1 discount on any future purchases.
During a reporting period, customers purchase products for
$100,000 and earn 10,000 points redeemable for future
purchases. The standalone selling price of the purchased products
is $100,000. The entity expects 9,500 points to be redeemed on
the basis of its past experience that it concludes is predictive of
the amount of consideration to which it will be entitled. The entity
estimates a standalone selling price of $0.95 per point (or $9,500
total) on the basis of the likelihood of redemption.
The points provide a material right to customers that they would
not receive without entering into a contract. Hence, the entity
concludes that the points are a separate performance obligation.
The entity allocates the transaction price to the product and the
points on a relative standalone selling price basis as follows:
Product
Points
a
b
a
$91,324
b
$8,676
$100,000 × $100,000 ÷ $109,500
$100,000 × $9,500 ÷ $109,500
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Example 24—Customer loyalty program (continued)
At the end of the first reporting period, 4,500 of the points have
been redeemed, and the entity continues to expect 9,500 points to
be redeemed in total. The entity recognizes revenue for the loyalty
points of $4,110 [(4,500 points ÷ 9,500 points) × $8,676].
During the second reporting period, an additional 4,000 points are
redeemed (cumulative points redeemed are 8,500). The entity
expects that 9,700 points will be redeemed in total. The
cumulative revenue that the entity recognizes is $7,603 [(8,500 ÷
9,700) × $8,676]. The entity has recognized $4,110 in the first
reporting period, so it recognizes revenue for the loyalty points of
$3,493 ($7,603 − $4,110) in the second reporting period.
In the third reporting period, an additional 1,200 points are
redeemed (cumulative points redeemed are 9,700). The entity
expects that no additional points will be redeemed. The entity has
already recognized revenue of $7,603 so it recognizes the
remaining revenue for the loyalty points of $1,073 ($8,676 −
$7,603).
IG80. The following Example illustrates the proposed guidance in paragraph
IG24 on using a practical alternative to determine the amount of the
transaction price to allocate to an option for a renewal of annual
maintenance services.
Example 25—Maintenance services with a renewal option
An entity enters into 100 contracts to provide 1 year of
maintenance services for $1,000 per contract. At the end of the
year, each customer has the option to renew the contract for a
second year by paying an additional $1,000. Customers who
renew for a second year are also granted the option to renew for a
third year under the terms of the existing contract.
The entity concludes that the renewal option provides a material
right to the customer because the entity expects to undertake
progressively more maintenance work each year if a customer
renews. Part of each customer’s payment of $1,000 in the first
year is, in effect, a nonrefundable prepayment of services to be
provided in a subsequent year. Hence, the option is a separate
performance obligation.
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Example 25—Maintenance services with a renewal option
(continued)
The renewal option is for a continuation of maintenance services,
and those services are provided in accordance with the terms of
the existing contract. Hence, rather than determining the
standalone selling prices for the renewal options directly, the entity
could allocate the transaction price by determining the
consideration that it expects to receive in exchange for all the
services that it expects to provide.
The entity expects 90 percent of customers to renew at the end of
Year 1 and 90 percent of those customers to renew at the end of
Year 2.
The entity determines the amount to allocate to the option at the
end of Years 1 and 2 as follows.
The expected amount of consideration for each contract that is
renewed twice is $2,710 [$1,000 + (90% × $1,000) + (90% × 90%
× $1,000)]. The entity determines that recognizing revenue on the
basis of costs incurred relative to total expected costs would
depict the transfer of services to the customer. For a contract that
is renewed twice and extended to 3 years, the estimated costs in
Years 1–3 are as follows:
Year 1
Year 2
Year 3
$ 600
$ 750
$1,000
Accordingly, the pattern of revenue recognition for each contract is
as follows:
Expected Costs
Adjusted for Likelihood
of Contract Renewal
Allocation of
Consideration Expected
Year 1 $ 600 ($600 × 100%) $ 780 ($600 ÷ $2,085 × $2,710)
Year 2
675 ($750 × 90%)
877 ($675 ÷ $2,085 × $2,710)
Year 3
810 ($1,000 × 81%) 1,053 ($810 ÷ $2,085 × $2,710)
$2,085
$2,710
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Example 25—Maintenance services with a renewal option
(continued)
Therefore, at the end of Year 1, the entity allocates to the option
$22,000 of the consideration received to date [cash of $100,000 –
revenue recognized of $78,000 ($780 × 100)]. The entity allocates
$24,300 to the option at the end of Year 2 [cumulative cash of
$190,000 – cumulative revenue recognized of $165,700 ($78,000
+ $877 × 100)].
Licensing (paragraphs IG33–IG37)
IG81. The following Example illustrates the proposed guidance in paragraphs
IG33–IG37 on licensing.
Example 26—Franchise rights
An entity enters into a contract with a customer and promises to
transfer to the customer a right to open a franchise store in a
specified location. The store will bear the entity’s trade name, and
the customer has the right to sell the entity’s products for five
years. The customer promises to pay an upfront, fixed fee and
ongoing royalty payments of 1 percent of the customer’s quarterly
sales. The customer is obliged to purchase products from the
entity at their current standalone selling prices at the time of
purchase. The entity also will provide the customer with employee
training and the equipment necessary to be a distributor of the
entity’s products. Similar training services and equipment are sold
separately.
To identify the performance obligations, the entity must determine
whether the promised rights, training services, and equipment are
distinct.
In accordance with paragraph 28, the rights to the trade name,
market area, and proprietary know-how for five years are not
individually distinct because individually they are not sold
separately and cannot be used with other goods or services that
are readily available to the customer. However, on a combined
basis, those rights are distinct because they can be used together
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Example 26—Franchise rights (continued)
with other services that are readily available to the customer.
Hence, those combined rights give rise to a separate performance
obligation. The entity satisfies the performance obligation to grant
those rights at the point in time when the customer obtains control
of the rights (that is, commencement of operations by the
customer).
The training services and equipment are distinct because similar
services and equipment are sold separately. The entity satisfies
those performance obligations when it transfers the services and
equipment to the customer.
The entity’s promise to stand ready to provide products to the
customer in the future would not be accounted for as a separate
performance obligation in the contract because it does not provide
the customer with a material right (as described in paragraph
IG22).
In accordance with paragraph 85, the entity cannot recognize
revenue for the royalty payments because the entity is not
reasonably assured to be entitled to those sales-based royalty
amounts. Hence, the entity recognizes revenue for the royalties
when (or as) the uncertainty is resolved.
This proposed Update was approved for publication by six members of the
Financial Accounting Standards Board. Mr. Linsmeier dissented from publication
of the proposed Update. His alternative view is set out at the end of the Basis for
Conclusions along with the alternative view of Mr. Jan Engström of the
International Accounting Standards Board.
Members of the Financial Accounting Standards Board:
Leslie F. Seidman, Chairman
Daryl E. Buck
Russell G. Golden
Thomas J. Linsmeier
R. Harold Schroeder
Marc A. Siegel
Lawrence W. Smith
85
Background Information, Basis for
Conclusions, and Alternative Views
Introduction
BC1.
This basis for conclusions summarizes the Boards’ considerations in
developing the proposed guidance for revenue (and some costs) from
contracts with customers. It includes the reasons for accepting particular
views and rejecting others. Individual Board members gave greater
weight to some factors than to others.
BC2.
This basis for conclusions discusses the following matters:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
Background (paragraphs BC3–BC28)
Scope (paragraphs BC29–BC46)
Identifying the contract (paragraphs BC47–BC61)
Identifying performance obligations (paragraphs BC62–BC81)
Satisfaction of performance obligations (paragraphs BC82–
BC123)
Measurement of revenue (paragraphs BC124–BC162)
Collectibility (paragraphs BC163–BC175)
Allocating the transaction price to separate performance
obligations (paragraphs (BC176–BC197)
Constraint on the cumulative amount of revenue recognized
(paragraphs BC198–BC203)
Onerous performance obligations (paragraphs BC204–BC216)
Contract costs (paragraphs BC217–BC234)
Presentation (paragraphs BC235–BC242)
Disclosure (paragraphs BC243–BC273)
Implementation guidance (paragraphs BC274–BC325)
Transition, effective date, and early adoption (paragraphs
BC326–BC335)
Benefits and costs (paragraphs BC336–BC344)
Consequential amendments (paragraphs BC345–BC351)
Application to nonpublic entities (paragraphs BC352–BC370)
Alternative view (paragraphs BC371–BC380).
Background
BC3.
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The FASB and the IASB initiated a joint project to improve the financial
reporting of revenue under U.S. GAAP and IFRSs. The Boards decided
that their existing requirements on revenue needed improvement for the
following reasons:
(a)
(b)
(c)
BC4.
U.S. GAAP comprises broad revenue recognition concepts and
numerous requirements for particular industries or transactions,
which can result in different accounting for economically similar
transactions.
The two main revenue standards in IFRSs have different
principles and can be difficult to understand and apply to
transactions beyond simple transactions. In addition, IFRSs have
limited guidance on important topics such as revenue recognition
for multiple-element arrangements. Consequently, some entities
that apply IFRSs refer to parts of U.S. GAAP to develop an
appropriate revenue recognition accounting policy.
The disclosures required under both U.S. GAAP and IFRSs are
inadequate and lack cohesion with the disclosures of other items
in the financial statements.
The Boards decided to eliminate those inconsistencies and weaknesses
by developing a comprehensive revenue recognition model that would
apply to a wide range of transactions and industries. The Boards
decided that this approach also would improve U.S. GAAP and IFRSs
by:
(a)
(b)
(c)
(d)
Providing a more robust framework for addressing revenue
recognition issues
Improving comparability of revenue recognition practices across
entities, industries, jurisdictions, and capital markets
Simplifying the preparation of financial statements by reducing
the number of requirements to which entities must refer
Requiring enhanced disclosures to help users of financial
statements better understand the amount, timing, and
uncertainty of revenue that is recognized.
BC5.
In December 2008, the Boards published for public comment the
Discussion Paper, Preliminary Views on Revenue Recognition in
Contracts with Customers, and received more than 200 comment letters
in response. In the Discussion Paper, the Boards proposed the general
principles of a contract-based revenue recognition model with a
measurement approach based on an allocation of the transaction price.
That revenue model was developed after the Boards held extensive
discussions on alternative models for recognizing and measuring
revenue (see paragraphs BC17–BC28).
BC6.
Respondents generally supported the objective of developing a
comprehensive revenue recognition model for both U.S. GAAP and
IFRSs. Most respondents also generally supported the recognition and
measurement principles proposed in the Discussion Paper, which are
the basic building blocks of the revenue model. In particular, the
Discussion Paper introduced the concepts of a contract containing
performance obligations for the entity to transfer goods or services to a
87
customer and that revenue is recognized when the entity satisfies its
performance obligations as a result of the customer obtaining control of
those goods or services. Respondents to the Discussion Paper were
mainly concerned about the proposals to:
(a)
(b)
Identify separate performance obligations only on the basis of
the timing of the transfer of the good or service to the customer—
Respondents commented that this would be impractical,
especially when many goods or services are transferred over
time to the customer (for example, in construction contracts).
Use the concept of control to determine when a good or service
is transferred—Respondents asked for clarification of the control
concept to avoid the implication that the proposals would require
completed contract accounting for all construction contracts (that
is, revenue is recognized only when the customer obtains legal
title or physical possession of the completed asset).
BC7.
The Boards considered those comments when developing the Exposure
Draft, Revenue from Contracts with Customers (the FASB’s Exposure
Draft was a proposed Accounting Standards Update), which was
published in June 2010. Nearly 1,000 comment letters were received
from a wide range of industries, including construction, manufacturing,
telecommunications, technology, pharmaceutical, biotechnology,
financial services, consulting, entertainment, energy and utilities, freight
and logistics, and industries with significant franchising operations, such
as hospitality and fast food restaurant chains. Some of the concerns
raised by those respondents were specific to their industry, but many
concerns were shared by respondents across various industries.
BC8.
The Boards also received a substantial number of comment letters in
response to a question asked by the FASB on whether the proposals
should apply to nonpublic entities. Almost all of those comment letters
were from respondents associated with sections of the U.S. construction
industry (for example, private construction contractors, accounting firms
that serve those contractors, and surety providers who use the financial
statements of construction contractors when deciding whether to
guarantee that those contractors will meet their obligations under a
contract). Those respondents raised concerns about the application of
the proposed model to nonpublic entities. Those issues were discussed
separately by the FASB.
BC9.
The Boards and their staffs also consulted extensively on the proposals
in the 2010 proposed Update. Roundtable discussions were held in
London (United Kingdom), Kuala Lumpur (Malaysia), and in Norwalk,
Connecticut and Palo Alto, California (United States of America).
Members of the Boards and the staffs also participated in conferences,
working group sessions, discussion forums, and one-to-one discussions
that were held across all major geographical regions. Targeted outreach
88
to develop and refine the proposals involved representatives from
accounting firms, local standard setters, regulators, users of financial
statements, preparers, and affected industries (such as the
real estate, construction, defense/aerospace, telecommunications,
software/information technology, media, and pharmaceutical industries).
BC10.
With the exception of many of the responses from nonpublic entities in
the construction industry, most of the feedback from the comment
letters and from the consultation activities generally supported the
Boards’ proposal for a comprehensive revenue recognition model for
both U.S. GAAP and IFRSs. Moreover, most respondents supported the
core principle of that model, which is that an entity should recognize
revenue to depict the transfer of goods or services to a customer in an
amount that reflects the amount of consideration for those goods or
services.
BC11.
Almost all respondents to the 2010 proposed Update indicated that the
Boards needed to further clarify the operation of the core principle. In
particular, respondents were concerned about the application of the
following:
(a)
(b)
The concept of control and, in particular, the application of the
indicators of the transfer of control to service contracts and
contracts for the transfer of an asset over time to a customer as it
is being constructed (that is, a work-in-process asset)
The principle of distinct goods or services for identifying separate
performance obligations in a contract. Many respondents were
concerned that the principle, as proposed in the 2010 proposed
Update, would lead to inappropriate disaggregation of the
contract.
BC12.
Many of those respondents were concerned that those proposals could
be difficult to apply consistently across a wide range of industries and
may produce accounting outcomes that do not faithfully portray the
entity’s contracts with customers and the entity’s performance under
those contracts. Some respondents were concerned that the Boards’
objective of comparability of revenue recognition practices across
industries might be achieved only at the cost of losing the current levels
of comparability in the revenue recognition practices within each
industry. Consequently, some of those respondents suggested that the
Boards might need to develop industry-specific guidance or create
industry-specific exceptions to the general principles.
BC13.
The Boards addressed those concerns during the redeliberations of the
proposals in the 2010 proposed Update. A summary of the changes that
the Boards made to those proposals is presented in Appendix B. In
many cases, those changes either clarify the Boards’ intentions in the
2010 proposed Update (either by articulating the proposals differently or
89
by adding guidance) or simplify those proposals. In some cases, the
changes have resulted in revised guidance that aligns more closely with
existing guidance or current practice than did the proposals in the 2010
proposed Update.
BC14.
As the redeliberations of those proposals drew to a close, the Boards
decided to reexpose the proposed guidance for public comment to
provide interested parties with an opportunity to comment on revisions
that the Boards have made since the 2010 proposed Update was
issued. The Boards decided unanimously that it was appropriate to go
beyond their established due process and to reexpose their revised
revenue proposals because of the importance of the revenue number to
all entities and the desire to avoid unintended consequences in the
recognition of revenue for specific contracts or industries.
Why make the change?
BC15.
Some respondents to the Discussion Paper and to the 2010 proposed
Update questioned the need to replace existing guidance on revenue
recognition—in particular, those requirements that seem to work
reasonably well in practice and provide useful information about the
different types of contracts for which they are intended.
(a)
(b)
BC16.
90
For U.S. GAAP, some questioned whether a new revenue
recognition model is necessary because Accounting Standards
Update No. 2009-13, Revenue Recognition (Topic 605): MultipleDeliverable Revenue Arrangements, has resolved some of the
issues that the revenue recognition project set out to resolve.
®
Furthermore, the FASB Accounting Standards Codification has
simplified the process of accessing and researching existing
guidance on revenue.
For IFRSs, some indicated that the IASB could improve its
existing standards by developing additional requirements on
critical issues (for example, multiple-element arrangements)
without replacing existing standards.
The Boards acknowledge that it would be possible to improve many
existing revenue recognition requirements without replacing them.
However, in the Boards’ view, even after the changes to U.S. GAAP
mentioned above, the existing requirements in U.S. GAAP and IFRSs
would continue to result in inconsistent accounting for revenue and,
consequently, would not provide a robust framework for addressing
revenue recognition issues in the future. Furthermore, amending
existing requirements would fail to achieve one of the goals of the
revenue recognition project—to develop a common revenue standard
for U.S. GAAP and IFRSs that entities can apply consistently across
industries, jurisdictions, and capital markets. Because revenue is a
crucial number to users of financial statements, the Boards considered
that having a common standard on revenue for U.S. GAAP and IFRSs
is an important step toward achieving the goal of a single set of highquality global accounting standards. Consistent with that goal, the
Boards noted that existing revenue recognition guidance in U.S. GAAP
and IFRSs should not be used to supplement the principles in the
proposed guidance.
Alternative revenue recognition models
BC17.
During the early stages of the Boards’ project on revenue recognition,
the Boards considered various alternative revenue recognition models,
including the following:
(a)
(b)
The basis for recognizing revenue—specifically, whether an
entity should recognize revenue only when the entity transfers a
promised good or service to a customer (that is, a contract-based
revenue recognition principle) or when (or as) the entity
undertakes a productive activity (which could be an activity that
is undertaken only when a contract with a customer exists or
regardless of whether a contract exists)
The basis for measuring revenue—specifically, whether revenue
should be measured at an allocated customer consideration
amount or at a current exit price.
Basis for recognizing revenue
BC18.
In the Discussion Paper, the Boards proposed a principle to recognize
revenue based on the accounting for the asset or liability arising from a
contract with a customer. The Boards had two reasons for developing a
standard on revenue that applies only to contracts with customers. First,
contracts to provide goods or services to customers are important
economic phenomena and are the lifeblood of most entities. Second,
most existing revenue recognition guidance in U.S. GAAP and IFRSs
focuses on contracts with customers. The Boards decided that focusing
on (a) the recognition and measurement of that asset or liability and (b)
the changes in that asset or liability over the life of the contract would
bring discipline to the earnings process approach. Consequently, it
would result in entities recognizing revenue more consistently than
when applying existing standards.
BC19.
On entering into a contract with a customer, an entity obtains rights to
receive consideration from the customer and assumes obligations to
transfer goods or services to the customer (performance obligations).
The combination of those rights and performance obligations gives rise
to a (net) asset or (net) liability depending on the relationship between
91
the remaining rights and performance obligations. If the measure of the
remaining rights exceeds the measure of the remaining performance
obligations, the contract is an asset (a contract asset). Conversely, if the
measure of the remaining performance obligations exceeds the
measure of the remaining rights, the contract is a liability (a contract
liability).
BC20.
By definition, revenue from a contract with a customer cannot be
recognized until a contract exists. Revenue recognition could, in
concept, arise at the point at which an entity enters into a contract with a
customer. For an entity to recognize revenue at contract inception (that
is, before either party has performed), the measure of the entity’s rights
must exceed the measure of the entity’s performance obligations. That
would lead to revenue recognition because of an increase in a contract
asset. However, as discussed in paragraph BC26, the Boards proposed
in the Discussion Paper that performance obligations should be
measured at the same amount as the rights in the contract, thereby
precluding the recognition of a contract asset and revenue at contract
inception.
BC21.
Hence, in the Discussion Paper, the Boards proposed that revenue
should be recognized only when an entity transfers a promised good or
service to a customer, thereby satisfying a performance obligation in the
contract. That transfer results in revenue recognition because, on
satisfying a performance obligation, an entity no longer has that
obligation to provide the good or service. Consequently, its position in
the contract increases—either its contract asset increases or its contract
liability decreases—and that increase leads to revenue recognition.
BC22.
Although, in concept, revenue arises from an increase in a contract
asset or a decrease in a contract liability, the Boards have articulated
the proposed guidance in terms of recognition and measurement of
revenue rather than recognition and measurement of the contract. The
Boards thought that focusing on the timing and amount of revenue from
a contract with a customer would simplify the proposed guidance.
Feedback from respondents to the Discussion Paper and the 2010
proposed Update confirmed that view.
BC23.
Nearly all respondents to the Discussion Paper agreed with the Boards’
view that, in general, an entity should not recognize revenue if there is
no contract with a customer. However, some respondents thought that
the Boards should instead develop an activities model in which revenue
would be recognized as the entity undertakes activities in producing or
providing goods or services regardless of whether those activities result
in the transfer of goods or services to the customer (that is, regardless
of whether a performance obligation is satisfied). Those respondents
reasoned that recognizing revenue over time, for example, throughout
long-term construction or other service contracts, regardless of whether
92
goods or services are transferred to the customer, would provide users
of financial statements with more useful information.
BC24.
However, the Boards noted the following concerns about an activities
model:
(a)
(b)
(c)
(d)
BC25.
Revenue recognition would not be based on accounting for the
contract—In an activities model, revenue arises from increases
in the entity’s assets such as inventory or work-in-process, rather
than only from rights under a contract. Therefore, conceptually,
an activities model does not require a contract with a customer
for revenue recognition, although revenue recognition could be
precluded until a contract exists. However, that would result in
revenue being recognized at contract inception for any activities
completed to that point.
It would be counterintuitive to many users of financial
statements—An entity would recognize consideration as revenue
when the customer has not received any promised goods or
services in exchange.
There would be potential for abuse—An entity could accelerate
revenue recognition by increasing its activities (for example,
production of inventory) at the end of a reporting period.
It would result in a significant change to existing standards and
practices—In many of those standards, revenue is recognized
only when goods or services are transferred to the customer. For
example, in IAS 18, Revenue, revenue from the sale of a good is
recognized when the entity has transferred ownership of the
good to the customer. The Boards also observed that the basis
for percentage-of-completion accounting in existing standards is
similar to the core principle of the proposed guidance.
Accordingly, the Boards did not develop an activities model and they
have maintained their view that a contract-based revenue recognition
principle would be the most appropriate principle for a general revenue
recognition standard for contracts with customers.
Basis for measuring revenue
BC26.
In the Discussion Paper, the Boards proposed an allocated transaction
price approach to measure performance obligations. Under that
approach, an entity would allocate the transaction price to each
performance obligation in the contract (see paragraphs BC124 and
BC176). The Boards rejected an alternative approach to measure
performance obligations directly at current exit prices for the following
reasons:
93
(a)
(b)
(c)
An entity would recognize revenue before transferring goods or
services to the customer at contract inception if the measure of
rights to consideration exceeds the measure of the remaining
performance obligations. That would be a typical occurrence at
contract inception because the transaction price often includes
amounts that enable an entity to recover its costs to obtain a
contract.
Any errors in identifying or measuring performance obligations
could affect revenue recognized at contract inception.
A current exit price for the remaining performance obligations
would typically not be observable, and an estimated current exit
price could be complex and costly to prepare and difficult to
verify.
BC27.
Almost all responses to the Discussion Paper supported the Boards’
proposal to measure performance obligations using an allocated
transaction price approach.
BC28.
The Boards also considered in the Discussion Paper whether it would
be appropriate to require an alternative measurement approach for only
some performance obligations (for example, performance obligations
with highly variable outcomes for which an allocated transaction price
approach may not result in useful information). The Boards rejected that
approach in developing the proposals for the 2010 proposed Update
because a common type of contract with customers that has highly
variable outcomes would be an insurance contract, which is excluded
from the scope of the proposed guidance. The Boards decided that the
benefits of accounting for all performance obligations within the scope of
the proposed guidance using the same measurement approach
outweighed any concerns about using that approach for some
performance obligations.
Scope (paragraphs 9–11)
BC29.
The proposed guidance would apply only to a subset of revenue as
defined in each of the Boards’ conceptual frameworks—revenue from
contracts with customers. Revenue that does not arise from a contract
with a customer is not within the scope of this proposed Update and,
therefore, is not affected by this proposed guidance. For example, in
accordance with other standards, revenue would continue to be
recognized from the following transactions or events:
(a)
(b)
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Dividends
For IFRSs, changes in the value of biological assets, investment
properties, and the inventory of commodity broker traders
(c)
For U.S. GAAP, changes in regulatory assets and liabilities
arising from alternative revenue programs for rate-regulated
entities. (The FASB decided that the revenue arising from those
assets or liabilities should be presented separately from
revenues arising from contracts with customers.)
BC30.
The proposed guidance does not amend the existing definitions of
revenue in each Board’s conceptual framework. The Boards decided
that the definition of revenue is a matter for consideration in their joint
project on the conceptual framework. However, the IASB decided to
carry forward into its proposed guidance the description of revenue from
the IASB’s Conceptual Framework for Financial Reporting rather than
the definition of revenue from IAS 18. The IASB noted that the IAS 18
definition refers to “gross inflow of economic benefits” and the IASB had
concerns that some may misread that reference as implying that an
entity should recognize as revenue a prepayment from a customer for
goods or services. As described in paragraphs BC18–BC25, revenue
would be recognized in accordance with the proposed guidance only as
a result of an entity satisfying a performance obligation in a contract with
a customer. In addition, the FASB decided to carry forward a definition
of revenue that is based on the definition in FASB Concepts Statement
No. 6, Elements of Financial Statements.
BC31.
The definitions of a contract and a customer establish the scope of the
proposed guidance.
Definition of a contract (Appendix A)
BC32.
The definition of a contract is based on common legal definitions of a
contract in the United States and is similar to the definition of a contract
used in IAS 32, Financial Instruments: Presentation. The IASB decided
not to adopt a single definition of a contract for both IAS 32 and the
proposed guidance because the IAS 32 definition implies that contracts
can include agreements that are not enforceable by law. Including such
agreements would be inconsistent with the Boards’ decision that a
contract with a customer must be enforceable by law for an entity to
recognize the rights and obligations arising from that contract. The IASB
also noted that amending the IAS 32 definition would pose the risk of
unintended consequences in accounting for financial instruments.
BC33.
The definition of a contract emphasizes that a contract exists when an
agreement between two or more parties creates enforceable rights and
obligations between those parties. The Boards noted that such an
agreement does not need to be in writing to be a contract. Whether the
agreed terms are written, oral, or evidenced otherwise, a contract exists
if the agreement creates rights and obligations that are enforceable
against the parties. Determining whether a contractual right or obligation
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is enforceable is a question of law, and the factors that determine
enforceability may differ between jurisdictions. Although the contract
must be legally enforceable, the Boards decided that the performance
obligations within the contract could include promises that result in the
customer having a valid expectation that the entity will transfer goods or
services to them even though those promises are not enforceable. This
is discussed further in paragraph BC63.
BC34.
The Boards decided to complement the contract definition by specifying
(in paragraph 14) the following attributes of a contract that must be
present before an entity can apply the proposed guidance. Those
attributes are derived mainly from existing guidance:
(a)
(b)
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The contract has commercial substance—The Boards decided to
include commercial substance as an attribute of a contract with a
customer when they discussed whether revenue should be
recognized for nonmonetary exchanges. Such transactions have
been an area of financial reporting abuse, with entities
transferring goods or services back and forth to each other (often
for little or no cash consideration), thereby artificially inflating
their revenues. Therefore, the Boards decided that an entity
should not recognize revenue from a nonmonetary exchange if
the exchange has no commercial substance. The Boards
decided to describe commercial substance consistently with its
existing meaning in other financial reporting contexts, such as
existing guidance for nonmonetary exchange transactions.
Because other types of contracts also could lack commercial
substance, the Boards decided that all contracts should have
commercial substance to be within the scope of the proposed
guidance.
The parties to the contract have approved the contract and are
committed to perform their respective obligations—The Boards
decided to include those factors as attributes of a contract with a
customer because if the parties to a contract have not approved
the contract, it is questionable whether that contract is legally
enforceable. Some respondents questioned whether oral and
implied contracts could meet the requirement that “the parties to
the contract have approved the contract,” especially if it is difficult
to verify the entity’s approval of that contract. The Boards
decided that the form of the contract does not, in and of itself,
determine whether the parties have approved and are committed
to the contract. Instead, an entity should consider all relevant
facts and circumstances in assessing whether the parties intend
to be bound by the terms and conditions of the contract.
Consequently, in some cases, the parties to an oral or implied
contract (in accordance with customary business practices) may
have the intent and the commitment to fulfill their respective
obligations. In other cases, a written contract may be required to
determine that the parties to the contract have approved and are
committed to perform under the contract.
(c)
(d)
BC35.
The Boards also clarified that this attribute is not intended to
represent a threshold for recognizing revenue if there are
concerns about a customer’s ability and willingness to pay the
promised consideration. The Boards decided that those concerns
typically relate to the collectibility of the receivable, which is a
measurement issue (discussed further in paragraphs BC163–
BC175). However, if there is significant doubt at contract
inception about the collectibility of consideration from the
customer, that doubt may indicate that the parties are not
committed to perform their respective obligations under the
contract and thus the criterion in paragraph 14(b) may not be
met.
The entity can identify each party’s rights regarding the goods or
services to be transferred—This attribute is necessary because
an entity would not be able to assess the transfer of goods or
services if the entity cannot identify each party’s rights regarding
those goods or services.
The entity can identify the payment terms for the goods or
services to be transferred—This attribute is necessary because
an entity would not be able to determine the transaction price if
the entity cannot identify the payment terms in exchange for the
promised goods or services. Respondents from the construction
industry questioned whether an entity can identify the payment
terms for unpriced change orders (that is, change orders for
which the scope of work may be defined even though the specific
amount of consideration for that work has not yet been
determined and may not be finally determined for a period of
time). The Boards clarified that their intention was not to preclude
revenue recognition for unpriced change orders if the scope of
the work has been approved and thus the entity has a right to
payment for the additional work performed. The Boards affirmed
that the consideration need not be fixed to identify the payment
terms. Hence, the entity would determine the transaction price on
the basis of the proposed guidance in paragraphs 50–67.
The Boards decided that the proposed revenue guidance should not
apply to wholly unperformed contracts if each party to the contract has
the unilateral enforceable right to terminate the contract without penalty.
Accounting for those contracts would not affect an entity’s financial
position or performance until either party performs. In contrast, there
could be an effect on an entity’s financial position and performance if
only one party could terminate a wholly unperformed contract without
penalty. For instance, if only the customer could terminate the wholly
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unperformed contract without penalty, the entity is obliged to stand
ready to perform at the discretion of the customer. And, if only the entity
could terminate the wholly unperformed contract without penalty, the
entity has an enforceable right to payment from the customer if the
entity chooses to perform. In accordance with the proposed guidance,
an entity’s rights and obligations in wholly unperformed contracts would
be measured at the same amount and, therefore, would offset each
other. However, by including those contracts within the scope of the
proposed guidance, an entity would provide additional information about
a change in the entity’s financial position that resulted from entering into
those contracts. That would involve the entity recognizing a liability if a
performance obligation in that contract is onerous (in accordance with
paragraphs 86–90) or disclosing the amount of transaction price
allocated to the remaining performance obligations in that wholly
unperformed contract (in accordance with paragraphs 119–121).
Definition of a customer (Appendix A)
BC36.
The purpose of defining a customer is to distinguish a revenue contract
from other contracts into which an entity enters. Some respondents
asked the Boards to clarify the meaning of ordinary activities in the
definition of a customer. However, that notion was derived from the
existing definitions of revenue. In particular, the IASB’s Conceptual
Framework definition of revenue refers specifically to the “ordinary
activities of an entity” and the definition of revenue in Concepts
Statement 6 refers to the notion of an entity’s “ongoing major or central
operations.” As noted in paragraph BC30, the Boards are not
reconsidering those definitions in the revenue project.
BC37.
When considering the definition of a customer, the Boards observed
that revenue could be recognized from transactions with partners or
participants in a collaborative arrangement. Those arrangements would
be within the scope of the proposed guidance only if the other party to
the arrangement meets the definition of a customer. Some industry
respondents asked the Boards to clarify whether parties to common
types of arrangements in their industries would meet the definition of a
customer. However, the Boards decided that it would not be feasible to
develop implementation guidance that would apply uniformly to various
industries because the terms and conditions of a specific arrangement
may affect whether the parties to the arrangement have a suppliercustomer relationship or some other relationship (for example, as
collaborators or as partners). Therefore, an entity would need to
consider all relevant facts and circumstances in assessing whether the
counterparty meets the definition of a customer. Examples of
arrangements in which an entity would need to make such an
assessment are as follows:
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(a)
(b)
Collaborative research and development efforts between
biotechnology and pharmaceutical entities or similar
arrangements in the aerospace and defense, technology, or
healthcare industries, or higher education
Arrangements in the oil and gas industry in which partners in an
offshore oil and gas field may make payments to each other to
settle any differences between their proportionate entitlements to
production volumes from the field during a reporting period.
Exchanges of products to facilitate a sale to another party
(paragraph 9(e))
BC38.
In industries with homogeneous products, it is common for entities in the
same line of business to exchange products to facilitate sales to
customers or potential customers other than the parties to the
exchange. An example is when an oil supplier swaps inventory with
another oil supplier to reduce transport costs, meet immediate inventory
needs, or otherwise facilitate the sale of oil to the end customer. The
Boards noted that a party exchanging inventory with an entity would
meet the proposed definition of a customer because it has contracted
with the entity to obtain an output of the entity’s ordinary activities. As a
consequence, an entity might (absent specific guidance) recognize
revenue once for the exchange of inventory and then again for the sale
of the inventory to the end customer. The Boards decided that outcome
would be inappropriate for the following reasons:
(a)
(b)
BC39.
It would gross up revenues and expenses and make it difficult for
users of financial statements to assess the entity’s performance
and gross margins during the reporting period.
Some view the counterparty in those arrangements as also
acting as a supplier and not as a customer.
The Boards considered modifying the definition of a customer. However,
they rejected that alternative because of concerns about unintended
consequences. Therefore, the Boards decided to exclude from the
scope of the proposed guidance nonmonetary exchanges between
entities in the same line of business to facilitate sales to customers, or
to potential customers, other than the parties to the exchange.
Contracts outside the scope of the proposed guidance
(paragraph 9)
BC40.
The Boards excluded from the scope of the proposed guidance three
types of contracts with customers that the Boards are addressing in
other standard-setting projects:
(a)
Leases
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(b)
(c)
Insurance contracts
Financial instruments and other contracts within the scope of the
financial instruments standards.
BC41.
The FASB also decided to exclude from the scope of the proposed
guidance guarantees (other than product warranties) that are within the
scope of Topic 460 on guarantees. The focus of the existing accounting
guidance for those guarantee arrangements relates primarily to
recognizing and measuring a guarantee liability.
BC42.
Some respondents reasoned that excluding some contracts with
customers from the scope of the proposed guidance could perpetuate
the development of industry-specific or transaction-specific revenue
guidance, which would be inconsistent with the revenue project’s stated
objective. The Boards disagreed with that view. In the Boards’ view, the
proposed guidance would provide them with a framework for
considering revenue issues in other standard-setting projects. Any
departure from the proposed revenue guidance would arise because the
Boards have decided that, in the context of those other projects, a
different basis of accounting for those contracts with customers would
provide users of financial statements with more useful information.
BC43.
Many respondents expressed concerns about how the revenue model
would apply to construction-type contracts and asked the Boards to
retain existing guidance for those contracts. The Boards discussed
those concerns on various occasions with representatives from the
construction industry and observed that the concerns were partly
attributable to a misperception that the proposals would require
completed contract accounting for contracts currently within the scope
of Subtopic 605-35 on construction-type and production-type contracts
or IAS 11, Construction Contracts. In addition, many in the construction
industry were concerned about the costs of accounting for a single
construction contract as many performance obligations. In the 2010
proposed Update, the Boards clarified that not all construction contracts
would result in an entity recognizing revenue only at completion of the
contract. Furthermore, as discussed below, the proposed guidance
provides further clarity on identifying separate performance obligations
in construction contracts and determining when those performance
obligations are satisfied over time. Hence, the Boards affirmed their
view that the proposed guidance should apply to construction contracts.
Contracts partially within the scope of other standards
(paragraph 11)
BC44.
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Some contracts with customers would be partially within the scope of
the proposed guidance and partially within the scope of other standards
(for example, a lease with a service). In those cases, the Boards
decided that it would be inappropriate for an entity to account for the
entire contract in accordance with one or another standard because it
could result in different accounting outcomes, depending on whether the
goods or services were sold on a standalone basis or together with
other goods or services.
BC45.
The Boards decided that the proposed guidance should be the default
approach for separating a contract and allocating consideration to each
part. However, specific issues could arise in separating contracts that
are not within the scope of the proposed guidance. For example, a
financial instrument or an insurance contract might require an entity to
provide services that are best accounted for in accordance with the
standards on financial instruments or insurance contracts.
BC46.
Therefore, the Boards decided that if other standards specify how to
separate and/or initially measure parts of a contract, an entity should
first apply that guidance. In other words, the more specific standard
would take precedence in accounting for a part of a contract. The
Boards’ decision is consistent with the existing requirements on
multiple-element arrangements in Subtopic 605-25.
Identifying the contract (paragraphs 12–15)
BC47.
In most cases, an entity would apply the proposed guidance to a single
contract with a customer. However, the structure and scope of contracts
can vary depending on how the parties to a contract decide to record
their agreement. For instance, there may be legal or commercial
reasons for the parties to use more than one contract to record the sale
of related goods or services or to use a single contract to record the
sale of unrelated goods or services. The Boards’ objective in developing
the proposed guidance is that the accounting for a contract should
depend on an entity’s present rights and obligations rather than on how
the entity structures the contract. Consistent with that objective, if an
entity enters into a contract with a customer that can be renewed or
cancelled by either party at discrete points in time, the entity would
account separately for its rights and obligations (that is, as a separate
contract) for each period for which the contract cannot be cancelled by
either party.
BC48.
In the 2010 proposed Update, the Boards proposed to meet the
objective of identifying a contract by prescribing when an entity should
account for more than one contract as a single contract (that is, a
contract combination requirement) and when it should account for
segments of a single contract as separate contracts (that is, a contract
segmentation requirement). The Boards proposed using a principle of
“price interdependence/independence” for this purpose. Price
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interdependence is a common principle that underlies the requirements
in existing standards (for example, Subtopics 605-25 and 605-35 and
IASs 11 and 18) on combining contracts. The Boards also proposed
using the same principle of price interdependence to determine whether
a contract modification should be accounted for as a modification to an
existing contract or as a separate contract.
BC49.
In their redeliberations on the 2010 proposed Update, the Boards
decided to eliminate the step of segmenting a contract into separate
(hypothetical) contracts because that step is unnecessary. The Boards
noted that the proposed requirement to identify the separate
performance obligations in a contract achieves the same result as
accounting for the separate components of a contract. Furthermore,
although the Boards proposed segmenting a contract in order to restrict
the allocation of the transaction price (including discounts or subsequent
changes in the transaction price), the Boards decided to address those
matters directly in the proposed requirements on allocation (see
paragraphs BC176–BC192).
BC50.
The Boards’ redeliberations on the use of the principle of price
interdependence in accounting for contract combinations and contract
modifications are discussed in the following sections.
Combination of contracts (paragraphs 16 and 17)
BC51.
The 2010 proposed Update included guidance on when an entity should
combine two or more contracts and account for them as a single
contract. That is because, in some cases, the amount and timing of
revenue might differ depending on whether an entity accounts for two or
more contracts separately or accounts for them as one contract. The
2010 proposed Update proposed that contracts should be combined if
their prices are interdependent and proposed the following indicators
that two or more contracts have interdependent prices:
(a)
(b)
(c)
The contracts are entered into at or near the same time.
The contracts are negotiated as a package with a single
commercial objective.
The contracts are performed either concurrently or consecutively.
Those indicators were similar to those in existing standards.
BC52.
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Although most respondents agreed that an entity should consider price
interdependence for determining whether to combine contracts, some
respondents commented that the notion of price interdependence would
be too confusing as the overall principle for combining contracts. For
instance, it could be difficult to determine whether a discount offered on
one contract arises because of price interdependency with another
contract or because the discount relates to an existing customer
relationship that arises from previous contracts. Making that distinction
would be particularly difficult for entities that negotiate each contract
individually instead of entering into contracts with standard terms. Some
respondents also were concerned that the notion of price
interdependence was too broad and could result in an entity being
required to combine an initial contract with subsequent contracts
between the entity and the customer, including subsequent contracts
that arise from the exercise of options in the initial contract.
BC53.
To address those concerns, the Boards decided that entering into
contracts at or near the same time is a necessary, but not sufficient,
condition for the contracts to be combined. That decision is consistent
with the contract combination principle of identifying, at contract
inception, the contract to be accounted for as the unit of account. In
addition to meeting that condition, the Boards decided that the contracts
would need to satisfy one or more of three criteria. Two of those criteria
are based on guidance in the 2010 proposed Update—that the
contracts are negotiated as a package with a single commercial
objective and that the amount of consideration to be paid in one contract
depends on the price or performance of the other contract. The Boards
observed that when either of those criteria is met, the relationship
between the consideration in the contracts is such that if those contracts
were not combined, the amount of consideration allocated to the
performance obligations in each contract might not faithfully depict the
value of the goods or services transferred to the customer. The Boards
decided to add a further criterion—that the goods or services promised
in the contracts would be a single performance obligation in accordance
with paragraphs 27–30. The Boards added this criterion to avoid the
possibility that an entity could effectively bypass the proposed
requirements on identifying separate performance obligations
depending on how the entity structures its contracts.
BC54.
The Boards clarified that for two or more contracts to be combined, they
should be with the same customer. However, the Boards acknowledged
that in some situations, contracts with related parties (as defined in
Topic 850 on related party disclosures and IAS 24, Related Party
Disclosures) need to be combined when there are interdependencies
between the separate contracts with those related parties. Thus, in
those situations, combining the contracts with related parties would
result in a more appropriate depiction of the amount and timing of
revenue recognition.
Contract modifications (paragraphs 18–22)
BC55.
A contract modification is a change in the scope or the price of a
contract (or both). For contract modifications that amend only the
contract price (that is, there is no change to the performance
obligations), the Boards decided that the subsequent change to the
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transaction price arising from those modifications should be accounted
for consistently with changes in the transaction price in accordance with
paragraphs 77–80.
BC56.
For all other contract modifications, the Boards decided that some
modifications change the existing terms and conditions of a contract and
other modifications effectively create new or separate contracts. In the
2010 proposed Update, the Boards proposed that an entity should
distinguish between those modifications by assessing whether the
prices of the modification and the existing contract are interdependent. If
those prices are interdependent, an entity would account for the
modification together with the existing contract and the entity would
recognize the cumulative effect of the modification in the period in which
the modification occurs (that is, the modification would be accounted for
on a cumulative catch-up basis). If those prices are not interdependent,
the entity would account for the modification as a separate contract (that
is, the modification would be accounted for prospectively).
BC57.
Respondents generally agreed that contract modifications can have
different effects on an entity’s rights and obligations and, therefore, the
accounting for those modifications should reflect those differences.
However, many respondents commented that distinguishing contract
modifications on the basis of whether the prices of the modification and
the existing contract are interdependent could produce anomalous
outcomes. For instance, an entity could be required to account for some
contract modifications on a cumulative catch-up basis even though the
modification relates only to the remaining performance obligations in the
contract. Conversely, an entity could be required to account for other
modifications as separate contracts even though the modifications
relate to the original contract (for example, change orders in
construction industry). Instead of relying only on the principle of price
interdependence to distinguish contract modifications, many
respondents suggested that factors such as risk or the degree of
functionality between the goods or services being provided in the
contract(s) should be relevant for determining whether an entity should
account for a contract modification as a separate contract or as part of
the existing contract. Those factors are consistent with the principles
underlying the Boards’ revised criteria for identifying distinct goods or
services.
BC58.
The Boards agreed with the feedback that the principle of “price
interdependence” was insufficient for determining whether to account for
a contract modification as a separate contract or as a modification of an
existing contract. Consequently, the Boards decided to develop specific
criteria for distinguishing contract modifications. In developing those
criteria, the Boards agreed that, consistent with the core principle of the
proposed Update, an entity should account for a modification as a
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separate contract if the effects of the modification do not affect the
amount or timing (that is, pattern) of revenue recognition for the existing
contract. The Boards decided that a contract modification would not
change the pattern of revenue recognition for the existing contract if
both of the following criteria are met:
(a)
(b)
The additional promised goods or services are distinct. That
factor indicates that the entity could account separately for the
additional goods or services promised in the modification.
The pricing of the modification reflects the entity’s standalone
selling prices of those additional promised goods or services
(subject to any appropriate adjustments to those selling prices to
reflect the circumstances of that contract). That factor indicates
that the pricing of the modification does not include a material
discount or premium that relates to, and therefore should be
allocated to, the existing contract. That factor improves on the
principle of price interdependence that was proposed in the 2010
proposed Update.
BC59.
The Boards decided that, in all other cases, contract modifications
should be accounted for as amendments to existing contracts. However,
accounting for all those contract modifications on a cumulative catch-up
basis could be complex and may not necessarily faithfully depict the
economics of the modification because the modification is negotiated
after the original contract and is based on new facts and circumstances.
The Boards considered that those concerns typically would arise when
an entity’s performance completed to date in a contract is separate from
its remaining performance obligations (that is, the remaining promised
goods or services in the modified contract are distinct from the goods or
services that have already transferred to the customer). Consequently,
the Boards decided that an entity should account for the effects of those
modifications on a prospective basis. That approach avoids opening up
the accounting for previously satisfied performance obligations and,
thus, avoids any adjustments to revenue that has already been
recognized.
BC60.
If the remaining goods or services are not distinct and are part of a
single performance obligation that is partially satisfied (that is, a
performance obligation satisfied over time), the Boards decided that an
entity should recognize the effect of the modification on a cumulative
catch-up basis by updating the transaction price and the measure of
progress for that performance obligation. That approach is particularly
relevant and generally accepted in the construction industry because a
modification to the contract typically would not result in the transfer of
additional goods or services that are distinct from those promised in the
existing contract and, accordingly, the modification affects the entity’s
measure of progress toward completion of the contract.
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BC61.
Some respondents to the 2010 proposed Update questioned how the
guidance would apply to unpriced change orders (as described in
paragraph BC34(d)), which are common in the construction industry.
The Boards noted that once the parties have approved a change in the
scope of the contract, the entity would have a right to payment for work
performed. However, because the change order is unpriced, there is
uncertainty about the amount of consideration that will be paid. Thus,
the Boards clarified that in these cases, an entity would apply the
proposed guidance for a contract modification when the entity has an
expectation that the price of the modification will be approved. The
entity would then be able to determine the transaction price in
accordance with paragraphs 50–67 and whether the recognition of
revenue should be constrained in accordance with paragraphs 81–85.
Identifying performance obligations
Definition of a performance obligation (Appendix A)
BC62.
The proposed guidance distinguishes obligations to provide goods or
services to a customer from other obligations by describing them as
performance obligations. The notion of a performance obligation is
similar to the notions of deliverables, components, or elements of a
contract in existing standards. Although the notion of a performance
obligation is implicit in many existing standards, the term performance
obligation has not been defined previously. Therefore, in the Discussion
Paper, the Boards proposed to define a performance obligation as “a
promise in a contract with a customer to transfer an asset (such as a
good or a service) to that customer” (paragraph 3.2).
BC63.
The 2010 proposed Update proposed a similar definition of a
performance obligation. However, the proposed definition in the 2010
proposed Update specified that the promise must be enforceable.
Respondents to the 2010 proposed Update expressed concerns about
the term enforceable because they thought that an entity should
account for some promised goods or services as performance
obligations even though the promise to transfer those goods or services
may not be enforceable (for example, some when-and-if-available
software upgrades and award credits associated with customer loyalty
programs). Consequently, the Boards decided that although a contract
with a customer must be enforceable, a performance obligation could
arise from a promise associated with a contract if the customer has a
valid expectation that the entity will transfer a good or service. In making
that decision, the Boards noted that identifying a performance obligation
based on such promises is consistent with both of the following:
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(a)
(b)
The core principle of the proposed Update, because an entity
would account for promised goods or services that the customer
reasonably expects to receive and for which the customer
promises to pay
The current application of U.S. GAAP and IFRSs (for example,
the definition of a constructive obligation in IAS 37, Provisions,
Contingent Liabilities and Contingent Assets).
Marketing incentives, incidental obligations, and perfunctory
obligations
BC64.
Some respondents to the 2010 proposed Update suggested that an
entity should account for some promised goods or services as
marketing expenses or as incidental obligations even though those
promises meet the definition of a performance obligation. Examples of
such promised goods or services include “free” handsets provided by
telecommunication entities and customer loyalty points awarded by
supermarkets, airlines, and hotels. Those respondents thought that
revenue should be recognized only for the main goods or services for
which the customer has contracted and not for the marketing incentives
and other incidental obligations.
BC65.
When a customer contracts with an entity for a bundle of goods or
services, it can be difficult and subjective for the entity to identify the
“main” goods or services for which the customer has contracted. In
addition, the outcome of that assessment could vary significantly
depending on whether an entity performs the assessment from the
perspective of its business model or from the perspective of the
customer. Consequently, the Boards decided that all goods or services
promised to a customer as a result of a contract are performance
obligations because they are part of the negotiated exchange between
the entity and its customer. Although the entity might consider those
goods or services to be marketing incentives or incidental goods or
services, they are goods or services for which the customer pays and to
which the entity should allocate consideration for purposes of revenue
recognition. In contrast to performance obligations in a contract,
marketing incentives are provided independently of the contract that the
incentives are designed to secure. (See paragraphs BC296–BC304 for
additional discussion on marketing incentives and the accounting for
customer options to acquire additional goods or services.)
BC66.
For similar reasons, the Boards decided not to exempt an entity from
accounting for performance obligations that the entity might regard as
being perfunctory or inconsequential. Instead, an entity would assess
whether those performance obligations are immaterial in accordance
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with IAS 8, Accounting Policies, Changes in Accounting Estimates and
Errors, and Topic 105 on generally accepted accounting principles.
Identifying separate performance obligations (paragraphs 23–
30)
BC67.
Contracts with customers can contain many performance obligations. In
the Discussion Paper, the Boards proposed that an entity should refer to
the timing of the transfer of the promised goods or services to identify
the performance obligations that it should account for separately.
Respondents to the Discussion Paper were concerned that this
proposal would require an entity to account separately for every
promised good or service in a contract that is transferred at a different
time, which would not be practical for many contracts, especially for
long-term services and construction contracts. Consequently, in
developing both the 2010 proposed Update and this proposed Update,
the Boards’ intention was to develop clear guidance that would result in
an entity identifying separate performance obligations in a way that
would be both practical and result in a pattern of revenue recognition
that faithfully depicts the transfer of goods or services to the customer.
BC68.
During outreach activities on the Discussion Paper and on the 2010
proposed Update, the Boards observed that, for many contracts, it is
intuitive for an entity to identify the promised goods or services that the
entity should account for separately. Consequently, the Boards wanted
to develop a principle for identifying separate performance obligations
that would be intuitive when applied across the various industries and
transactions in the scope of the proposed guidance. That principle is the
notion of a good or service that is distinct. The term distinct, in an
ordinary sense, suggests something that is different, separate, or
dissimilar. However, to avoid the significant diversity in practice that
could result from the proposed guidance relying too heavily on the
judgment of an entity about whether a good or service is distinct, the
Boards decided to specify when a good or service is distinct.
BC69.
In the 2010 proposed Update, the Boards proposed that a good or
service is distinct if it is sold separately (by the entity or by another
entity) or if it could be sold separately. The Boards were concerned that
requiring an entity to account separately (and estimate a standalone
selling price) for a good or service that is not capable of being sold
separately might result in information that would not be useful to users
of financial statements. The Boards specified in the 2010 proposed
Update that a good or service must have both of the following attributes
to be capable of being sold separately:
(a)
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A distinct function (that is, the good or service must have utility
either on its own or together with other goods or services that the
(b)
customer has acquired from the entity or that are sold separately
by the entity or another entity)
A distinct profit margin (that is, the good or service must be
subject to distinct risks and the entity must be able to separately
identify the resources needed to provide the good or service).
BC70.
A majority of respondents to the 2010 proposed Update agreed with
using the principle of “distinct” to identify the separate performance
obligations in a contract. However, many respondents were still
concerned that applying the criteria for determining when a good or
service is distinct would not be practical and would result in an entity
unbundling a contract into components that are identified without
considering the economics of the transaction. Those concerns related
mainly to the proposal that a good or service is distinct if it is sold
separately by the entity or by another entity. Some respondents
commented that the experience of other entities, including entities that
operate in other markets or other jurisdictions, could be costly to obtain
and would not be relevant for determining whether an entity should
account separately for a promised good or service. In addition,
respondents were concerned that many construction- and productiontype contracts would be accounted for as many separate performance
obligations because each component of the contract is sold separately
(for example, by a subcontractor or by a supplier of building materials).
Respondents thought that not only would it be impractical for an entity to
account for those types of contracts as consisting of many performance
obligations, but doing so would not reflect the economics of those
transactions because the promised goods or services are highly
interrelated and interdependent (that is, each good or service in the
bundle is not distinct).
BC71.
Respondents to the 2010 proposed Update also raised some concerns
about the use of distinct function and distinct profit margin as attributes
of a distinct good or service. Respondents requested additional
guidance on the meaning of distinct function because they considered
that almost any element of a contract could have utility in combination
with other goods or services. Respondents also found the distinct profit
margin criterion to be confusing for the following reasons:
(a)
(b)
Entities may decide to assign the same margin to various goods
or services even though those goods or services use different
resources and are subject to different risks.
For some goods or services, especially for software and other
types of intellectual property, cost is not a significant factor in
determining price and, therefore, margins could be highly
variable because they may be determined by the customer’s
ability to pay or to obtain substitute goods or services from
another entity.
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BC72.
In the proposed Update, the Boards affirmed their 2010 proposal that an
entity should identify the separate performance obligations in a contract
on the basis of whether a promised good or service is distinct. However,
in response to the feedback on the 2010 proposed Update, the Boards
refined the criteria for determining when a good or service is distinct by
specifying:
(a)
(b)
The attributes that all goods or services must possess to be
capable of being distinct (see paragraph 28)
The attributes of goods or services that when promised together
(that is, as a bundle) are not distinct, even if the individual goods
or services otherwise would meet the criteria in paragraph 28
(see paragraph 29).
Attributes of a distinct good or service (paragraph 28)
BC73.
The Boards propose two criteria that would provide evidence that a
good or service is capable of being distinct. One criterion (in paragraph
28(b)) specifies that the “customer can benefit from the good or service
either on its own or together with other resources that are readily
available to the customer.” That criterion expands on the notion of a
distinct function in the 2010 proposed Update by clarifying that a good
or service is distinct if either of the following conditions is met:
(a)
(b)
BC74.
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The customer can benefit from the good or service on its own
(that is, the good or service is an asset that, on its own, can be
used, consumed, sold for an amount other than a scrap value,
held, or otherwise used in a way that generates economic
benefits).
The customer can benefit from the good or service when the
good or service is combined with other resources that are readily
available to the customer. Readily available resources are goods
or services that are sold separately (by the entity or by another
entity) or resources that the customer already has obtained (from
the entity or from other transactions or events).
The other criterion (in paragraph 28(a)) that “the entity regularly sells the
good or service separately” is a practical expedient for determining
whether a good or service would meet the criterion in paragraph 28(b).
That is because, in concept, any good or service that is sold separately
should be able to be used on its own or with other resources, otherwise
there would be no market for an entity to provide that good or service on
a standalone basis. The Boards decided to limit the scope of the
practical expedient to only the entity’s standalone sales because of
concerns raised previously by respondents that the experience of other
entities was not relevant for determining whether a good or service is
distinct.
BC75.
If a good or service is not distinct in accordance with the criteria in
paragraph 28, it is questionable whether it is an asset. Hence, the
Boards thought that requiring a good or service to be distinct would
emphasize that an entity can have a performance obligation only for
promises that, when fulfilled, would result in the transfer of an asset to
the customer.
BC76.
The proposed attributes of a distinct good or service are comparable to
the guidance on multiple-element arrangements in Subtopic 605-25,
which specifies that a delivered item have “value to the customer on a
standalone basis” for an entity to account for that item separately.
However, the Boards decided against using that terminology because it
could suggest that an entity must identify performance obligations on
the basis of an assessment of the customer’s intended use of the
promised goods or services, which would affect the “value to the
customer.” It would be difficult, if not impossible, for an entity to know
the customer’s intentions in any given contract. In addition, the Boards
noted that an item that has value to the customer on a standalone basis
is defined as an item that the customer could resell (even in a
hypothetical market). Therefore, the Boards decided not to carry forward
the terminology in Subtopic 605-25 as an additional criterion for
determining whether a good is distinct for the following reasons:
(a)
(b)
(c)
Nearly any item could be resold by the customer (although
possibly only for scrap value).
In some circumstances, an item may be distinct but the customer
may not have the ability to resell that item because of contractual
restrictions (for example, to protect the entity’s intellectual
property).
The ability to resell an item is included in the criterion in
paragraph 28(b), which considers a distinct good or service from
the perspective of whether the customer benefits from the good
or service on its own or together with other goods or services
that are readily available to the customer.
Bundles of goods or services (paragraph 29)
BC77.
The Boards decided that the criteria for a distinct good or service in
paragraph 28 are necessary to identify separate performance
obligations but they are not sufficient. In other words, an entity must
consider the attributes of an individual good or service but the entity
also must consider how that good or service is bundled with other goods
or services in a particular contract.
BC78.
During the redeliberations following the 2010 proposed Update, the
Boards observed that, in some cases, the individual goods or services
in a bundle might meet the criteria in paragraph 28, but those goods or
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services would not be distinct because of the way in which the goods or
services are bundled. In those cases, the risk that an entity assumes to
fulfill its obligation to transfer one of those promised goods or services
to the customer is a risk that is inseparable from the risks relating to the
transfer to the customer of the other promised goods or services in that
bundle. Hence, the Boards considered whether to specify “separable
risks” as an additional attribute of a distinct good or service. Although
the Boards considered that the existence of separable risks indicated
that a good or service is distinct, the Boards decided that, given the
feedback on the 2010 proposed Update, the concept of inseparable
risks may not be an intuitive or practical criterion for determining
whether a good or service is distinct. That is because it may be difficult
for an entity to determine which risks should be included in that
assessment. Instead, the Boards decided to develop the following
criteria to clearly identify the circumstances in which an entity promises
goods or services as a bundle and the goods or services are not
individually distinct because the risks of providing the bundle of goods
or services are largely inseparable:
(a)
(b)
BC79.
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“The goods or services in the bundle are highly interrelated and
transferring them to the customer requires that the entity also
provide a significant service of integrating the goods or services
into the combined item(s) for which the customer has contracted”
(see paragraph 29(a)).
“The bundle of goods or services is significantly modified or
customized to fulfill the contract” (see paragraph 29(b)).
Those criteria typically are met when an entity uses goods or services
as inputs into a single process or project that is the output of the
contract. A single process or project can comprise more than one
phase, element, or unit of output. The Boards developed the criterion
specified in paragraph 29(a) using feedback on the 2010 proposed
Update and suggestions from respondents (especially respondents from
the construction and manufacturing industries) that the standard should
include some of the discussion in the 2010 proposed Update’s basis for
conclusions on distinct profit margins. That discussion highlighted that,
in many construction contracts, the contractor provides an integration
service in addition to providing, or subcontracting for, goods or services
to complete individual construction tasks. That integration service
provided by the contractor is to manage and coordinate the various
construction tasks. Moreover, if a contractor employs subcontractors,
that service might also cover the risk that the tasks performed by the
subcontractors are not in accordance with the contract specifications
and do not combine with other services to provide the integrated
construction services for which the customer contracted. The Boards
added the criterion in paragraph 29(b) because without it there was a
risk that all contracts that include any type of integration service might
be deemed to be a single performance obligation even if the risk that
the entity assumes in integrating the promised goods or services is
negligible (for example, a simple installation of standard equipment).
BC80.
Although the criteria in paragraph 29 were developed in response to
feedback that was received largely from the construction industry, the
criteria are intended to apply to other industries and transactions with
similar features. For example, some software development contracts will
similarly have promised products and services that meet the criteria in
paragraph 29 and, hence, would be accounted for as a single
performance obligation.
Pattern of transfer (paragraph 30)
BC81.
In the 2010 proposed Update, the Boards proposed that an entity need
not account separately for goods or services if accounting for those
goods or services together would result in the same pattern of revenue
recognition. That guidance would apply if those goods or services are
transferred to the customer at the same point in time or if they are
transferred to the customer over the same period of time and the same
method of measuring progress is used to depict the transfer of goods or
services to the customer. The Boards decided to carry forward that
guidance in this proposed Update as a practical expedient when
identifying the separate performance obligations in a contract with a
customer. The practical expedient is intended to address the concerns
raised by some respondents that they frequently would have to identify
numerous performance obligations and account for them separately.
The Boards noted that, in at least some of the examples raised by
respondents, an entity would not need to account for those performance
obligations separately because the pattern of transfer would be the
same. For example, if an entity promises to provide professional
services for one year, each increment of service may meet the criteria
for being distinct. However, it is likely that an entity would account for
the services as a single performance obligation if the entity could select
a single method of measuring progress that appropriately depicts its
performance throughout the year.
Satisfaction of performance obligations (paragraphs 31–
47)
BC82.
In the proposed guidance, revenue would be recognized when (or as)
goods or services are transferred to a customer. That is because an
entity satisfies its performance obligation (that is, fulfills its promise to
the customer) by transferring the promised good or service underlying
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that performance obligation to the customer. Therefore, assessing when
a good or service is transferred is a critical step in applying the
proposed guidance.
Control
BC83.
Most existing revenue standards require an entity to assess the transfer
of a good or service by considering the transfer of risks and rewards of
ownership. However, the Boards decided that an entity should assess
the transfer of a good or service by considering when the customer
obtains control of that good or service for the following reasons:
(a)
(b)
(c)
BC84.
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Both goods and services are assets that a customer acquires
(even if many services are not recognized as an asset by the
customer because those services are simultaneously received
and consumed by the customer), and the Boards’ existing
definitions of an asset use control to determine when an asset is
recognized or derecognized.
Assessing the transfer of goods or services using control should
result in more consistent decisions about when goods or services
are transferred because it can be difficult for an entity to judge
whether a preponderance (or some other balance) of the risks
and rewards of ownership of a good or service has been
transferred to the customer if the entity retains some risks and
rewards.
A risks and rewards approach could conflict with identifying
separate performance obligations. For example, if an entity
transfers a product to a customer but retains some risks
associated with that product, an assessment based on risks and
rewards might result in the entity identifying a single performance
obligation that could be satisfied only after the risks are
eliminated. However, an assessment based on control might
appropriately identify two performance obligations—one for the
product and another for a remaining service such as a fixed-price
maintenance agreement. Those performance obligations would
be satisfied at different times.
Many respondents to the 2010 proposed Update agreed with using
control to determine when a good or service is transferred to a
customer. However, they indicated that the transfer of risks and rewards
of ownership is sometimes a helpful indicator that control has
transferred (see paragraph BC107).
Developing the notion of control
BC85.
The Boards developed a description of control for the proposed
guidance based on the meaning of control in the definitions of an asset
in the Boards’ respective conceptual frameworks. Thus, the Boards
determined that control of a promised good or service (that is, an asset)
is the customer’s ability to direct the use of and obtain substantially all of
the remaining benefits from the asset. Those components are explained
as follows:
(a)
(b)
(c)
BC86.
Ability—A customer must have the present right to direct the use
of and obtain substantially all the remaining benefits from an
asset for an entity to recognize revenue. For example, in a
contract that requires a manufacturer to produce an asset for a
particular customer, it might be clear that the customer ultimately
will have the right to direct the use of and obtain substantially all
the remaining benefits from the asset. However, the entity should
not recognize revenue until the customer has obtained that right
(which, depending on the contract, might occur during production
or afterwards).
Direct the use of—A customer’s ability to direct the use of an
asset refers to the customer’s right to deploy that asset in its
activities, to allow another entity to deploy that asset in its
activities, or to restrict another entity from deploying that asset.
Obtain the benefits from—The customer must have the ability to
obtain substantially all the remaining benefits from an asset for
the customer to obtain control of it. In concept, the benefits from
a good or service are potential cash flows (either an increase in
cash inflows or a decrease in cash outflows). An entity can
obtain the benefits directly or indirectly in many ways, such as by
using, consuming, disposing of, selling, exchanging, pledging, or
holding an asset.
The Boards observed that the assessment of when control has
transferred could be applied from the perspective of either the entity
selling the good or service or the customer purchasing the good or
service. Consequently, revenue could be recognized when the seller
surrenders control of a good or service or when the customer obtains
control of that good or service. Although in many cases both
perspectives lead to the same result, the Boards decided that control
should be assessed primarily from the perspective of the customer. That
perspective would minimize the risk of an entity recognizing revenue
from undertaking activities that do not coincide with the transfer of
goods or services to the customer.
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Applying the notion of control
BC87.
As discussed above, many respondents to the 2010 proposed Update
agreed with using control as the basis for assessing when the transfer
of a promised good or service (that is, an asset) occurs. Respondents
also acknowledged the progress made by the Boards since the
Discussion Paper in developing guidance for applying control to
contracts with customers. However, respondents stated that the
additional guidance for assessing the transfer of control proposed in the
2010 proposed Update was most helpful when applied to performance
obligations for the transfer of goods. They commented that applying the
concept of control is intuitive in those cases because, typically, it is clear
that an asset has transferred from the entity to its customer. But they
noted that the guidance was less intuitive and more difficult to apply to
performance obligations for services and construction-type contracts
because it could be difficult to determine when a customer obtains
control of a service. That is because in many service contracts the
service asset is simultaneously created and consumed and, therefore, it
is never recognized as an asset by the customer. And even in the case
of a construction contract in which there is a recognizable asset, it can
be difficult to assess whether a customer has the ability to direct the use
of and obtain substantially all the remaining benefits from a partially
completed asset that the seller is in the process of creating.
Consequently, many respondents in the construction industry were
concerned that they would be required to change their revenue
recognition policy from using a percentage-of-completion method to a
completed contract method (on the basis that the transfer of assets
occurs only upon transfer of legal title or physical possession of the
finished asset, which typically occurs upon contract completion).
BC88.
As a result, some respondents suggested that the Boards provide
guidance on the transfer of control of services separately from the
guidance for goods. The Boards decided that the notion of control
should apply equally to goods and services. However, to address
respondents’ concerns, the Boards decided to specify requirements that
would focus on the attribute of the timing of when a performance
obligation is satisfied (that is, when a good or service is transferred to a
customer). That is because it would be difficult to clearly define a
service and not all contracts that are commonly regarded as services
result in a transfer of resources to customers over time. Accordingly, the
proposed guidance includes criteria for determining whether a
performance obligation is satisfied over time.
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Performance obligations satisfied over time (paragraphs 35 and
36)
BC89.
The Boards developed the additional guidance in paragraph 35 of the
proposed Update to assist an entity in determining when goods or
services are transferred over time and, thus, when a performance
obligation is satisfied over time. That proposed guidance is divided into
two categories—one for when the entity’s performance creates or
enhances an asset of the customer and another for when the entity’s
performance does not create an asset with alternative use to the entity.
Performance creates or enhances an asset that the customer
controls as it is created (paragraph 35(a))
BC90.
The Boards decided that if an entity’s performance creates or enhances
an asset that the customer controls as the asset is created or enhanced,
the entity’s performance transfers goods or services to the customer.
Accordingly, in such cases a performance obligation is satisfied over
time as the entity creates or enhances that asset. For example, the
performance obligation is satisfied over time in many construction
contracts when the customer controls any work-in-process (tangible or
intangible) arising from the entity’s performance.
BC91.
This criterion is consistent with the proposed implementation guidance
in the 2010 proposed Update on determining whether a good or service
is transferred over time. That guidance stated that goods or services
would be transferred over time if the customer controls the work-inprocess as it is created. Many respondents to the 2010 proposed
Update agreed with that concept but thought it needed to be articulated
more prominently in the standard itself. In the Boards’ view, the concept
of control is similar to the basis for percentage-of-completion accounting
in accordance with paragraph 22 of AICPA Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts:
Under most contracts for construction of facilities,
production of goods, or provision of related services to a
buyer’s specifications, both the buyer and the seller
(contractor) obtain enforceable rights. The legal right of the
buyer to require specific performance of the contract means
that the contractor has, in effect, agreed to sell his rights to
work-in-progress as the work progresses. This view is
consistent with the contractor’s legal rights; he typically has no
ownership claim to the work-in-progress but has lien rights.
Furthermore, the contractor has the right to require the buyer,
under most financing arrangements, to make progress
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payments to support his ownership investment and to approve
the facilities constructed (or goods produced or services
performed) to date if they meet the contract requirements. The
buyer’s right to take over the work-in-progress at his option
(usually with a penalty) provides additional evidence to
support that view. Accordingly, the business activity taking
place supports the concept that in an economic sense
performance is, in effect, a continuous sale (transfer of
ownership rights) that occurs as the work progresses.
Performance does not create an asset with an alternative use
to the entity (paragraph 35(b))
BC92.
This second criterion was developed for performance obligations for
which it may not be clear whether any asset that is created or enhanced
is controlled by the customer or for which the entity’s performance does
not result in a recognizable asset.
BC93.
In developing this criterion, the Boards decided that it would be easier to
determine when the entity’s performance results in a transfer of goods
or services to the customer by first eliminating the circumstances in
which the entity’s performance would not result in a transfer of goods or
services to the customer. The Boards decided that an entity’s
performance would not result in a transfer of goods or services to the
customer if the entity’s performance creates an asset with an alternative
use to the entity. If an asset has an alternative use to an entity, the
entity could readily direct the asset to another customer. For instance, in
many cases an asset will have an alternative use because it is a
standard inventory-type item and the entity has discretion to substitute
the item across contracts with customers. Because the entity has
discretion to substitute the asset being created for a similar item, the
customer cannot control the asset.
BC94.
Conversely, if an entity creates an asset that is highly customized for a
particular customer, then the asset would be less likely to have an
alternative use because the entity likely would incur significant costs to
reconfigure the asset for sale to another customer (or would need to sell
the asset for a significantly reduced price). The Boards observed that
the level of customization might be a helpful factor to consider when
evaluating whether an asset has an alternative use. However, the
Boards decided that it should not be a determinative factor because, in
some cases (for example, some real estate, software, or some
manufacturing contracts), an asset might be standardized but yet still
might not have an alternative use to an entity as a result of contractual
or practical limitations that preclude the entity from readily directing the
asset to another customer. If a contract precludes the entity from
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transferring an asset to another customer, the entity does not have an
alternative use for that asset because it is legally obliged to direct the
asset to the customer.
BC95.
Having decided that a performance obligation can be satisfied over time
only if the entity’s performance does not create an asset with alternative
use to the entity, the Boards then developed the three additional criteria
in paragraph 35(b). The Boards decided that those criteria were
necessary to determine that control of the good or service transfers to
the customer over time as the entity performs and, hence, the
performance obligation is satisfied over time.
The customer simultaneously receives and consumes benefits
as the entity performs (paragraph 35(b)(i))
BC96.
In some cases in which an entity’s performance does not create an
asset with an alternative use to the entity, the customer simultaneously
receives a benefit and consumes that benefit as the entity performs. In
those cases, the entity is transferring goods or services as it performs,
thereby satisfying its performance obligation over time. For example,
consider an entity that promises to process transactions on behalf of a
customer. The entity’s processing of each transaction does not create
an asset with an alternative use to the entity and the customer
simultaneously receives and consumes a benefit as each transaction is
processed. Consequently, the entity would satisfy its performance
obligation over time as those transactions are processed for the
customer.
Another entity would not need to substantially reperform the
work completed to date (paragraph 35(b)(ii))
BC97.
In other cases in which the entity’s performance does not create an
asset with an alternative use to the entity, it is less clear that the
customer benefits from the entity’s performance as it occurs. To
address this issue, the second criterion would require an entity to
consider whether another entity would need to substantially reperform
the work completed to date to fulfill the remaining obligation. That is
because a customer must have benefited from the entity’s performance
completed to date (that is, received goods or services) if another entity
could simply fulfill the remaining obligation to the customer without
substantially reperforming the work completed to date. For example,
consider a freight logistics company that has an obligation to transport a
customer’s asset by road from Vancouver to New York. If the company
transports the asset halfway to its destination (or perhaps to a hub that
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may be further away from the asset’s destination), another company
could fulfill the remaining obligation to the customer without having to
reperform the transportation service provided to date.
BC98.
The Boards decided that when determining whether another entity
would need to reperform any work, it is important to disregard the
benefit of any assets related to the contract (for example, work-inprocess) that are controlled by the entity. For instance, in a construction
contract, another entity would not be able to fulfill the remaining
obligation without reperforming work completed to date if the entity
controls the work-in-process. It would be able to do so only if the
customer controls the work-in-process.
BC99.
In practice, there may be contractual or other constraints on an entity’s
ability to transfer a (partially satisfied) performance obligation to another
entity. However, the Boards decided that the application of this criterion
should not be constrained by contractual or practical limitations of
transferring the performance obligation because the objective is to
determine whether goods or services are transferred to the customer as
the entity performs.
The entity has a right to payment for performance completed
to date (paragraph 35(b)(iii))
BC100. For some performance obligations for which performance does not
create an asset with an alternative use to the entity, the criteria of a
“customer simultaneously receives and consumes the benefits” and
“another entity would not need to substantially reperform” will not help
the entity in determining whether its performance transfers goods or
services over time. To address these circumstances, the Boards
decided that the entity should consider whether it has a right to payment
for performance completed to date. The Boards decided that if an
entity’s performance completed to date does not create an asset with an
alternative use to the entity (for example, an asset that could readily be
directed to another customer) and the customer is obliged to pay for that
performance to date, then the customer could be regarded as receiving
the benefit from that performance.
BC101. In using the term right to payment, the Boards mean a payment that is
intended to compensate an entity for its performance completed to date
rather than, for example, payment for a deposit or to compensate the
entity for inconvenience or loss of profit. Accordingly, an entity would not
have a right to payment for its performance completed to date if the
entity could recover only compensation from the customer for a loss of
profit that would occur as a result of the customer terminating the
contract and the entity incurring significant rework costs to be able to
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redirect the asset to another customer. In addition, the Boards do not
mean that the entity must have a present unconditional right to
payment. In many cases, an entity will have that right only at an agreedupon milestone or on complete satisfaction of the performance
obligation. Therefore, in assessing whether it has that right, the entity
should consider whether it is entitled to payment for performance
completed to date, assuming that it will fulfill the remaining performance
obligation(s) (unless it does not expect to fulfill the contract as promised,
in which case the entity may not be entitled to payment for performance
completed to date).
BC102. For example, consider a consulting contract in which the consulting
entity agrees to provide a report at the end of the contract for an amount
that is conditional on successfully providing that report. If the entity is
performing under that contract, it would have a right to payment if the
terms of the contract (or the contract law in the entity’s jurisdiction)
require the customer to compensate the entity for its work completed to
date if the customer terminated the contract.
BC103. In the proposed guidance for determining when a performance
obligation is satisfied over time, the Boards decided that the criterion of
whether an entity has a right to payment for performance completed to
date was necessary only in cases in which the entity’s performance
does not create an asset with an alternative use to the entity and neither
of the criteria in paragraphs 35(b)(i) or (ii) is met. The Boards
considered whether they should specify a right to payment for
performance completed to date as a more overarching criterion in
determining when a performance obligation is satisfied. However, they
decided against this for the following reasons:
(a)
(b)
(c)
(d)
An entity must have a contract to recognize revenue in
accordance with the proposed guidance, and a component of a
contract is a right to payment.
The core revenue recognition principle is about determining
whether goods or services have been transferred to a customer,
not whether the entity has a right to payment. Including a right to
payment as an overarching criterion could potentially obscure
that revenue recognition principle.
A right to payment does not necessarily determine a transfer of
goods or services (for example, in some contracts, customers
are required to make nonrefundable upfront payments and do
not receive any goods or services in exchange).
In cases in which the customer clearly receives benefits as the
entity performs, as in many service contracts, the possibility that
the entity will not ultimately retain the payment for its
performance is dealt with in measuring revenue. For example, in
some service contracts that would meet the combination of the
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criteria in paragraph 35(b) and paragraphs 35(b)(i) or (ii), the
customer may be able to terminate the contract and receive a full
refund of its consideration. In such cases, the Boards decided
that because the entity is transferring services to the customer, it
should recognize revenue subject to being reasonably assured of
being entitled to the consideration.
Performance obligations satisfied at a point in time (paragraph
37)
BC104. The Boards decided that all performance obligations that do not meet
the criteria for being satisfied over time should be accounted for as
performance obligations satisfied at a point in time. For performance
obligations satisfied at a point in time, an entity should apply the
indicators of control to determine the point in time when the
performance obligation is satisfied.
BC105. The 2010 proposed Update included indicators to assist an entity in
determining when the customer obtains control of a good or service.
Because many respondents commented that this guidance was useful
for contracts for the sales of goods, the Boards decided to carry forward
those indicators to assist an entity in determining when it has
transferred control of an asset (whether tangible or intangible), with
some amendments for clarification.
BC106. Some respondents to the 2010 proposed Update questioned whether all
of the indicators would need to be present for an entity to conclude that
it had transferred control of a good or service or what an entity should
do if some but not all of the indicators were present. In their
redeliberations, the Boards emphasized that the guidance in paragraph
37 is not a checklist. Rather, it is a list of factors that are often present
when a customer has control of an asset and is provided to assist
entities in applying the principle of control in paragraph 31.
BC107. In the proposed guidance, the Boards added the indicator “the customer
has the significant risks and rewards of ownership of the asset” in light
of comments from respondents who disagreed with the Boards’
proposal to eliminate considerations of the “risks and rewards of
ownership” from the recognition of revenue. Respondents observed that
risks and rewards can be a helpful factor to consider when determining
the transfer of control, as highlighted by the IASB in IFRS 10,
Consolidated Financial Statements, and is often a consequence of
controlling an asset. The Boards decided that adding risks and rewards
as an indicator would provide additional guidance but would not change
the principle of determining the transfer of goods or services on the
basis of the transfer of control.
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BC108. The Boards also added the indicator “the customer has accepted the
asset.” The 2010 proposed Update included that notion as
implementation guidance; however, the Boards decided to relocate that
guidance to the indicators of control in this proposed Update.
BC109. Many respondents to the 2010 proposed Update were concerned about
the application of the indicator that the “design or function of the good or
service is customer-specific” (which was proposed in paragraph 30(d) of
the 2010 exposure draft). For many, it was not clear how the indicator
related to the objective of determining the transfer of control because
the customer might clearly control an asset even though the design or
function of that asset is not customer-specific. Conversely, a customer
might not control an asset with a customer-specific design or function.
The Boards noted that because the indicator had been developed
mainly for service contracts, that indicator would not be necessary if
separate guidance were developed for determining when performance
obligations are satisfied over time. Thus, the Boards decided to
eliminate this as an indicator of control. As described in paragraph
BC94, the notion of customer-specific design or function has been
developed into the criterion of “an asset with no alternative use to the
entity.”
BC110. Respondents to the 2010 proposed Update also suggested additional
conditions such as the entity’s lack of continuing involvement (for
example, a call option on a delivered good). The Boards have included
implementation guidance to help an entity assess the transfer of control
in those circumstances.
IFRIC 15, Agreements for the Construction of Real Estate
BC111. In developing the proposed requirements for assessing when goods or
services transfer to the customer, the Boards considered the diversity in
practice from applying IFRIC 15, Agreements for the Construction of
Real Estate. That diversity in practice results from the difficulty in
determining when control of a good transfers to the customer over time
by applying the recognition criteria in paragraph 14 of IAS 18 to complex
contracts with different facts and circumstances. The Boards observe
that this diversity in practice is consistent with the feedback received on
the proposals in the 2010 proposed Update on determining when
control of a good or service transfers over time.
BC112. The Boards envisage that the diversity in practice should be reduced by
the proposed guidance in paragraphs 35 and 36 that clarifies when
goods or services transfer over time. However, the Boards observe that
the pattern of transfer may be different for different contracts because
the pattern of transfer will depend on the relevant facts and
circumstances of each contract. For example, some real estate
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contracts may result in an asset that cannot (under the terms of the
contract) be readily directed to another customer (that is, the entity’s
performance does not create an asset with an alternative use to the
entity), and the contract requires the customer to pay for performance to
date (thus meeting the criteria in paragraphs 35(b) and (b)(iii)).
However, many of those real estate contracts that do not create an
asset with an alternative use to the entity may not require the customer
to pay for performance to date. Thus, for those contracts, an entity may
reach a different conclusion on the pattern of transfer.
Measuring progress (paragraphs 38–48)
BC113. When an entity determines that a separate performance obligation is
satisfied over time, the entity must determine how much revenue to
recognize in each reporting period by measuring its progress toward
complete satisfaction of the performance obligation.
BC114. There are various methods that an entity might use to measure its
progress toward complete satisfaction of a performance obligation.
Because of the breadth of the scope of the proposed guidance, the
Boards decided that it would not be feasible to consider all possible
methods and prescribe when an entity should use each method.
Accordingly, an entity should use judgment when selecting an
appropriate method of measuring progress. That does not mean that an
entity has a “free choice.” The proposed guidance states that an entity
should select a method of measuring progress that is consistent with the
clearly stated objective of depicting the transfer of goods or services to
the customer (that is, the entity’s performance).
BC115. Furthermore, an entity should apply the selected method consistently for
that performance obligation and also across contracts that have
performance obligations with similar characteristics. The Boards
decided that an entity should not use different methods to measure its
performance in satisfying the same or similar performance obligations
because that could reduce comparability. Moreover, an entity would
effectively bypass the guidance for identifying separate performance
obligations and allocating the transaction price to those performance
obligations on the basis of standalone selling prices if the entity were to
use more than one method to measure its performance in fulfilling a
performance obligation. That is because the entity would need to
identify subcomponents of a performance obligation to which the
different measures of performance relate and to allocate a portion of the
transaction price to those subcomponents on a basis other than
standalone selling prices. A different basis of allocation would be
required because, by virtue of those subcomponents not being distinct
goods or services, those subcomponents would not be capable of being
sold as standalone goods or services.
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BC116. The proposals in paragraphs 38–48 carry forward some of the
proposals in the 2010 proposed Update. However, in light of feedback
received, the Boards have clarified and expanded that guidance as
explained below.
Output methods (paragraphs 41–43)
BC117. Consistent with existing guidance, the Boards explained in the 2010
proposed Update that output methods often result in the most faithful
depiction of the transfer of goods or services to a customer. Some
respondents agreed with that proposal in concept but thought that the
2010 proposed Update did not sufficiently describe the advantages and
disadvantages of output and input methods. In addition, some thought
that the 2010 proposed Update was too biased toward output methods
and asked the Boards to remove the stated preference for output
methods.
BC118. In redeliberating the proposals, the Boards affirmed that, conceptually,
an output measure is the most faithful depiction of an entity’s
performance because it directly measures the value of the goods or
services transferred to the customer. The Boards noted that the
description of output methods in the 2010 proposed Update implied that
recognizing revenue using “units of delivery” and “contract milestone”
methods would always be superior methods of recognizing revenue for
performance obligations satisfied over time compared with input
methods. However, the Boards observe that such methods may not
always result in appropriate depictions of the entity’s performance over
time. For example, a “units of delivery” method may be an appropriate
method for a long-term manufacturing contract of standard items that
individually transfer an equal amount of value to the customer.
However, a “units of delivery” method may not be appropriate if the
contract provides both design and production services because in this
case each item produced may not transfer an equal amount of value to
the customer. Accordingly, in the proposed guidance, the Boards have
clarified the description of an output measure and explained that “units
of delivery” and “contract milestones” are examples of output measures.
BC119. The Boards have also clarified that, in some circumstances, another
output method would be to recognize revenue at the amount of
consideration to which the entity has a right to invoice. This method
would be appropriate if the amount of consideration that the entity has a
right to invoice corresponds directly with the value of each incremental
good or service that the entity transfers to the customer (that is, the
entity’s performance to date). This may occur, for example, in a services
contract in which an entity invoices a fixed amount for each hour of
service provided.
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BC120. The Boards also acknowledged that, in some circumstances, an output
method can be unnecessarily costly for an entity to apply. Therefore, in
those situations, it would be appropriate for an entity to select an input
method to measure its progress provided that an input method is a
reliable proxy of the outputs to the customer.
Input methods (paragraphs 44–46)
BC121. In some contracts, an entity promises to transfer both goods and
services to the customer, and the customer takes control of the goods,
which are a significant part of the performance obligation, at a different
time from the services (for example, the customer obtains control of the
goods before they are installed). If those goods and services are not
distinct, then the entity would have a single performance obligation.
Because there is diversity in practice about how to apply an input
method to measure progress in such situations, the Boards decided to
provide additional guidance.
BC122. The Boards observed that if the customer obtains control of the goods,
then it would be inappropriate for the entity to continue to recognize the
goods as inventory. Instead, the entity should recognize revenue for the
transferred goods in accordance with the core principle of the proposed
guidance. The Boards also observed that if the entity applies a cost-tocost method of measuring progress, the entity might (absent clear
requirements in the proposed guidance) include the cost of the goods in
the cost-to-cost calculation and, hence, recognize a contract-wide profit
margin for the transfer of the goods. The Boards thought that
recognizing a contract-wide profit margin before the goods are installed
could overstate the measure of the entity’s performance. Alternatively,
requiring an entity to estimate a margin that is different from the
contract-wide margin could be complex and could effectively create a
separate performance obligation for goods that are not distinct (thus
bypassing the guidance for identifying separate performance
obligations). Hence, the Boards decided that, in specified
circumstances, an entity should recognize revenue for the transfer of
the goods but only in an amount equal to the cost of those goods. In
those circumstances, an entity would exclude the costs of the goods in
the cost-to-cost calculation and recognize the margin on the transferred
goods as the entity satisfies its single separate performance obligation.
Reasonable measures of progress (paragraphs 47 and 48)
BC123. The Boards clarified that when selecting a method to measure progress
and, thus, determining when to recognize revenue, an entity should
recognize revenue for its performance only if it can reasonably measure
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its progress toward complete satisfaction of the performance obligation.
However, in cases in which an entity cannot reasonably measure its
progress but the entity expects to recover the costs incurred in
satisfying the performance obligation, the Boards thought that the entity
should recognize at least some amount of revenue to reflect the fact
that it is making progress in satisfying the performance obligation.
Therefore, in these cases, the Boards decided that an entity should
recognize revenue for the satisfaction of the performance obligation only
to the extent of the costs incurred. (That method is consistent with
existing guidance on measuring progress in Subtopic 605-35 and IASs
11 and 18.) However, the Boards also decided that an entity would stop
using that method when it can reasonably measure its progress toward
complete satisfaction of the performance obligation or when the
performance obligation becomes onerous.
Measurement of revenue (paragraphs 49–67)
BC124. In their redeliberations, the Boards affirmed the proposal in the 2010
proposed Update to measure revenue based on an allocated
transaction price approach. Under that approach, an entity would
allocate the transaction price to each separate performance obligation
at an amount that depicts the amount of consideration to which the
entity expects to be entitled in exchange for satisfying each separate
performance obligation. That allocation would determine the amount of
revenue that an entity recognizes when (or as) it satisfies each
performance obligation. Most respondents to the Discussion Paper and
the 2010 proposed Update supported the allocated transaction price
approach.
BC125. The Boards considered, but rejected, an alternative measurement
approach, which would have been to measure the remaining
performance obligations directly at each reporting date. The Boards
observed that this alternative would make accounting for the contract
more complex. In addition, the Boards expected that it would provide
little additional information to users of financial statements in many
cases, either because the values of goods or services promised are not
inherently volatile or because the effect of any volatility that might exist
is limited because an entity transfers the goods or services to the
customer over a relatively short time. Paragraphs BC26–BC28 include
additional discussion on rejected measurement approaches.
BC126. The allocated transaction price approach generally would require an
entity to follow three main steps to determine the amount of revenue
that can be recognized for satisfied performance obligations. Those
steps are as follows:
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(a)
(b)
(c)
Determine the transaction price for the contract
Allocate the transaction price to separate performance
obligations
Recognize revenue at the amount allocated to the satisfied
performance obligation. When the amount of consideration to
which an entity expects to be entitled is variable, the cumulative
amount of revenue recognized should not exceed the amount to
which the entity is reasonably assured to be entitled.
Determining the transaction price (paragraphs 50–67)
BC127. Determining the transaction price is an important step in the revenue
recognition model because the transaction price is the amount that an
entity allocates to the separate performance obligations in a contract
(that is, for a contract with more than one performance obligation). The
transaction price is also an input to the onerous test (see paragraphs
BC204–BC216).
BC128. The Boards decided to define the transaction price as the amount of
consideration that an entity expects to be entitled to receive in exchange
for transferring goods or services. Therefore, the objective in
determining the transaction price at each reporting date is to predict the
total amount of consideration that the entity will be entitled to receive
from the contract.
BC129. In light of feedback on the 2010 proposed Update, the Boards clarified
that the transaction price would include only amounts (including variable
amounts) to which the entity has rights under the present contract. For
example, the transaction price does not include estimates of
consideration from (a) the future exercise of options for additional goods
or services or (b) future change orders. Until the customer exercises the
option or agrees to the change order, the entity does not have a right to
consideration. Additionally, the Boards observed that in some industries
(for example, the healthcare industry), there may be a difference
between the contractually stated price for a good or service (for
example, a list price) and the amount of consideration to which the
entity expects to be entitled in accordance with its customary business
practice of accepting a reduced amount of consideration as payment in
full from customers (or a class of customers).
BC130. Determining the transaction price when a customer promises to pay a
fixed amount of cash consideration will be simple. However, determining
the transaction price may be more difficult in the following cases:
(a)
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The promised amount of consideration is variable (paragraphs
BC131–BC142).
(b)
(c)
(d)
The contract has a financing component that is significant to the
contract (that is, time value of money, paragraphs BC143–
BC156).
The promised amount of consideration is in a form other than
cash (that is, noncash consideration, paragraphs BC157–
BC158).
There is consideration payable to the customer (paragraphs
BC159–BC162).
Variable consideration (paragraphs 53–57)
BC131. The 2010 proposed Update proposed that when the consideration in a
contract is variable, an entity should measure the transaction price (at
its expected value) using a probability weighted method. A probability
weighted method reflects the full range of possible consideration
amounts, weighted by their respective probabilities.
BC132. Many respondents to the 2010 proposed Update disagreed with
measuring the transaction price using a probability weighted method
because they thought it would:
(a)
(b)
Be complex and costly to apply.
Not generate meaningful results in all circumstances because,
for example, it could result in an entity determining the
transaction price at an amount of consideration that the entity
could never obtain under the contract.
BC133. Some respondents suggested that the Boards not specify a
measurement model and instead require that the transaction price be
determined using “management’s best estimate.” Many thought this
would provide management with the flexibility to make an estimate on
the basis of its experience and available information, without the
documentation that would be required when a measurement model is
specified.
BC134. In their redeliberations, the Boards first affirmed their decision in the
2010 proposed Update to specify an objective and appropriate
measurement method(s) for estimating the transaction price. This is
because specifying an objective and measurement methods would
provide the necessary framework to ensure rigor in the process of
estimation. Furthermore, without such a framework, the measurement of
revenue might not be understandable to users and might lack
comparability between entities.
BC135. However, the Boards then reconsidered the measurement model in the
proposed guidance. They noted that a probability weighted method
reflects all of the uncertainties existing in the transaction price at the
reporting date. Therefore, it best reflects the conditions that are present
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at each reporting date. For instance, it reflects the possibility of
receiving a greater amount of consideration as well as the risk of
receiving a lesser amount. However, in redeliberations, the Boards
observed that users are most interested in knowing the total amount of
consideration that ultimately will be realized from the contract.
Therefore, the Boards decided that for the estimate of the transaction
price to be meaningful at each reporting date, it should be an amount
that the entity expects to better predict the amount of consideration to
which it will be entitled.
BC136. The Boards observed that, in some cases, a probability weighted
estimate (that is, an expected value) is predictive of the amount of
consideration to which an entity will be entitled. For example, that is
likely to be the case if the entity has a large number of contracts with
similar characteristics. However, the Boards agreed with respondents
that an expected value may not always be predictive of the
consideration to which an entity will be entitled. For example, if the
entity is certain to receive one of only two possible consideration
amounts, the expected value would not be a possible outcome in
accordance with the contract. The Boards decided that in those cases,
another method, the most likely method, would be necessary to
estimate the transaction price. That is because the most likely method
identifies the individual amount of consideration in the range of possible
consideration amounts that is more likely to occur than any other
individual outcome.
BC137. Therefore, the Boards decided to specify that an entity should estimate
either the expected value or most likely amount to estimate the
transaction price, depending on which method the entity expects will
better predict the amount of consideration to which the entity will be
entitled.
BC138. Although in theory, an entity using the most likely method must consider
all the possible outcomes to identify the most likely one, in practice,
there is no need to quantify the less probable outcomes. Similarly, in
practice, estimating the expected value using a probability weighted
method does not require an entity to consider all possible outcomes
using complex models and techniques, even if an entity has extensive
data and can identify many outcomes. In many cases, a limited number
of discrete outcomes and probabilities can often provide a reasonable
estimate of the distribution of possible outcomes. Therefore, the Boards
decided that neither of the two approaches should be too costly or
complex to apply.
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Subsequent changes in the transaction price
BC139. After contract inception, an entity revises its expectations about the
amount of consideration to which it expects to be entitled as
uncertainties are resolved or as new information about remaining
uncertainties becomes available. To depict conditions that exist at each
reporting date (and changes in conditions during the reporting period),
the Boards decided that an entity should update its estimate of the
transaction price throughout the contract. The Boards believe that
reflecting current assessments of the amount of consideration to which
the entity expects to be entitled would provide more useful information
to users than retaining the initial estimates, especially for long-term
contracts that are subject to significant changes in conditions during the
life of the contract.
BC140. The Boards considered whether, if the transaction price changes during
a contract, an entity should:
(a)
(b)
Recognize those changes in profit or loss when those changes
occur.
Allocate those changes to performance obligations.
BC141. The Boards rejected the alternative of recognizing the entire amount of
a change in the estimate of the transaction price in profit or loss when
that change occurs. In the Boards’ view, that alternative could result in a
pattern of revenue recognition that does not faithfully depict the pattern
of the transfer of goods or services. Moreover, recognizing revenue
immediately (and entirely) for a change in the estimate of the
transaction price would be prone to abuse in practice. The Boards
considered whether changes in the estimate of the transaction price
could be presented as a gain or loss separately from revenue, thus
preserving the pattern of revenue recognition. However, the Boards
rejected that alternative because the total amount of revenue
recognized for the contract would not equal the amount of consideration
to which the entity was entitled under the contract.
BC142. Instead, the Boards decided that an entity should allocate a change in
the transaction price to all the performance obligations in the contract,
subject to the conditions in paragraph 76 of the proposed guidance
(discussed further in paragraphs BC186–BC189 and BC192). That is
because the cumulative revenue recognized would then depict the
revenue that the entity would have recognized if, at contract inception, it
had had the information that was available at the subsequent reporting
date. Consequently, the transaction price that is allocated to
performance obligations that already have been satisfied would be
recognized as revenue (or as a reduction to revenue) immediately.
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Time value of money (paragraphs 58–62)
BC143. Some contracts with customers include a financing component. The
financing component may be explicitly identified in the contract or may
be implied by the payment terms of the contract.
BC144. Paragraph 58 of the proposed guidance specifies that an entity should
account for the effects of the time value of money in a contract with a
customer only if that contract includes a financing component that is
significant to the contract. A contract has a financing component if the
promised amount of consideration differs from the cash-selling price of
the promised goods or services. In that case, the transaction price
would be calculated as the nominal amount of customer consideration
adjusted for the effects of the time value of money. The transaction
price would be allocated to the performance obligations in the contract
and, when a performance obligation is satisfied, the amount of revenue
recognized would be the amount of the transaction price adjusted for
the financing—in effect, the “cash selling price” of the underlying good
or service at the time the good or service is transferred. The Boards
noted that for some types of goods or services, such as prepaid phone
cards and customer loyalty points, the customer will pay for those goods
or services in advance, and the transfer of those goods or services to
the customer is at the discretion of the customer. Consequently, in
those cases, the Boards expect that those contracts would not include a
financing component that is significant because, on an individual
contract basis, the entity does not know when the goods or services will
transfer to the customer.
BC145. The Boards decided that an entity should account for the effects of the
time value of money if a contract has a financing component that is
significant for the following reasons:
(a)
(b)
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Entities are not indifferent to the timing of the cash flows in a
contract. Therefore, reflecting the time value of money portrays
an important economic feature of the contract. A contract in
which the customer pays for a good or service when that good or
service is transferred to the customer is different from a contract
in which the customer pays significantly before or after the good
or service is transferred.
Not recognizing the financing component could misrepresent the
profit of a contract. For example, if a customer pays in arrears,
ignoring the financing component of the contract would result in
full profit recognition on the transfer of the good or service,
despite the ongoing cost to the entity of providing financing to the
customer.
(c)
Contracts with explicitly identified financing components would
be accounted for consistently with contracts in which the
financing component is implicit in the contract price.
BC146. For many contracts, an entity would not need to adjust the amount of
customer consideration because the effects of the time value of money
would not materially change the amount of revenue that should be
recognized in relation to a contract with a customer. In other words, for
those contracts, the financing component would not be significant.
During their redeliberations, the Boards clarified that an entity would
only need to consider the significance of a financing component at a
contract level, rather than whether the financing is material at a portfolio
level. The Boards decided that it would be unduly burdensome to
require an entity to account for a financing component if the effects of
the time value of money are not material to the individual contract but
the combined time value of money effect for a portfolio of similar
contracts would be material to the entity as a whole.
BC147. During their redeliberations, the Boards also clarified when a financing
component is significant to the contract. The 2010 proposed Update
suggested that a financing component that is significant to the contract
would arise whenever payment is due either significantly before or
significantly after the transfer of goods or services to the customers.
However, in light of responses to the 2010 proposed Update, the
Boards agreed that the length of time between performance and
payment should not necessarily be the only factor that determines
whether a contract includes a financing component that is significant.
Instead, the Boards identified other factors (listed in paragraph 59) that
indicate that a contract has a financing component that is significant.
One of those factors refers to the typical credit terms in an industry and
jurisdiction because, in some circumstances, a payment in advance or
in arrears in accordance with the typical payment terms of an industry or
jurisdiction may have a primary purpose other than financing. For
example, a customer may retain or withhold an amount of consideration
that is payable only on successful completion of the contract or on
achievement of a specified milestone. The purpose of such payment
terms may be primarily to provide the customer with assurance that the
entity will satisfactorily complete their obligations under the contract,
rather than to provide financing to the customer. Consequently, the
effects of the time value of money may not be significant in those
circumstances.
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Exceptions to accounting for the effects of the time value of
money
BC148. Some existing standards require an entity to recognize the effects of
financing only if the time period exceeds a specified period, often one
year. For example, paragraph 835-30-15-3 excludes those “transactions
with customers or suppliers in the normal course of business that are
due in customary trade terms not exceeding approximately one year.”
The Boards decided to include similar relief from the requirement to
account for a financing component that is significant to the contract. The
Boards noted that the relief could produce arbitrary outcomes in some
cases because the time value of money could be material for short-term
contracts with high implicit interest rates and, conversely, may be
immaterial for long-term contracts with low implicit interest rates.
However, the Boards were persuaded to exempt entities from
accounting for the effects of the time value of money on contracts with
an expected duration of one year or less for the following reasons:
(a)
(b)
Compliance with the revenue standard would be simplified. This
is because an entity would not be required to:
(i)
Conclude whether those contracts contain the attributes
of a financing component that is significant to the contract
(as outlined in paragraphs BC146 and BC147 above).
(ii)
Determine the interest rate that is implicit within those
contracts.
The effect on the pattern of profit recognition should be limited
because the exemption includes only those implicit financing
arrangements that are expected to expire no later than during the
following annual reporting period (that is, when either the
customer pays or the entity performs).
BC149. Some respondents also suggested that the Boards should exempt an
entity from reflecting in the measurement of the transaction price the
effects of the time value of money associated with advance payments
from customers. Those respondents commented that accounting for any
effects of the time value of money arising from advance payments
would:
(a)
(b)
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Represent a change from existing practices in which an entity
typically does not recognize the time value of money implicit in
advance payments.
“Gross up” revenue (for example, if the discount rate implicit in
the contract resulted in the accretion of interest of $21 over 2
years, revenue would be recognized at the amount of the $121
rather than the $100 paid in advance).
(c)
Not reflect the economics of the arrangement when the customer
pays in advance for reasons other than financing (for example,
the customer is a credit risk or is compensating the entity for
incurring upfront contract costs).
BC150. The Boards decided not to exempt entities from accounting for the time
value of money effects of advance payments because ignoring the time
value of money effects of advance payments could substantially skew
the amount and pattern of profit recognition if the advance payment is
large and occurs well in advance of the transfer of the goods or services
to the customer.
Discount rate
BC151. The Boards considered whether the discount rate used to reflect the
financing should be the risk-free rate or a risk-adjusted rate. A risk-free
rate would be observable and simple to apply, and it would avoid the
costs of determining a rate specific to each contract. However, the
Boards decided that using the risk-free rate would not result in useful
information because the resulting interest rate would not reflect the
characteristics of the parties to the contract. In addition, the Boards
noted that it would not necessarily be appropriate to use any rate
explicitly specified in the contract because the entity might offer “cheap”
financing as a marketing incentive and, hence, using that rate would not
result in an appropriate recognition of profit over the life of the contract.
Therefore, the Boards decided that an entity should use the rate that
would be used in a financing transaction between the entity and its
customer that did not involve the provision of goods or services,
because that rate would reflect the characteristics of the party receiving
financing in the contract. That rate also would reflect the customer’s
creditworthiness, among other risks.
BC152. Some respondents to the 2010 proposed Update mentioned that
determining the discount rate that would be used in a separate financing
between an entity and the customer would be difficult and costly
because most entities within the scope of the revenue standard do not
enter into separate financing transactions with their customers. In
addition, it would be impractical for entities with large volumes of
customer contracts to determine a discount rate specifically for each
individual customer.
BC153. In many cases, the Boards expect that those concerns would be
addressed because the one-year exemption would apply. For those
remaining contracts in which the entity is required to account separately
for the financing component, the Boards expect that the entity and the
customer would typically negotiate the contractual payment terms
separately after considering factors such as inflation rates and the
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customer’s credit risk. Hence, an entity should have access to sufficient
information to determine the discount rate that would be used in a
separate financing between an entity and the customer.
Reevaluation of the effects of the time value of money
BC154. The 2010 proposed Update did not specify whether an entity should
reevaluate the effects of the time value of money after the initial
measurement of the transaction price. However, some respondents
questioned whether an entity would be required to revise that
measurement for a change in circumstances.
BC155. The Boards clarified that an entity should not update the discount rate
for a change in circumstances because they decided that an entity
should reflect in the measurement of the transaction price only the
discount rate that is implicit in the contract at contract inception. They
also observed that it would be impractical for an entity to update the
transaction price for changes in the assessment of the discount rate.
However, the Boards noted that an entity would reevaluate the effects of
the time value of money when there is a change in the estimated timing
of the transfer of goods or services to the customer.
Presentation of the effects of the time value of money
BC156. The Boards decided that an entity should present the effects of the
financing (that is, the unwinding of the discount) separately from
revenue as interest income or interest expense, rather than as a change
to the measurement of revenue. That is because contracts with
financing components that are significant have distinct economic
characteristics—one relating to the transfer of goods or services to the
customer and another relating to a financing arrangement—and those
characteristics should be accounted for and presented separately.
Noncash consideration (paragraphs 63 and 64)
BC157. When an entity receives cash from a customer upon delivery of a good
or service, the transaction price and, hence, the amount of revenue, is
the amount of cash received—that is, the value of the inbound asset. To
be consistent with that approach when the customer pays noncash
consideration (for example, goods or services), the Boards decided that
the entity also should measure noncash consideration (or promises of
noncash consideration) at fair value.
BC158. The Boards decided that if an entity cannot reasonably estimate the fair
value of the noncash consideration, it should measure the promised
consideration indirectly by reference to the selling price of the goods or
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services promised in exchange for the consideration. That approach is
consistent both with requirements in some existing revenue standards
(for example, IAS 18) and with requirements for other situations in which
the fair value of the assets surrendered in exchange for assets received
may be estimated more reliably (for instance, IFRS 2, Share-based
Payment, and Section 505-50-30 on the initial measurement of equitybased payments to nonemployees state that if the fair value of the
goods or services received cannot be estimated reliably, then the entity
measures them indirectly by reference to the fair value of the granted
equity instrument).
Consideration payable to the customer (paragraphs 65–67)
BC159. In some cases, an entity pays consideration to one of its customers or
to other parties that purchase the entity’s goods or services from its
customers (for example, an entity may sell a product to a dealer or
distributor and subsequently make a payment to a customer of that
dealer or distributor). That consideration might be a payment in
exchange for goods or services received from the customer, a discount
or refund for goods or services provided to the customer, or a
combination of both.
BC160. To help an entity distinguish between those types of payments, the
Boards decided that an entity should account for any good or service
received in the same way as for other purchases from suppliers only if
the good or service is distinct, using the same criteria proposed to
identify a separate performance obligation. Existing guidance in U.S.
GAAP (Section 605-50-45) on vendor’s consideration given to a
customer uses the term identifiable benefit, which is described as a
good or service that is “sufficiently separable from the recipient’s
purchase of the vendor’s products such that the vendor could have
entered into an exchange transaction with a party other than a
purchaser of its products or services in order to receive that benefit”
(paragraph 605-50-45-2). The Boards think that the principle in the
proposed guidance for assessing whether a good or service is distinct is
similar to the existing guidance in U.S. GAAP.
BC161. Regardless of whether they are separate events, the amount of
consideration received from the customer for goods or services and any
payment of consideration to that customer for goods or services could
be linked. For instance, a customer may pay more for goods or services
from the entity than it otherwise would have paid if it was not receiving a
payment from the entity. Therefore, to depict revenue faithfully in such
cases, the Boards decided that any amount accounted for as a payment
to the customer for goods or services received should be limited to the
fair value of those goods or services, with any amount in excess of the
fair value recognized as a reduction to the transaction price.
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BC162. If the payment of consideration is accounted for as a reduction of the
transaction price, the entity would recognize less revenue when it
satisfies the related performance obligation(s). However, in some cases,
an entity promises to pay consideration to a customer only after the
entity has satisfied the performance obligation and, hence, after it has
recognized revenue. Accordingly, the Boards propose clarifying that the
reduction to revenue is recognized at the later of when the entity
transfers the goods or services to the customer or when the entity
promises to pay the consideration. By using the phrase promises to pay,
the Boards intend to clarify that an entity should reflect in the transaction
price payments to customers that are conditional on future events (for
example, a payment to a customer conditional on the customer making
a specified number of purchases).
Collectibility (paragraphs 68 and 69)
BC163. The core principle of the proposed guidance is that an entity should
recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. In
developing the 2010 proposed Update, the Boards considered how an
entity should account for any uncertainty arising from the possibility that
the customer may be unable to pay—that is, uncertainty about the
collectibility of the promised consideration.
BC164. The 2010 proposed Update proposed that an entity should recognize
revenue at the amount that the entity expects to receive from the
customer. In other words, the customer’s credit risk would be reflected
in the measurement of the transaction price that is allocated to the
separate performance obligations in the contract. The Boards reached
that conclusion in the 2010 proposed Update after considering whether
an entity’s assessment of collectibility should affect either or both of the
following:
(a)
(b)
The recognition of revenue (that is, whether an entity recognizes
revenue when a good or service is transferred)
The amount of revenue (that is, how much revenue an entity
recognizes when a good or service is transferred).
BC165. The Boards’ proposal on collectibility was one of the topics on which
respondents to the 2010 proposed Update most commented. Although
some respondents agreed with the concept of the transaction price
reflecting the customer’s credit risk, nearly all respondents (including
preparers, users, and securities regulators) expressed concerns about
applying that concept in practice. After considering that feedback, the
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Boards decided not to adopt that proposal in the 2010 proposed
Update. Instead, the Boards propose the following:
(a)
(b)
(c)
Revenue should be recognized at the amount to which the entity
expects to be entitled.
The requirements for the recognition of revenue should not
include a specific threshold for expectations about the
collectibility of the promised consideration.
Any impairment losses (and reversals) should be presented as a
separate line item adjacent to the revenue line item.
BC166. The Boards’ rationale for those decisions is explained in the paragraphs
below.
Recognizing revenue at the amount to which the entity expects
to be entitled
BC167. The Boards propose that revenue should be measured at the amount to
which the entity expects to be entitled, which therefore would not reflect
any adjustments for amounts that the entity may not be able to collect
from the customer. In reaching that decision, the Boards were
persuaded by users of financial statements who commented that they
would prefer that revenue be measured at that “gross” amount so that
revenue growth and receivables management (or bad debts) can be
analyzed separately. Those users are interested in assessing the
performance of an entity’s sales function and receivables collection
function separately because they are often managed separately.
However, that information would not be available if an entity’s
assessment of sales and collectibility were only reflected on a “net”
basis in the revenue line.
A separate recognition threshold
BC168. The proposed guidance does not specify a threshold for expectations of
collectibility that must be passed before revenue can be recognized.
This represents a change from the guidance in some existing standards,
which address collectibility through recognition. For example, Section
605-10-S99 (SEC Staff Accounting Bulletin Topic 13, Revenue
Recognition) states that revenue can be recognized only if “collectibility
is reasonably assured.” In IFRSs, IAS 18 specifies that revenue is
recognized only when “it is probable that the economic benefits
associated with the transaction will flow to the entity.”
BC169. Instead, the Boards propose to address concerns about collectibility by
requiring the following:
(a)
The contract with a customer should have commercial substance
(as discussed in paragraph BC34).
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(b)
Any impairment losses should be presented as a separate line
item adjacent to the revenue line so that those losses on
contracts with customers can be easily compared with the
revenue recognized (as discussed in paragraphs BC171–
BC173).
BC170. In reaching that conclusion, the Boards noted the following
consequences of having collectibility as a recognition criterion:
(a)
(b)
(c)
The Boards would need to specify a probability threshold (for
example, reasonably assured or probable) that must be passed
before revenue would be recognized.
In many cases, collectibility is assessed at a portfolio level
because an entity typically does not know which customers will
default. Consequently, a revenue recognition hurdle may be
difficult to apply to individual contracts.
It would be inconsistent with the accounting for a receivable,
which incorporates assessments of collectibility in the
measurement of that financial asset.
Presentation of the effects of a customer’s credit risk
BC171. The Boards propose that an entity should present any impairment
losses from contracts with customers adjacent to the revenue line in
profit or loss (subject to the usual materiality considerations for line-item
disclosure). The Boards noted that their decision on presentation
typically only changes the location of the line item for impairment losses
arising from contracts with customers. The proposed guidance does not
include any changes to the recognition and measurement of impairment
losses of financial assets, such as trade receivables. Instead, an entity
would recognize and measure the impairment loss in accordance with
Topic 310 or IAS 39, Financial Instruments: Recognition and
Measurement (or IFRS 9, Financial Instruments, if the entity has
adopted IFRS 9). (In addition, the Boards have a separate project that is
currently considering improvements to the impairment models in those
standards.) Because impairment is a measurement issue that arises
after initial recognition of an asset, the Boards decided that the
proposed guidance also should specify the accounting for any
difference between the amount of revenue that has been recognized
and the corresponding initial measurement of the receivable. The
Boards decided that any loss that arises on initial recognition of the
receivable should be presented adjacent to the revenue line in profit or
loss similarly with any impairment losses. The Boards expect that an
entity typically would not recognize a loss on initial recognition because
the receivable normally would initially be measured at the original
invoice amount if the contract with a customer does not include a
financing component that is significant.
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BC172. The Boards agreed to link the presentation of the revenue line and the
impairment loss line so that it is transparent to all users of financial
statements that a portion of the entity’s gross revenue is expected to be
uncollectible. A consequence of that decision is that impairment losses
that are presented as a separate line item adjacent to the revenue line
item may relate to amounts of uncollectible consideration that was
recognized as revenue in previous reporting periods. Although there is
not necessarily a connection between the revenue recognized in a
particular reporting period and the impairment losses recognized in that
period, presenting the impairment loss adjacent to revenue facilitates
users’ understanding of the amounts that an entity ultimately expects to
receive from the customer. In addition, the Boards noted that for some
industries (for example, healthcare), it can be difficult to distinguish a
billing adjustment (which would be presented as an adjustment to
revenue) from other credit adjustments (which historically are presented
as expenses).
BC173. Another consequence of that decision is that impairment losses on trade
receivables arising from contracts with customers would be presented
differently than all other financial assets that are subject to impairment.
This is because the impairment loss for the trade receivable would be
presented adjacent to revenue, whereas for all other financial assets,
impairment loss would be presented together with other expense items
in the statement of comprehensive income. For the reasons explained in
paragraphs BC174 and BC175, those other financial assets would
include receivables arising from contracts with customers that include a
financing component that is significant to the contract.
Credit risk in contracts with a financing component that is
significant to the contract
BC174. The effect of the Boards’ decision on the time value of money (see
paragraphs BC143–BC156) is that a contract with a customer that has a
financing component that is significant to the contract would be
bifurcated into a revenue component (for the notional cash sales price)
and a loan component (for the effect of the deferred payment terms).
The revenue component would be within the scope of the revenue
standard, and the loan component would be within the scope of the
financial instruments standards. Consequently, bifurcating the contract
means that the accounting for a trade receivable arising from a contract
with a customer that has a financing component that is significant to the
contract should be comparable to the accounting for a loan with the
same features. Consider the following example: Customer A purchases
a good on credit and must pay $1,000 in 3 years. The present value of
this trade receivable is $751. Now consider Customer B who borrows
$751 from a bank with a promise to pay $1,000 in 3 years. Customer B
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uses the loan to purchase the same good as Customer A. Economically,
these transactions are the same but, absent the proposed guidance, the
form of the transaction would determine whether the financing
component would be accounted for as a trade receivable or as a loan.
For this reason, paragraph 58 of the proposed guidance would require a
contract (with a financing component that is significant to the contract)
to be bifurcated, which would result in the same accounting for the
financing elements of both transactions.
BC175. A contract that has a financing component that is significant to the
contract includes, in concept, two transactions—one for the sale and
another for the financing. The presentation of any impairment losses
from long-term trade receivables (that is, receivables arising from the
financing components of contracts with customers) would be consistent
with the presentation of impairment losses for other types of financial
assets within the scope of the financial instruments standards. Although
this means that impairment losses would be presented differently for
long-term trade receivables than for short-term trade receivables (that
is, receivables arising from contracts with customers that do not have
separately identified financing components), that outcome follows
naturally from the Boards’ decision to propose that an entity account for
the effects of the time value of money if the financing component is
significant to the contract.
Allocating the transaction price to separate performance
obligations (paragraphs 70–80)
BC176. In the 2010 proposed Update, the Boards proposed that an entity
should allocate the transaction price to all separate performance
obligations in proportion to the standalone selling price of the good or
service underlying each of those performance obligations at contract
inception (that is, on a relative standalone selling price basis). They
decided that an allocation based on standalone selling prices would
faithfully depict the different margins that may apply to promised goods
or services.
BC177. Most respondents to the 2010 proposed Update agreed with the
proposal to allocate the transaction price on a relative standalone selling
price basis. In addition, the 2010 proposed Update was broadly
consistent with recent changes to U.S. GAAP (Update 2009-13) to
account for multiple-deliverable revenue arrangements. However,
respondents expressed concerns about the following topics:
(a)
(b)
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Estimating the standalone selling price
Allocating discounts and contingent consideration.
Estimating standalone selling prices (paragraph 73)
BC178. Consistent with the 2010 proposed Update, the proposed guidance
specifies that if an entity does not have an observable price from selling
a good or service separately, the entity should estimate the standalone
selling price.
BC179. The Boards affirmed the proposal in the 2010 proposed Update to
indicate suitable estimation methods in paragraph 73 of the proposed
guidance. The Boards also affirmed that they do not intend to preclude
or prescribe any particular method for estimating a standalone selling
price so long as the estimate is a faithful representation of the price at
which the entity would sell the distinct good or service if it were sold
separately to the customer. However, the Boards clarified that the
method used by the entity to estimate a standalone selling price should
maximize the use of observable inputs and should be applied
consistently to estimate the standalone selling price of other goods or
services with similar characteristics.
BC180. The Boards observed that many entities may already have robust
processes for determining standalone selling prices on the basis of
reasonably available data points and the effects of market
considerations and entity-specific factors. However, other entities may
need to develop processes for estimating selling prices of goods or
services that are typically not sold separately. The Boards decided that
when developing those processes, an entity should consider all
reasonably available information on the basis of the specific facts and
circumstances. That information might include the following:
(a)
(b)
(c)
(d)
Reasonably available data points (for example, a standalone
selling price of the good or service, the costs incurred to
manufacture or provide the good or service, related profit
margins, published price listings, third-party or industry pricing,
and the pricing of other goods or services in the same contract)
Market conditions (for example, supply and demand for the good
or service in the market, competition, constraints, and trends)
Entity-specific factors (for example, business pricing strategy and
practices)
Information about the customer or class of customer (for
example, type of customer, geography, and distribution channel).
Residual approach
BC181. In the 2010 proposed Update, the Boards proposed that the residual
method should not be used to allocate the transaction price to separate
performance obligations. However, in the accompanying basis for
conclusions, the Boards noted that a residual (or reverse residual)
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approach might be a suitable technique for estimating a standalone
selling price if there is a directly observable price for one performance
obligation but not the other. Under the residual approach, an entity
would determine a standalone selling price of a good or service on the
basis of the difference between the total transaction price and the
standalone selling prices of other goods or services in the contract.
BC182. Respondents to the 2010 proposed Update generally agreed that, in
some circumstances, it might be appropriate to use a residual approach
to estimate a selling price. However, those respondents thought that the
proposed guidance should clarify how and when an entity could use the
residual approach as an estimation method. Therefore, paragraph 73(c)
of this proposed Update specifies the circumstances in which a residual
approach would be a suitable method to estimate a standalone selling
price. In specifying those circumstances, the Boards were particularly
mindful of the challenges in determining standalone selling prices in
contracts for intellectual property and other intangible products, in which
the pricing can be highly variable because there is little or no
incremental cost to the entity in providing those goods or services to a
customer. In those circumstances, the most reliable way of determining
the standalone selling price in the contract will often be to use a residual
approach. For the same reason, the Boards noted that the residual
approach might be appropriate in situations in which an entity has not
yet established the selling price for a good or service that has not
previously been sold.
Specifying a hierarchy of evidence
BC183. Most respondents agreed with the Boards’ proposal in the 2010
proposed Update for not prescribing a hierarchy of evidence for
estimating a standalone selling price. However, some respondents
recommended that the Boards specify a hierarchy of evidence to
determine the standalone selling price of a separate performance
obligation similar to the following hierarchy in Subtopic 605-25:
(a)
(b)
(c)
If vendor-specific objective evidence of a selling price is
available, it would be used to determine the selling price of a
promised good or service.
If vendor-specific objective evidence is not available, an entity
would determine the selling price using third-party evidence, if
available.
If third-party evidence is not available, then an entity would use
its best estimate of selling price.
BC184. Those respondents indicated that specifying a hierarchy of evidence for
determining standalone selling prices (and requiring disclosures using
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that hierarchy) would enhance the quality and reliability of an entity’s
reported revenues.
BC185. The Boards observed that under the proposed guidance, an entity
should use observable prices when a good or service is sold separately
by the entity (similar to a vendor-specific objective evidence notion). It is
only when a good or service is not sold separately that an entity would
estimate selling prices. And, in that estimation process, an entity would
still be required to maximize the use of observable inputs. The Boards
observed that there is little distinction between third-party evidence and
a best estimate of selling price in the above hierarchy in Subtopic 60525. For instance, third-party evidence of a selling price might require
adjustments to reflect differences either in (a) the good or service
(because the third-party price could be for a similar, rather than
identical, good or service) or (b) pricing strategies between the third
party and the entity. Hence, the Boards affirmed their proposal in the
2010 proposed Update not to specify a hierarchy. Instead, the Boards
decided that it was important to emphasize that an entity should
maximize the use of observable inputs when developing estimates of
standalone selling prices.
Allocating discounts and contingent consideration (paragraphs
74–76)
BC186. A consequence of allocating the transaction price on a relative
standalone selling price basis is that any discount in the contract is
allocated to all the separate performance obligations in the contract.
Some respondents to the 2010 proposed Update thought that this would
not always faithfully depict the amount of consideration to which an
entity is entitled on satisfying a particular performance obligation. For
instance, they noted that the allocation of the discount could result in a
loss on one part of the contract if the contract as a whole is profitable
(for example, the contract contains both a high margin item and a low
margin item). They suggested that the Boards permit an entity to
allocate the discount in a contract using one of the following
alternatives:
(a)
(b)
(c)
A management approach, whereby an entity would assess which
promised good or service is priced at a discount to its standalone
selling price
A residual approach, whereby any discount in the contract would
be allocated entirely to the satisfied performance obligations
A profit margin approach, whereby an entity would allocate the
discount in a contract in proportion to the individual profit margin
on each performance obligation. The individual profit margin for
each performance obligation is the difference between the
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standalone selling price and the direct costs of the good or
service underlying each separate performance obligation.
BC187. Another consequence of allocating the transaction price on a relative
standalone selling price basis is that any amount of the consideration
that is contingent on a future event or circumstance is allocated to all
the separate performance obligations in the contract. Some
respondents to the 2010 proposed Update thought that this would not
always faithfully depict the amount of consideration to which an entity is
entitled on satisfying a particular performance obligation. Many
suggested that such contingent amounts should be allocated only to the
performance obligation(s) to which they relate.
BC188. In redeliberating the proposals in the 2010 proposed Update, the
Boards noted that the objective of the model is for an entity to recognize
revenue in the amount of consideration to which the entity expects to be
entitled from the customer in exchange for transferring goods or
services. The relative standalone selling price basis allocation is simply
a method to achieve that objective rather than the principle itself for
allocating the transaction price.
BC189. However, the Boards also note that allocating the transaction price on a
relative standalone selling price basis brings rigor and discipline to the
process of allocating the transaction price and, therefore, enhances
comparability both within an entity and across entities. Therefore, the
Boards decided that it should be the default method for allocating the
transaction price. However, they agreed with respondents that it might
not always result in a faithful depiction of the amount of consideration to
which the entity expects to be entitled from the customer. Accordingly,
in the proposed guidance, the Boards have specified when other
methods should be used.
Allocating discounts (paragraphs 74 and 75)
BC190. The 2010 proposed Update acknowledged that, in some cases, it would
be inappropriate to allocate a discount to all the separate performance
obligations in a contract. Hence, the 2010 proposed Update included a
“contract segmentation” principle that would restrict the allocations of
discounts on the basis of goods or services that are priced
independently (discussed in paragraph BC49). Many respondents to the
2010 proposed Update agreed with the objective of the contract
segmentation principle. However, most thought that the objective could
be better met by incorporating the principle into the allocation process.
Accordingly, the Boards have largely carried forward into the proposed
guidance the notion that an entity should allocate a discount to one or
more separate performance obligations, rather than to all the
performance obligations, if the entity has observable sales prices for
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parts of the contract that establish that the entire discount in the contract
is attributable only to one or more separate performance obligations.
BC191. The Boards rejected the other alternatives suggested by respondents.
The Boards decided that the transaction price is for the contract as a
whole. Therefore, unless the price of some promised goods or services
in the contract is largely independent of the price of other promised
goods or services, any discount in the contract would be attributable to
the contract as a whole and should be allocated proportionally to all the
separate performance obligations in the contract. In addition, the Boards
noted that the profit margin method would require an entity to estimate
the costs to satisfy a performance obligation. Apart from creating
additional complexity, the Boards were concerned that different
treatments in the way costs are allocated to performance obligations
could significantly affect how the transaction price is allocated.
Allocating contingent consideration (paragraph 76)
BC192. The Boards agreed with respondents that it would not always be
appropriate for an entity to allocate amounts that are contingent on
future events or circumstances to all the performance obligations in a
contract. For example, an entity may contract to provide two products at
different times with a variable amount contingent upon the timely
delivery of the second product. In such an example, it might not be
appropriate to attribute the variable amount to both the products.
Therefore, the Boards specified the criteria in paragraph 76 to identify
the circumstances in which an entity should allocate the variable
consideration entirely to a distinct good or service rather than all of the
distinct goods or services. The Boards decided that those criteria were
necessary to ensure that the contingent amount relates to the entity’s
efforts to transfer the good or service and that the allocation of the
variable consideration entirely to a distinct good or service is reasonable
relative to all of the other performance obligations and payment terms in
the contract.
Contingent revenue cap
BC193. Some respondents to the 2010 proposed Update disagreed with the
Boards’ proposal that the transaction price should be allocated on a
relative standalone selling price basis. Those respondents (primarily
from the telecommunications and cable television industry) requested
that, instead, the Boards carry forward the contingent revenue allocation
guidance from Subtopic 605-25 (often described as the contingent
revenue cap). (There is no equivalent guidance in IAS 18, although in
practice the Boards understand that most telecommunications entities
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that apply IFRSs account for their contracts in a similar manner as
entities that apply U.S. GAAP.)
BC194. The contingent revenue cap limits the amount of consideration allocated
to a satisfied performance obligation to the amount that is not contingent
on the satisfaction of performance obligations in the future (or meeting
other specified performance conditions). For example, under that
guidance, the amount of consideration that a telecommunications entity
can allocate to a handset that is bundled with network services is limited
to the amount that is not contingent on the delivery of network services
in the future. Hence, when the handset is transferred to the customer,
revenue is recognized at the amount that the customer paid for the
handset at contract inception. The remaining contractual payments are
recognized subsequently as revenue as the entity provides network
services to the customer.
BC195. Respondents from the telecommunications industry observed that
without a contingent revenue cap, revenue would be recognized for
delivering a handset in an amount that exceeds the amount of
consideration paid for the handset. These respondents do not think this
is appropriate because they would be entitled to collect the excess only
when they provide the network services. Therefore, they reasoned that
the contract asset that results from recognizing revenue for delivery of
the handset does not meet the definition of an asset. Additionally, they
suggested that without a contingent revenue cap, the proposed model
would be complex and costly to apply because of the high volume of
contracts that they have to manage and the various potential
configurations of handsets and network service plans.
BC196. However, the Boards affirmed their proposal in the 2010 proposed
Update not to carry forward the contingent revenue cap for the following
reasons:
(a)
(b)
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Limiting the amount of consideration that can be allocated to a
satisfied separate performance obligation is tantamount to cashbasis accounting and does not meet the core principle of the
proposed guidance. That is because revenue recognized would
not depict the amount of consideration to which the entity
expects to be entitled for the delivered good or service.
Consequently, the contingent revenue cap could result in
economically similar contracts being accounted for differently.
The contingent revenue cap can result in the recognition of
losses when the contract is profitable. That would occur when
the amount allocated to a satisfied performance obligation is
constrained (potentially to zero) to an amount that is less than
the expenses recognized for the costs of providing the good or
service (unless those costs are deferred). However, costs
(c)
(d)
(e)
(f)
relating to a good or service already transferred to the customer
would not give rise to an asset.
Recognizing a contract asset in the situation described in
paragraph BC195 is appropriate because the entity clearly has a
valuable contractual right as a result of satisfying a performance
obligation and that right meets the definition of an asset. That
right exists even if the entity does not have the present right to
collect consideration from the customer. This is evidenced by the
fact that if the entity were to transfer the remaining rights and
performance obligations in the contract to a third party after it
had delivered a handset, it would expect to be compensated for
that past performance.
Applying the contingent cap more broadly than it is applied in
existing standards could have far-reaching consequences. For
example, in many services contracts (including construction
contracts), it is appropriate to recognize revenue when services
are provided even though the amount of consideration is
contingent on the entity’s future performance. Otherwise, the
entity would not recognize any revenue until reaching a contract
milestone or potentially until completion of the contract (which
would not depict the transfer of goods or services to the
customer).
Although the consequences on construction and other service
contracts could be reduced by limiting the amount allocated to
satisfied separate performance obligations (rather than limiting
the amount allocated to a satisfied portion of a single
performance obligation), the Boards decided that this would
create an arbitrary distinction and put additional pressure on the
criteria for identifying separate performance obligations.
For many contracts that currently are accounted for under the
contingent revenue cap, the amount of consideration allocated to
delivered items is not contingent because even if the customer
cancels the contract, it would be obliged to pay for the delivered
item(s). For example, in some contracts for the sale of a handset
and network services, the contract either is not cancellable or, if
it is, the customer is obliged to pay a termination fee that
corresponds with the value of the handset delivered upfront
(even if the entity chooses not to enforce payment of that fee).
BC197. Additionally, the Boards decided not to introduce an exception to the
revenue model for telecommunications and similar contracts because
they do not view those contracts to be unique. Furthermore, the Boards
decided that the proposed guidance would provide a more consistent
basis for recognizing revenue and would produce results in accounting
that more closely match the underlying economics of transactions.
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Constraint on the cumulative amount of revenue
recognized (paragraphs 81–85)
BC198. The 2010 proposed Update proposed that an entity should recognize
revenue from satisfying a performance obligation only if the transaction
price could be reasonably estimated. The Boards then specified the
criteria that would have to be met to determine whether the transaction
price could be reasonably estimated. The Boards decided to include a
constraint on the recognition of revenue because revenue is an
important measure to users of financial statements when valuing an
entity and because a significant portion of errors in financial statements
have related to the overstatement or premature recognition of revenue.
BC199. Most respondents supported a constraint on revenue recognition.
However, some respondents noted some unintended consequences
from the proposal to constrain the transaction price that would be
allocated to all the performance obligations in the contract. In particular,
respondents in the asset management industry noted that constraining
the transaction price would not result in a pattern of revenue recognition
that would faithfully depict their performance under the contract. In
addition, respondents noted that if the transaction price is constrained,
in some cases, an entity might not allocate any consideration to the
remaining performance obligations in the contract. In such cases, those
remaining performance obligations would be identified as onerous even
though the entity expects those performance obligations to be profitable.
BC200. Therefore, in the proposed guidance, the Boards clarified that the
constraint would apply when the promised amount of consideration in a
contract is variable and only to the cumulative amount of revenue
recognized to date for satisfied or partially satisfied performance
obligations, rather than to the amount of consideration (that is, the
transaction price) allocated to all performance obligations.
BC201. The Boards also decided to specify that the cumulative amount of
revenue an entity recognizes should be limited to the amount to which
the entity is reasonably assured to be entitled, rather than the amount
that can be reasonably estimated. The primary reason for that change is
that, in some circumstances, an entity might be able to reasonably
estimate an amount even though the entity is not reasonably assured to
be entitled to that amount in accordance with the proposed guidance. In
other words, the Boards decided that the term reasonably estimated
was appropriate in the context of the 2010 proposed Update when the
Boards proposed constraining the estimate of the overall transaction
price. However, for the purposes of constraining the amount of revenue
that an entity would recognize, the Boards decided that the term
reasonably assured would be a more appropriate label for describing
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the circumstances in which the amount of revenue should be
constrained. The Boards acknowledge that the constraint is a qualitative
threshold, rather than a quantitative threshold, and is not meant to
include assessments of collectibility, which are considered separately
(see paragraphs BC163–BC175).
Determining when the amount of revenue recognized is
reasonably assured
BC202. The Boards proposed criteria in the 2010 proposed Update for when
revenue should be constrained. Most respondents agreed that the
criteria were appropriate and useful. Therefore, the Boards decided to
carry forward those criteria with some modifications as described below.
Those criteria, specified in paragraph 81, are as follows:
(a)
(b)
The entity has experience with similar types of performance
obligations (or has other evidence such as access to the
experience of other entities)—An entity’s experience with similar
types of performance obligations is necessary to be able to
conclude that the amount of revenue recognized is reasonably
assured. Without that experience, the level of uncertainty in the
amount of revenue recognized would be too high for users to find
that amount useful. In other words, a user might find it more
useful if an entity were to recognize revenue only when the
uncertainty is resolved. There may be circumstances in which an
entity might not have such experience, such as for new offerings
of goods or services or expansion into new markets. In those
cases, the Boards decided that another entity’s experience or
other evidence may be a reasonable proxy for the entity’s own
experience.
The entity’s experience (or other evidence) is predictive of the
amount of consideration to which the entity will be entitled in
exchange for satisfying those performance obligations—An
entity’s experience (or other evidence) is necessary, but not
sufficient, for the entity to conclude that it is reasonably assured
to be entitled to an amount of consideration. That experience
also needs to be predictive of the amount of consideration to
which the entity will be entitled, for example, because the entity
does not expect significant changes in circumstances from its
experience with similar performance obligations in the past. The
Boards modified this criterion from the 2010 proposed Update,
which stated that an entity’s experience must be relevant,
because they decided that the term predictive would better align
with the objective of determining and allocating the transaction
price (that is, to allocate to each performance obligation the
amount of consideration to which the entity expects to be entitled
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in exchange for satisfying those performance obligations). To
help an entity assess whether its experience predicts the amount
of consideration, the Boards decided to specify the indicators in
paragraph 82. Those indicators were derived in part from existing
guidance in U.S. GAAP on estimating sales returns. Those
indicators also were proposed in the 2010 proposed Update.
BC203. Some respondents expressed concern that the criteria for when
revenue should be constrained would require an entity to recognize
revenue when factors outside the entity’s control could subsequently
affect the amount of revenue recognized. For instance, with many salesbased royalties, an entity’s performance occurs at the beginning of the
contract, but the amount of consideration is based on the customer’s
subsequent sales of goods or services. In those cases, both users and
preparers thought that it would not be useful for an entity to recognize
revenue at the inception of the contract for the total amount of the
consideration to which the entity expects to be entitled. That is because
that approach inevitably would require the entity to report, throughout
the life of the contract, significant adjustments to the amount of revenue
recognized at inception of the contract as a result of changes in
circumstances. For those contracts, users and preparers explained that
the most useful information would be to recognize revenue when there
is no longer uncertainty about the amount of consideration to which the
entity is entitled. To address those concerns, the Boards decided that
for the circumstances described in paragraph 85 an entity should not
recognize revenue for the uncertain amounts until the uncertainty is
resolved (that is, when the customer’s subsequent sales occur).
However, the Boards emphasized that paragraph 85 would not preclude
an entity from recognizing revenue in all circumstances in which factors
outside the entity’s influence exist. Thus, for circumstances other than
those in paragraph 85, an entity should consider the indicators in
paragraph 82 to determine the amount of consideration to which the
entity is reasonably assured to be entitled.
Onerous performance obligations (paragraphs 86–90)
BC204. The proposed guidance specifies that an entity should recognize a
liability for an onerous performance obligation that is satisfied over time
and that the entity expects at contract inception to satisfy over a period
of time greater than one year. The Boards decided that an onerous test
is a necessary component of a revenue model in which the initial
measurements of performance obligations are not routinely updated.
The onerous test provides users with important information by, in effect,
remeasuring performance obligations to reflect significant adverse
changes in circumstances.
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BC205. Some respondents agreed with the Boards that the proposed revenue
model should include an onerous test. However, a few respondents
stated that performance obligations should never be remeasured and
that losses on a contract should emerge over time as the revenue is
recognized. In addition, some stated that a liability for an onerous
performance obligation represents an accrual of costs and, therefore, is
not related to revenue recognition. The Boards disagreed with those
views for the following reasons:
(a)
(b)
(c)
(d)
Both U.S. GAAP and IFRSs include an onerous test for some
types of loss-making contracts (that is, the consideration to be
received must equal or exceed the expected costs to satisfy the
performance obligations). Not having such a test would be a
major change to current practice for some types of contracts.
Including the onerous test in the proposed guidance would
achieve greater convergence of U.S. GAAP and IFRSs on the
margins reported from some contracts with customers.
Although the onerous test appears to be a liability recognition
and measurement issue (because it results in the recognition of
a separate liability that has no effect on the revenue recognition),
conceptually, the onerous test is a (re)measurement issue,
because there has been no new obligating event.
The onerous test can be viewed as the mirror image for liabilities
of an asset impairment test (that is, a test to ensure that the
amount of a performance obligation is not understated).
Unit of account
BC206. Many respondents disagreed with the proposal in the 2010 proposed
Update to apply the onerous test to individual performance obligations.
Those respondents observed that applying the onerous test to individual
performance obligations may not always generate meaningful
information, in particular, because the onerous test would often require
the recognition of a loss at contract inception for loss-making
performance obligations even though the contract as a whole is
expected to be profitable. Other respondents explained that their
contracts are priced and profitability is assessed at a unit of account
higher than the contract (or the remaining performance obligations) and,
therefore, the unit of account for applying the onerous test should also
be higher to correspond with how the entity manages those contracts.
BC207. The Boards considered, but rejected, changing the unit of account for
the onerous test because they thought that it would add complexity and
be inconsistent with recognizing revenue at the performance obligation
level. In addition, the Boards noted that specifying the contract as the
unit of account could be arbitrary because the unit of account would
depend on whether the entity provides its goods or services in one
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contract or in more than one contract. Instead, the Boards decided to
address respondents’ concerns on the unit of account by modifying the
scope of the onerous test.
Scope of the onerous test
BC208. The Boards propose to limit the scope of the onerous test to
performance obligations that are satisfied over time. Thus, a liability
would be recognized when a performance obligation that is satisfied
over time is determined to be onerous. As a practical expedient, the
Boards propose that an entity would apply the onerous test only to
performance obligations that an entity expects at contract inception will
be satisfied over a period of time that is greater than one year. In the
Boards’ view, limiting the scope of the onerous test limits the risk of
unintended consequences of applying the onerous test to some
contracts. That is because the proposed scope is closest to the scope of
existing revenue standards that specify an onerous test (that is,
Subtopic 605-35 and IAS 11).
BC209. In addition, limiting the scope of the onerous test would address some
cost-benefit concerns because it would minimize the amount of
additional effort needed for an entity to apply the test. When a
performance obligation is satisfied over time, an entity already is
required to measure progress toward complete satisfaction of that
performance obligation, which typically would require the entity to
evaluate whether the performance obligation is loss-making.
BC210. The Boards noted that performance obligations excluded from the
scope of the onerous test (that is, performance obligations satisfied at a
point in time) typically have or result in the creation of related assets
that would be subject to impairment testing in other standards. For
example, existing standards on inventory already provide guidance on
how an entity should test for impairment inventory that is subject to a
sales contract. That guidance also may require an entity to recognize
any loss from contracts to transfer goods to a customer at a point in
time, even if the entity has not yet acquired those goods that would be
recognized as inventory (see paragraph 330-10-35-17 and paragraph
31 of IAS 2, Inventories).
Identifying when a performance obligation is onerous
BC211. In the 2010 proposed Update, the Boards proposed that an entity
should identify a performance obligation as onerous when the expected
costs to satisfy the performance obligation exceed the amount of the
transaction price allocated to that performance obligation. The Boards
observed that the main consequence of using this approach is that any
margin in the measurement of the performance obligation would act as
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a buffer to absorb adverse changes in the performance obligation. In
other words, the amount of the performance obligation would remain
unchanged until the entity expects that the satisfaction of the
performance obligation would result in a loss.
BC212. In developing the 2010 proposed Update, the Boards considered, but
rejected, requiring an entity to identify a performance obligation as
onerous when the current price of the performance obligation (that is,
costs plus a margin) exceeds the amount of the transaction price
allocated to it. The Boards observed that this approach would potentially
result in earlier recognition of the effects of adverse changes in
circumstances because any margin in the measurement of the
performance obligation would not be used as a buffer to absorb adverse
changes. However, because this approach would include a margin in
the trigger for identifying when a performance obligation is onerous, the
Boards decided that it would increase the frequency of
remeasurements. Consequently, it would increase complexity and more
closely resemble an approach in which the performance obligations are
remeasured at each reporting date, which is an approach that the
Boards had previously rejected (as discussed in paragraph BC26).
BC213. In redeliberations, the Boards noted that, in some cases, the expected
costs to satisfy a performance obligation might exceed the amount that
the entity would have to pay under the terms of the contract to exit the
performance obligation (for example, the amount the entity would be
required to pay the customer to cancel the performance obligation). In
such cases, an entity rationally would select the option with the lowest
cost of settling the performance obligation (that is, the lower of fulfilling
and exiting). Therefore, the Boards revised the trigger for identifying
when a performance obligations is onerous by specifying that it is
onerous when the lowest cost of settling the performance obligation
(which is the lower of the costs that relate directly to satisfying the
performance obligation and the amount that the entity would pay to exit
the performance obligation) exceeds the amount of the transaction price
allocated to it.
Measurement basis
BC214. The Boards affirmed their proposal in the 2010 proposed Update that
when a performance obligation is onerous, it should be remeasured on
a basis that is consistent with the trigger for identifying when that
performance obligation is onerous. Accordingly, they decided that an
onerous performance obligation should be measured at the lowest cost
of settling that obligation. Additionally, the Boards affirmed the proposal
in the 2010 proposed Update that the costs that relate directly to
satisfying the performance obligation should be the same as those
defined in paragraph 92 of the proposed guidance. Absent specifying a
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value or a price for the remeasurement, the Boards decided that this
approach would provide a clear objective for which costs to include.
BC215. In developing the 2010 proposed Update, the Boards considered, but
rejected, requiring entities to include a margin in the remeasurement of
an onerous performance obligation. The rationale for including a margin
would be that a profit-oriented entity typically does not promise to
transfer a good or service to a customer without a margin. However, the
Boards noted that including a margin in the remeasurement would be a
significant change to the guidance for loss-making contracts in existing
standards (for example, Subtopic 605-35 and IAS 11) and would
increase the complexity of remeasuring onerous performance
obligations, particularly when observable prices do not exist.
Furthermore, some think that it would be counterintuitive for an entity to
recognize a profit when it satisfies an onerous performance obligation.
Presentation of the liability for onerous performance
obligations
BC216. The Boards decided that when an entity remeasures an onerous
performance obligation, it should recognize the corresponding amount
in profit or loss separately from revenue. Additionally, because the
remeasurement would need to be tracked for the purposes of reporting
its effects in profit or loss separately from revenue, the Boards decided
that it would be clearer if they specified that the remeasurement is
recognized as a liability separate from the contract asset or contract
liability. That would be consistent with existing standards and practices
and would clarify that the remeasurement and its subsequent
accounting should not affect revenue.
Contract costs (paragraphs 91–103)
Costs of fulfilling a contract (paragraphs 91–93)
BC217. In the 2010 proposed Update, the Boards developed guidance for
accounting for some costs to fulfill a contract. That guidance was
developed in response to concerns that the proposals in the Discussion
Paper focused on how an entity should recognize revenue in a contract
without considering how an entity should account for the costs to fulfill a
contract. Some respondents to the Discussion Paper, in particular those
from the construction industry, said that guidance on profit margin
recognition is as important as guidance on revenue recognition. Other
respondents, mainly preparers who use U.S. GAAP, were concerned
about the withdrawal of cost guidance that was developed specifically
for their respective industries.
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BC218. The proposed cost guidance in the 2010 proposed Update was intended
to:
(a)
(b)
(c)
Fill the gap arising from the withdrawal of existing revenue
standards—The proposed revenue standard would result in the
withdrawal of some guidance on contract costs, in particular, the
guidance in Subtopic 605-35 and IAS 11.
Improve current practice—The proposed guidance would provide
clearer guidance on accounting for some costs to fulfill a contract
(for example, setup costs for services) and would result in an
entity no longer having to rely on, or analogize to, requirements
that were not developed specifically for contracts with customers.
For instance, in accounting for setup costs, an entity applying
U.S. GAAP might analogize to the guidance on the deferral of
direct loan origination costs in paragraph 310-20-25-2. An entity
applying IFRSs might evaluate those costs in accordance with
IAS 38, Intangible Assets. Specifying clear requirements also
would result in greater consistency in practice.
Promote convergence in accounting for contract costs—More
costs would be accounted for similarly under U.S. GAAP and
IFRSs (although total consistency in accounting for costs to fulfill
a contract will not be achieved until the Boards align their
respective standards on inventories; property, plant, and
equipment; intangible assets; and impairment of assets).
BC219. Most respondents supported the proposed guidance in the 2010
proposed Update. Some respondents recommended that the Boards
address cost guidance comprehensively in a separate project. However,
because cost guidance is included in many existing standards, the
Boards noted that this would require reconsideration of those existing
standards, such as inventories; property, plant, and equipment;
intangible assets; and impairment of assets. The Boards decided
against broadening the scope of the proposed cost guidance at this time
because they thought that the proposed guidance would result in
worthwhile improvements to both U.S. GAAP and IFRSs until such time
that the Boards decide to comprehensively reconsider existing cost
guidance.
BC220. Because the Boards decided not to reconsider all cost guidance
comprehensively, paragraphs 91–103 of the proposed guidance specify
the accounting for contract costs that are not within the scope of other
standards. Consequently, if the other standards preclude the recognition
of any asset arising from a particular cost, an asset cannot then be
recognized under the proposed guidance (for example, preproduction
costs under long-term supply arrangements would continue to be
accounted for in accordance with paragraphs 340-10-25-1 through 253).
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BC221. The proposals clarify that only costs that give rise to resources that will
be used in satisfying performance obligations in the future and that are
expected to be recovered would be eligible for capitalization. Those
proposals ensure that only costs that result in assets are capitalized,
and an entity would be precluded from deferring costs merely to
normalize profit margins throughout a contract by allocating revenue
and costs evenly over the life of the contract. To provide a clear
objective for recognizing and measuring an asset arising from contract
fulfillment costs, the Boards decided that only costs that relate directly to
a contract should be included in the cost of the asset.
Incremental costs of obtaining a contract (paragraphs 94–97)
BC222. In the 2010 proposed Update, the Boards proposed that an entity
should recognize the costs of obtaining a contract as expenses when
those costs are incurred. The Boards observed that, in concept, an
entity may obtain a contract asset as a result of its efforts to obtain a
contract (because the measure of the remaining rights might exceed the
measure of the remaining obligations). However, they decided that
under the proposed model, an entity should recognize a contract asset
and revenue only as a result of satisfying a performance obligation in
the contract. Therefore, the 2010 proposed Update specified that the
contract asset would be measured at zero at contract inception and any
costs of obtaining a contract would be recognized as expenses when
incurred.
BC223. Many respondents disagreed with recognizing all costs to obtain a
contract as expenses when incurred because they thought that the
assets arising from those costs should be recognized in some cases. In
addition, they noted that:
(a)
(b)
Other standards require some of the costs of obtaining a contract
to be included in the carrying amount of an asset on initial
recognition.
The proposals in the 2010 proposed Update were inconsistent
with the tentative conclusions in the Boards’ leases and
insurance contracts projects.
BC224. During redeliberations, the Boards decided that, in some cases, it might
be misleading for an entity to recognize all the costs of obtaining a
contract as expenses when incurred. For example, the Boards observed
that recognizing the full amount of a sales commission as an expense at
inception of a long-term service contract (when that sales commission is
reflected in the pricing of that contract and expected to be recovered)
would fail to acknowledge the existence of an asset.
BC225. Therefore, the Boards decided that an entity should recognize an asset
from the costs of obtaining a contract but present the asset separately
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from the contract asset or liability. To limit the acquisition costs to those
that can be clearly identified as relating specifically to, and recoverable
under, a contract, the Boards propose that only the incremental costs of
obtaining a contract should be included in the measurement of the
asset. The Boards decided that determining whether other costs relate
to a contract can be more subjective. The proposed approach also is
consistent with most existing revenue recognition practices (for
example, for investment management services as described in the
illustrative examples that accompany IAS 18).
BC226. The Boards acknowledge that, in some cases, the costs to an entity of
recognizing an asset from incremental acquisition costs might exceed
the financial reporting benefits. Therefore, as a practical expedient, they
decided to allow an entity to recognize those costs as expenses when
incurred for contracts in which the amortization period for the asset that
the entity otherwise would have recognized is one year or less.
Amortization and impairment (paragraphs 98–103)
BC227. The 2010 proposed Update proposed that an entity should amortize the
asset recognized from fulfillment costs in accordance with the pattern of
transfer of goods or services to which the asset relates. Respondents to
the 2010 proposed Update generally supported that proposal but asked
the Boards to clarify whether those goods or services might relate to
future contracts. Hence, the Boards clarified in this proposed Update
that in amortizing the asset in accordance with the transfer of goods or
services to which the asset relates, those goods or services could be
provided under an anticipated contract that the entity can identify
specifically. That conclusion is consistent with the notion of amortizing
an asset over its useful life and with existing requirements.
BC228. The Boards considered testing for impairment a recognized asset
arising from fulfillment costs using one of the existing impairment tests
in their respective standards (for example, Section 330-10-35 on
subsequent measurement of inventory, IAS 2, Section 360-10-35 on the
impairment of long-lived assets, and IAS 36, Impairment of Assets).
However, the Boards decided that to be consistent with the
measurement approach of the proposed guidance, the impairment test
should be based on comparing the carrying amount of the asset with the
remaining amount of consideration to which an entity expects to be
entitled in exchange for the goods or services to which the asset relates
less the remaining costs of providing those goods or services—that is,
typically the amount of the transaction price allocated to the remaining
performance obligations in the contract less the remaining costs to fulfill.
That also would be consistent with the test for identifying whether
performance obligations are onerous (as discussed in paragraphs
BC211–BC213).
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BC229. In light of feedback on the 2010 proposed Update, this proposed Update
specifies that when the reasons for an impairment cease to exist, that
impairment should not be reversed under U.S. GAAP but should be
reversed under IFRSs. The Boards acknowledged that this would result
in entities accounting differently for those contract costs under U.S.
GAAP and IFRSs. However, the Boards decided that because the
reasons for an impairment of an asset recognized in accordance with
paragraph 91 or 94 could also result in impairments of other assets, it
was important for the proposed guidance to be consistent with their
respective impairment models for other types of assets, which have
different guidance for the reversal of impairments.
Learning curve
BC230. A learning curve is the effect of efficiencies realized over time when an
entity’s costs of performing a task (or producing a unit) decline in
relation to how many times the entity performs that task (or produces
that unit). The phenomenon of a “learning curve” can exist
independently of a contract with a customer. For example, a typical
manufacturer that produces units for inventory would become more
efficient in its production process over time. Some respondents to the
2010 proposed Update questioned how to apply the proposals to
account for the effects of learning costs in a contract with a customer.
BC231. The Boards noted that the proposals in the 2010 proposed Update
already addressed the accounting for the effects of learning costs in the
following situations:
(a)
(b)
An entity has a single performance obligation to deliver a
specified number of units.
The performance obligation is satisfied over time.
BC232. In those situations, an entity would recognize revenue by selecting a
method of measuring progress that depicts the transfer over time of the
good or service to the customer. An entity likely would select a method
(for example, cost-to-cost) that would result in the entity recognizing
more revenue and expense for the early units produced relative to the
later units. That effect would be appropriate because of the greater
value of the entity’s performance in the early part of the contract. If an
entity were to sell only one unit, it would charge the customer a higher
price for that unit than the average unit price when the customer
purchases more than one unit.
BC233. In other situations, an entity may promise to deliver a specified number
of units in a contract, but that promise does not give rise to a single
performance obligation that is satisfied over time. In those situations,
the Boards decided that an entity should apply the guidance of other
standards (for example, inventory) for the following reasons:
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(a)
(b)
If an entity incurs costs to fulfill a contract but does not satisfy a
performance obligation over time, then the entity likely would be
creating an asset that would be in the scope of other standards.
For example, the costs of producing tangible units would
accumulate as inventory, and the entity would select an
appropriate method of measuring that inventory (for example, on
the basis of average costs). In such cases, the Boards decided
that an entity should not account for the learning curve differently
depending on whether a contract exists.
The type of contract described in this paragraph is not the type of
contract contemplated by Subtopic 605-35 and IAS 11, which are
the standards typically used by respondents who questioned the
accounting for learning curve effects in accordance with the
proposed guidance.
BC234. The Boards, however, acknowledged the diversity in practice when
accounting (in accordance with other standards) for the costs of
products produced under long-term production programs. They agreed
to consider adding a project to their agenda at a future time.
Presentation (paragraphs 104–108)
BC235. The Boards propose that the remaining rights and performance
obligations in a contract form a single unit of account and should be
accounted for, and presented, on a net basis as either a contract liability
or a contract asset. The Boards noted that the rights and obligations in a
contract with a customer are interdependent—the right to receive
consideration from a customer is dependent on the entity’s performance
and, similarly, the entity will perform only as long as the customer
continues to pay. They decided that these interdependencies are best
reflected by presenting the remaining rights and obligations net in the
statement of financial position.
BC236. The Boards considered whether the rights and performance obligations
in contracts that are subject to the legal remedy of specific performance
should be presented on a gross basis, that is, as separate assets and
liabilities. The Boards observed that in the event of a breach, such
contracts require the entity and the customer to perform as specified in
the contract. Therefore, unlike most contracts that can be settled net,
specific performance contracts generally would result in a two-way flow
of resources between the customer and the entity. The contracts are
akin to those financial contracts that are settled by physical delivery
rather than by a net cash payment and for which the units of account
are the individual assets and liabilities arising from the contractual rights
and obligations.
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BC237. However, the Boards decided against making any exception for specific
performance contracts. That is because the remedy of specific
performance is relatively rare and is not available in all jurisdictions. In
addition, it is only one of a number of possible remedies that could be
awarded by a court if legal action were taken for breach of contract.
Therefore, basing the accounting on a determination of what would
happen in that event would both be counterintuitive (because entities do
not enter into contracts with the expectation that they will be breached)
and difficult (because an entity would need to determine at contract
inception what remedy would be awarded by the court if litigation were
to take place in the future).
BC238. The Boards decided that the proposed guidance should not specify
whether an entity should be required to present its contract assets and
contract liabilities as separate line items in the statement of financial
position. Instead, an entity should apply the general principles for the
presentation of financial statements to determine whether to present
contract assets and contract liabilities separately in the statement of
financial position. For example, IAS 1, Presentation of Financial
Statements, requires an entity to present separately each material class
of similar items and items of a dissimilar nature or function unless they
are immaterial. The Boards noted that in some industries, an entity
typically provides additional detail about its contract assets and contract
liabilities either in the financial statements or in the notes. For instance,
the entity may use different labels to describe those assets or liabilities
or may recognize them in more than one line item. Because that
additional detail is often useful to users of those financial statements,
the Boards decided that an entity could use different descriptions of
contract assets, contract liabilities, and receivables and could use
additional line items to present those assets and liabilities if the entity
also provides sufficient information for users to be able to distinguish
those assets and liabilities. The Boards noted that, regardless of how an
entity presents its contract assets and contract liabilities in the
statement of financial position, the entity is required to disclose those
contract assets and contract liabilities as part of the reconciliation in
paragraph 117.
Relationship between contract assets and receivables
BC239. When an entity performs first by satisfying a performance obligation
before a customer performs by paying the consideration, the entity has
a contract asset—a right to consideration from the customer in
exchange for goods or services transferred to the customer.
BC240. In many cases, that contract asset is an unconditional right to
consideration—a receivable—because nothing other than the passage
of time makes payment of the consideration due. The Boards decided
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that there was no need for the revenue recognition standard to address
the accounting for receivables in addition to revenue recognition. Issues
such as the subsequent measurement (or impairment) of receivables
and disclosures relating to those assets are already addressed in U.S.
GAAP and IFRSs.
BC241. Therefore, the Boards decided that once an entity has an unconditional
right to consideration, the entity should present that right as a receivable
separately from the contract asset and account for it in accordance with
existing guidance. Consequently, contract assets would be recognized
in accordance with the proposed guidance when an entity has satisfied
a performance obligation but does not yet have an unconditional right to
consideration, for example, because it first needs to satisfy another
performance obligation in the contract.
BC242. In many cases, an unconditional right to consideration arises when the
entity satisfies the performance obligation and invoices the customer.
For example, a payment for goods or services is typically due and an
invoice is issued when the entity has transferred the goods or services
to the customer. However, the act of invoicing the customer for payment
does not indicate whether the entity has an unconditional right to
consideration. For instance, the entity may have an unconditional right
to consideration before it invoices (unbilled receivable) if there is nothing
but the passage of time before it is able to issue an invoice. In addition,
in some cases, an entity can have an unconditional right to
consideration before it has satisfied a performance obligation. For
example, an entity may enter into a noncancellable contract that
requires the customer to pay the consideration a month before the entity
provides goods or services. On the date when payment is due, the
entity has an unconditional right to consideration. (However, in such
cases, the entity would recognize revenue only when it has transferred
the goods or services.)
Disclosure (paragraphs 109–129)
BC243. Some of the main criticisms made by regulators and users of existing
revenue requirements are that the disclosures are inadequate and lack
cohesion with the disclosure of other items in the financial statements.
For example, many users complain that entities present revenue in
isolation so that users cannot relate revenue to the entity’s financial
position.
BC244. In light of those deficiencies, the Boards decided to propose a
comprehensive and coherent set of disclosures to help users of financial
statements understand and analyze how contracts with customers affect
an entity’s financial statements. The Boards decided that a
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comprehensive and coherent set of revenue disclosures should include
the following:
(a)
(b)
(c)
(d)
(e)
An explanation of the composition of revenue recognized in a
reporting period
A reconciliation of changes in contract asset and liability
balances from period to period
Information about performance obligations and onerous
contracts that the entity has with customers
Information about acquisition and fulfillment costs
An explanation of the judgments, and changes in the judgments,
used in recognizing revenue.
BC245. The Boards’ conclusions on the disclosure of this type of information are
explained in paragraphs BC249–BC271.
Disclosure objective (paragraphs 109–112)
BC246. Many recent standards specify a disclosure objective. The Boards
decided that the proposed guidance also should specify an objective for
the revenue disclosures. In the Boards’ view, interpretation and
implementation of the disclosure requirements improve if the
overarching objective of the disclosures is clearly stated. That is
because a preparer can assess whether the overall quality and
informational value of its revenue disclosures are sufficient to meet
users’ needs. The Boards also observed that specifying a disclosure
objective would avoid the need for detailed and prescriptive disclosure
requirements to meet the specific information needs for the many and
varied types of contracts with customers that are within the scope of the
proposed guidance. The Boards noted that developing principle-based
disclosure requirements is necessary because it would not be possible
or appropriate, given the objective of a single revenue standard, to
develop specific requirements for specific transactions or industries.
Materiality
BC247. Most respondents to the 2010 proposed Update (mainly preparers,
auditors, and some professional bodies and national standard setters)
stated that when viewed as a package, the disclosures specified in the
2010 proposed Update would result in voluminous disclosures that may
not be justified on a cost-benefit basis. In contrast, users of financial
statements generally supported the disclosure package because they
consider existing revenue disclosures to be insufficient. That conflicting
feedback on the proposed disclosures highlights the challenges that the
Boards have faced in developing disclosures that provide users with
information that is useful and that can be prepared at a reasonable cost.
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BC248. After consulting further with some users and preparers, the Boards
decided that the revised proposed disclosures achieve an appropriate
balance between users’ needs and preparation concerns. The Boards
disagreed with concerns that the proposed disclosures are excessive.
Although the volume of disclosure would increase compared to existing
revenue disclosure requirements, the Boards consider that the increase
in disclosure is necessary for an improvement to existing disclosure
practices and the usefulness of financial reporting, which, as noted in
paragraph BC243, have substantial shortcomings. Furthermore, the
Boards think that at least some of the concerns about excessive
disclosure are based on inferences relating to the length of the list of
proposed disclosures. That list of disclosures is necessary because the
revenue standard would apply to entities operating in a wide array of
industries and, as such, needs to specify revenue disclosures that might
be relevant for some entities or industries but not for others.
Consequently, those disclosures should not be viewed as a checklist of
minimum disclosures. One of the reasons the Boards included
paragraph 110 in the proposed guidance is to clarify that, consistent
with existing guidance in U.S. GAAP and IFRSs on materiality, an entity
would not need to disclose information that is immaterial. For the
purposes of applying the disclosure requirements, the Boards noted that
an entity should consider materiality in determining how much
information to provide.
Disaggregation of revenue (paragraphs 114–116)
BC249. Revenue recognized in the statement of comprehensive income is a
composite amount arising from many contracts with customers. The
revenue could arise from the transfer of different goods or services or
from contracts involving different types of customers or markets. The
disclosure of disaggregated revenue information helps users to
understand the composition of the revenue that has been recognized in
a reporting period. The level of disaggregation is important because
information is obscured if the disclosure of that information is either too
aggregated or too granular.
BC250. In developing the 2010 proposed Update, the Boards observed that
existing standards require revenue to be disaggregated and that those
standards specify the basis for the disaggregation. For example:
(a)
(b)
IAS 18 requires disclosure of the amount of each significant
category of revenue recognized during the period, including
revenue arising from the sale of goods, the rendering of services,
interest, royalties, and dividends.
Topic 280 on segment reporting and IFRS 8, Operating
Segments, require an entity to disclose revenue for each
operating segment (reconciled to total revenue) and to
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disaggregate its total revenue by products or services (or by
groups of similar products or services) and by geographical
areas to the extent that the entity’s operating segments are not
based on different products or services or different geographical
areas. Related disclosure is required on the entity’s types of
products and services and its major customers. However, the
amounts disclosed can be measured on a basis that is used
internally and might not agree with the measurements used in
U.S. GAAP or IFRSs.
BC251. Feedback from users consulted on the revenue disclosures indicated
that the basis for meaningfully disaggregating revenue should not be
uniform. Because the most useful disaggregation of revenue depends
on various entity-specific or industry-specific factors, the Boards
decided that the proposed guidance should not prescribe a specific
characteristic of revenue to be used as the basis for disaggregation.
Instead, the Boards decided that an entity should disaggregate revenue
into the primary categories that best depict how the nature, amount,
timing, and uncertainty of revenue and cash flows are affected by
economic factors. In redeliberating the proposed disclosures, the
Boards clarified that an entity may need to use more than one type of
category to disaggregate revenue to meet that disclosure objective.
BC252. The Boards clarified that the allowance for any impairment loss that is
presented adjacent to revenue (in accordance with paragraph 69) is not
required to be disaggregated in accordance with paragraph 114. The
Boards noted that disaggregation of the impairment loss could be
difficult to prepare and may provide only limited useful information. That
is because credit risk is a customer-specific risk that is typically
managed by the entity centrally, whereas the most useful
disaggregation of revenue will typically be specific to the attributes of
the transaction (for example, by type of good or service or geography).
BC253. Some respondents to the 2010 proposed Update were concerned that
the proposal to disclose revenue on a disaggregated basis would
duplicate the disaggregation requirements for revenue in IFRS 8 and
Topic 280. Paragraph 112 of this proposed Update clarifies that an
entity would not need to disclose information if it has provided the
information in accordance with another standard. Consequently, an
entity would not need to provide disaggregated revenue disclosures if
the entity is separately providing segment reporting disclosures for
revenue that would meet the requirements specified in paragraph 114
and those disclosures recognize and measure revenue in accordance
with the proposed guidance. Nevertheless, the Boards included a
proposal to disaggregate revenue in the proposed guidance for the
following reasons:
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(a)
(b)
The segment reporting disclosures for revenue may be based on
non-GAAP information (that is, the revenue that is reported to the
chief operating decision maker may be recognized and
measured on a basis that is not in accordance with the revenue
standard).
Some entities that would apply the revenue standard are exempt
from providing segment disclosures (for example, entities that
are not listed on a public stock exchange).
Reconciliation of contract balances (paragraph 117)
BC254. For users to assess the nature, amount, timing, and uncertainty of
revenue and cash flows arising from an entity’s contracts with
customers, they need to understand the relationship between the
revenue recognized in a reporting period and changes in the balances
of the entity’s contract assets and contract liabilities. Among other
things, this includes identifying whether the entity typically receives
payment before or after transferring goods or services to the customer
and quantifying the relationship between revenue recognized and cash
flows. Although entities currently recognize working capital balances at
each reporting date, such as trade receivables and deferred revenue,
users have indicated that the relationship between those balances and
the revenue recognized in the period is unclear. Therefore, to clarify that
relationship, the Boards proposed in the 2010 proposed Update that an
entity should disclose a reconciliation of the contract asset and contract
liability balances.
BC255. In developing the 2010 proposed Update, the Boards considered
whether the reconciliation of contract balances should be presented
gross or net. A gross reconciliation would show the remaining
contractual rights and performance obligations in separate columns with
a total net amount that links to the statement of financial position. In
doing so, the reconciliation would highlight the amount of new contracts
obtained and the amount of unsatisfied performance obligations and,
hence, indicate the amount of revenue expected to be recognized in the
future as a result of contracts that already exist. The Boards
acknowledged that this information would be useful to users of financial
statements. However, they also noted the following:
(a)
(b)
(c)
The cost of preparing and auditing the reconciliation would be
high because an entity would be required to measure all
unperformed contracts, including executory contracts.
There is a high level of judgment inherent in executory contracts,
including determining when a contract comes into existence.
The information provided may not be useful for many types of
contracts, such as those with a short duration.
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Hence, the Boards decided to propose in the 2010 proposed Update
that an entity should disclose a reconciliation from the opening to the
closing balance of the contract assets and contract liabilities recognized
in the statement of financial position.
BC256. Preparers and users expressed differing views on the proposal to
disclose a reconciliation of contract balances. Most preparers
commented that it would be costly to compile and present the
information required by the reconciliation of contract assets and contract
liabilities. Furthermore, some preparers doubted whether, given the
preparation costs, the disclosure would be cost-beneficial. In contrast,
users stated that the information that would be provided by the
reconciliation is not available from other qualitative or quantitative
disclosure requirements. And, although the reconciliation would impose
costs on preparers, those users commented that the disclosure was
important because it would help them to understand the interaction
between revenue that has been recognized and the movements in cash
and receivables, as well as to understand contract assets and contract
liabilities.
BC257. In light of the feedback received from some preparers, the Boards
considered whether to require an entity to disclose the reconciliation
only if specified criteria are met. For instance, those criteria might
include the following:
(a)
(b)
The contract meets specified attributes (for example, it is a longterm contract or the entity operates in a particular industry).
The contract assets or contract liabilities are classified as
noncurrent assets or liabilities in the statement of financial
position.
BC258. The Boards decided that this would not be a viable approach because
of the difficulty in clearly identifying those types of contracts or industries
for which a reconciliation would provide (or would not provide) useful
information. Even though users suggested that the reconciliation would
be especially useful for industries or entities with long-term contracts,
such as construction contracts and outsourcing contracts, they also
indicated that there would be other circumstances in which a
reconciliation of contract balances would be useful. Furthermore, the
criteria in paragraph BC257 could result in excluding some of an entity’s
contract assets and contract liabilities from the reconciliation. If that
were to happen, the disclosure would not represent a reconciliation of
the items in the financial statements.
BC259. Therefore, the Boards affirmed the proposal to require the reconciliation
of contract balances because of the importance of that information to
users of financial statements. The Boards also decided that the
reconciliation should be presented in a tabular format because users
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commented that this would make the reconciliation easier to understand
and would facilitate comparisons between entities.
BC260. The Boards observed that an entity should consider whether the
information to be disclosed in the reconciliation would be material. As
explained in paragraph BC248, the Boards think that the guidance in
existing U.S. GAAP and IFRSs not to disclose immaterial information
would apply in determining:
(a)
(b)
When the reconciliation is provided (for example, the
reconciliation could be immaterial for entities that operate cash
sales businesses)
How much detail is provided in that reconciliation (that is, how
many reconciling items are presented).
Disclosure of remaining performance obligations (paragraphs
119–121)
BC261. In the 2010 proposed Update, the Boards proposed that an entity
should disclose the amount of its remaining performance obligations
and the expected timing of the satisfaction of those performance
obligations (in one-year time bands for each of the subsequent three
years and a fourth time band for all performance obligations remaining
after three years). That was because the reconciliation of contract
balances would not result in the disclosure of information about an
entity’s performance obligations on a gross basis. The Boards
determined that separately disclosing the remaining performance
obligations would enable users to:
(a)
(b)
(c)
(d)
(e)
Assess the risks associated with future revenues. In general,
users see the outcome as more uncertain if satisfaction of the
performance obligation occurs at a much later date because it
will be subject to a greater number of factors and uncertainties
than will a more immediately satisfied performance obligation.
Understand the timing and amount of revenue to be recognized
from existing contracts.
Analyze trends in the amount and timing of revenue.
Obtain consistency in the reporting of “backlog,” which often is
disclosed by entities in management commentary but calculated
on a variety of bases.
Understand how changes in judgments or circumstances might
affect the pattern of revenue recognition.
Because the information provided by this disclosure would be most
useful for longer term contracts, the Boards proposed the disclosure for
only those contracts with an original expected duration of more than one
year.
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BC262. Many respondents to the 2010 proposed Update questioned whether
the proposal would be cost-beneficial. Users commented that the
proposed disclosure could have some information value for some types
of contracts (for example, the disclosure would provide more useful
information for subscription services than for retail transactions).
However, they suggested that the usefulness of the disclosure would be
enhanced significantly if the disclosure also included the remaining
performance obligations associated with wholly unperformed contracts
that could be terminated without penalty. Other respondents, including
preparers, made the following observations:
(a)
(b)
(c)
The disclosure would be difficult and costly to prepare and audit
because existing accounting systems are not designed to track
and capture the required information, including the information
on scheduling the timing of the satisfaction of those remaining
performance obligations.
The information provided by the disclosure could be
misinterpreted because, depending on the nature of the entity’s
business(es), the disclosure may give prominence to only a
relatively small subset of the entity’s potential future revenues.
Forward-looking information should be presented in
management commentary rather than in the notes to the
financial statements, especially because the location of that
disclosure also has practical consequences in some jurisdictions.
For instance, in the United States, disclosures that are presented
in the notes to the financial statements are excluded from the
“safe harbor” protections regarding forward-looking statements
that are afforded under the Private Securities Litigation Reform
Act and the Securities and Exchange Commission’s related
regulations.
BC263. In redeliberating the proposed disclosure of remaining performance
obligations, the Boards observed that the circumstances that led them
to propose the disclosure remained unchanged because they had
affirmed their proposal to require a reconciliation of contract balances to
be provided on a net basis rather than on a gross basis. The Boards
also observed that in some industries in which long-term contracts are
essential to the business model, disclosure of a similar (but non-GAAP)
nature is demanded by analysts as a critical input to the evaluation of
revenue and revenue growth. However, because of the concerns raised
by users and preparers about the proposed disclosure, the Boards
considered the disclosure of different amounts of future revenues from
contracts with customers and whether those amounts provide users of
financial statements with useful information.
BC264. The Boards decided to retain the proposal in the 2010 proposed Update
(that is, the disclosure of future revenue from contracts with customers
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should be the gross amount of performance obligations remaining from
contracts with an original expected duration of more than one year). The
Boards decided against requiring the disclosure of future revenue from
contracts with customers based on the other amounts for the following
reasons:
Measure
Reason for Rejection
Disclosure of the carrying amount
of contract liabilities (that is,
scheduling when advance
payments received from
customers will be recognized as
revenue)
The Boards decided that the
proposal in the 2010 proposed
Update would provide users with
more relevant information (for
example, for the purposes
outlined in paragraph BC261).
The Boards noted that some
entities currently disclose a
maturity analysis of their contract
liabilities that will be recognized as
revenue in future reporting periods
(particularly entities that provide
subscription or information
technology support services over
time, for which customers typically
pay in advance). The Boards think
that those entities would continue
to provide that information if users
demand it.
Disclosure of the gross amount of
performance obligations remaining
from all contracts with customers
(that is, including those contracts
with an original expected duration
of one year or less)
The Boards rejected this
alternative on a cost-benefit basis.
They think that the cost of
preparing the disclosure for shortterm contracts would not be offset
by the benefits provided by that
disclosure.
Disclosure of order book/backlog,
including cancellable contracts or
the disclosure of estimated future
revenue of the entity including
anticipated contracts
Although the disclosure of this
information was supported by
users, the Boards rejected this
disclosure because it would have
included revenue that is outside
the scope of the proposed
guidance (that is, the disclosure
would include future contracts and
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Measure
Reason for Rejection
contracts that are wholly
unperformed and that can be
terminated without penalty).
BC265. Nevertheless, the Boards acknowledged that the proposed disclosure
would impose significant costs on preparers and, therefore, the Boards
considered whether the disclosure could be limited to those contracts
whereby the information on remaining performance obligations would be
most cost-beneficial to disclose. The Boards decided to:
(a)
(b)
Affirm the proposal in the 2010 proposed Update to exclude from
the disclosure those contracts that have an original expected
duration of one year or less.
Propose that, as a practical expedient, an entity need not
disclose the amount of remaining performance obligations if the
nature of the contract is such that the entity recognizes revenue
as invoiced. The Boards proposed this practical expedient after
observing that, in some cases, an entity would not need to strictly
apply each step of the model to be able to recognize revenue.
This would be the case for some “cost plus” or “time and
materials” contracts in which the contract price is based on a rate
per unit of input (for example, hours worked and materials
consumed). With those contracts, an entity would be able to
recognize revenue as it performs the work and consumes the
materials in the amount specified in the contract without needing
to apply each step of the revenue model. By permitting those
contracts to be excluded from the scope of the proposed
disclosure, the Boards are ensuring that an entity would not be
required to determine the transaction price and allocate that
amount to the performance obligations in the contract for the
purposes of preparing the disclosure.
BC266. Many respondents also disagreed with the proposal in the 2010
proposed Update that prescribed the basis for presenting the maturity
analysis (that is, by requiring the remaining performance obligations to
be scheduled into one-year time bands). Respondents disagreed with
the rigidity of those time bands and some also expressed a concern that
the scheduling could imply a false degree of precision in the expectation
of when a performance obligation will be satisfied. Hence, the Boards
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decided to permit an entity to choose whether to provide that
explanation:
(a)
(b)
On a quantitative basis using a time band series that would be
most appropriate for the duration of the contract
By using a mixture of quantitative and qualitative information in
scheduling the amount of remaining performance obligations.
Performance obligations (paragraph 118)
BC267. Existing standards require entities to disclose their accounting policies
for recognizing revenue (see paragraph 10(e) of IAS 1 or the guidance
in Section 235-10-50 on disclosure in the notes to financial statements).
However, users have suggested that in many cases, entities provide a
“boilerplate” description of the accounting policy adopted without
explaining how the accounting policy relates to the contracts that the
entity enters into with customers. To address that problem, paragraph
118 of this proposed Update would require an entity to disclose
information about its performance obligations in contracts with
customers. That proposed disclosure would complement the accounting
policy disclosure requirements in existing standards by requiring an
entity to provide more descriptive information about its performance
obligations.
Onerous performance obligations (paragraphs 122 and 123)
BC268. The Boards decided that the disclosures relating to onerous
performance obligations recognized in accordance with the proposed
guidance should be consistent with the existing onerous contract
disclosures in IAS 37.
Assumptions and uncertainties (paragraphs 124–127)
BC269. U.S. GAAP and IFRSs have general requirements for the disclosure of
significant accounting estimates and judgments made by an entity.
Because of the importance placed on revenue by users of financial
statements, the Boards decided to propose specific disclosure
requirements on the estimates used and judgments made in
determining the amount and timing of revenue recognition.
BC270. The FASB’s Emerging Issues Task Force (EITF) reached a similar
conclusion when developing the guidance in Section 605-25-50 for the
disclosure of multiple-element arrangements. The EITF consulted
extensively to develop disclosures to communicate the judgments used
and their effect on the recognition of revenue from multiple-element
arrangements. After considering whether those disclosures could apply
appropriately to all contracts with customers, the Boards decided that
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the proposed guidance should include disclosures on significant
judgments that are similar to those required by Section 605-25-50.
Assets from the costs to obtain or fulfill a contract (paragraphs
128 and 129)
BC271. Users commented that the 2010 proposed Update did not propose any
disclosures about assets arising from costs to fulfill a contract. They
thought that information about these assets would be helpful in
understanding the types of costs that the entity has recognized as
assets and how those costs are subsequently amortized or impaired.
Consequently, the Boards decided that an entity should disclose a
reconciliation of the carrying amount of an asset arising from the costs
to obtain or fulfill a contract with a customer, by major classification at
the beginning and end of the period. The Boards also decided that this
disclosure was necessary to replace some of the existing disclosures
that would be eliminated by consequential amendments to Topic 605 on
revenue recognition and IAS 2.
Disclosures required for interim financial statements
BC272. Absent specific disclosure requirements for interim financial statements,
an entity would apply Topic 270 on interim reporting or IAS 34, Interim
Financial Reporting, to determine the information about revenue from
contracts with customers that the entity should disclose in its interim
financial statements. Those standards require, as a general principle,
that an entity disclose information about significant changes in financial
position and performance of the entity since the end of the last annual
reporting period. However, because information about revenue is crucial
for users of financial statements to make informed assessments about
an entity’s financial performance and prospects, the Boards decided to
specify the disclosures about revenue and contracts with customers that
an entity should provide in interim financial statements. Hence, users
would be provided with consistent and comparable disclosures in
interim periods because specifying the required disclosures would limit
the risk that entities could reach different conclusions on what
represents a significant change and how information about that
significant change should be presented in the interim financial
statements.
BC273. The disclosures specified by the Boards relate to information that would
be expected to change significantly from period to period; therefore,
disclosure of that information would be consistent with the general
disclosure principles in Topic 270 and IAS 34. The Boards considered,
but ultimately rejected, an alternative approach of specifying that an
entity should disclose a disaggregation of revenue in interim financial
statements and to specify other disclosures that an entity might need to
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disclose only if that information significantly changes from period to
period. Although, in some cases, that alternative approach could limit
the volume of information that would be required to be disclosed in
interim financial statements, the Boards decided that the alternative
might result in diversity in the amount of information that some entities
disclose in interim financial periods given the judgement associated with
identifying what represents a significant change to the recognition of
revenue.
Implementation guidance (paragraphs IG1–IG58)
BC274. The Boards decided to include implementation guidance to clarify how
the principles in the proposed guidance would apply to features found in
various typical contracts with customers. Some of that implementation
guidance is based on existing guidance in U.S. GAAP or IFRSs.
Consistent with the objective of developing a single revenue recognition
model (as discussed in paragraphs BC3 and BC4), the Boards do not
intend to provide guidance that would apply only to specific industries.
Sale of a product with a right of return (paragraphs IG2–IG9)
BC275. In some contracts, an entity transfers a good to a customer and also
grants the customer the right to return the good to the entity. The
Boards decided that, conceptually, a contract with a right of return
includes at least two performance obligations—a performance obligation
to provide the good to the customer and a performance obligation for
the return right service, which is a standready obligation to accept the
goods returned by the customer during the return period.
BC276. In relation to performance obligations to provide goods to customers,
the Boards decided that in effect an entity has made an uncertain
number of sales. That is because it is only after the return right expires
that the entity will know with certainty how many sales it has made (that
is, how many sales did not fail). Therefore, the Boards decided that an
entity should not recognize revenue for the sales that are expected to
fail as a result of customers exercising their return rights. Instead, for
those sales, the entity should recognize a liability for its obligation to
refund amounts to customers.
BC277. The Boards decided that in determining the amount of revenue to
recognize (and hence the amount of the refund obligation), an entity
should use the principles for recognizing and measuring variable
consideration. Consistent with those principles, if an entity is not
reasonably assured of the amount of consideration to which it will be
entitled (considering the quantity of goods to be returned), the entity
would recognize any consideration received as a refund liability.
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BC278. The Boards considered whether to account for the return right service
as a performance obligation separate from the refund liability. If an
entity does not recognize a performance obligation for the return right
service, it would have recognized all of the revenue and margin in the
contract once the customer obtains control of the good. Such an
outcome might not faithfully depict the entity’s performance under the
contract. However, the Boards noted that accounting for the return right
service as a performance obligation that is separate from the refund
liability would typically require the entity to estimate the standalone
selling price of that service. Given that in many cases, the number of
returns is expected to be a small percentage of the total sales and the
return period is often short (such as 30 days), the Boards decided that
the incremental information provided to users by accounting for the
return right service as a separate performance obligation would not
justify the complexities and costs of doing so. Therefore, the Boards
decided that the return right service should not be accounted for as a
separate performance obligation.
BC279. A right of return gives the entity a contractual right to recover the good
from the customer if the customer exercises its option to return the good
and obtain a refund. The Boards decided that the right to recover the
good should be recognized as an asset rather than offset against the
refund liability. The Boards observed that recognizing the asset
separately from the refund liability provides greater transparency and
ensures that the asset is considered for impairment testing.
Product warranties and product liabilities (paragraphs IG10–
IG15)
BC280. When an entity sells a product (whether that product is a good or
service) to a customer, the entity may also provide the customer with a
warranty on that product. The warranty might be described as, for
example, a manufacturer’s warranty, a standard warranty, or an
extended warranty. The Boards decided to provide specific guidance on
applying the revenue model to warranties because many contracts with
customers for the sale of products include a warranty and the nature of
that warranty may vary across products, entities, and jurisdictions.
BC281. In the Discussion Paper, the Boards proposed accounting for all
warranties consistently because a unifying feature of all warranties is
that an entity promises to stand ready to replace or repair the product in
accordance with the terms and conditions of the warranty. The
Discussion Paper proposed that a promise to stand ready provides the
customer with a service of warranty coverage, which would be a
separate performance obligation to which revenue would be attributed.
However, most respondents to the Discussion Paper stated that the
accounting for warranties should reflect the fact that some product
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warranties are different from others. Some warranties protect the
customer from defects that exist when the product is transferred to the
customer, and other warranties protect the customer from faults that
arise after the product has been transferred to the customer. Those
respondents commented that the customer is not receiving a separate
service if the warranty only protects the customer from the product
being defective at the time of sale. Consequently, any subsequent
repairs or replacements are additional costs of providing the product
and, therefore, relate to an entity’s past performance.
BC282. The 2010 proposed Update proposed that an entity should distinguish
between warranties on the basis of the objective of the warranty (that is,
the nature of the protection promised to the customer). The 2010
proposed Update identified the following types of warranties:
(a)
(b)
A “quality assurance warranty”—a promise that the product is
free from defects at the time of sale
An “insurance warranty”—a promise to repair or replace the
product if a fault arises within a specified period (normally subject
to some conditions).
BC283. The 2010 proposed Update would have required an entity to account for
some warranties differently than other warranties. However, in this
proposed Update, the Boards decided not to distinguish between
warranties only on the basis of the nature of the protection promised to
the customer. They made this decision because almost all respondents
to the 2010 proposed Update commented that it could be difficult to
determine when a fault has arisen in a product. For example:
(a)
(b)
In the manufacturing industry, products often go through rigorous
inspection processes before delivery to the customer, and an
entity may not be aware of faults at the time of delivery.
In the software industry, it is not clear how an entity would
determine whether a software bug fix is repairing a latent defect
or a defect that occurred after the product was transferred to the
customer.
BC284. Instead, paragraphs IG10–IG13 of this proposed Update would require
an entity to identify a promised warranty as a separate performance
obligation if either of the following criteria is met:
(a)
(b)
The customer has the option to purchase the warranty separately
from the entity.
The warranty provides a service to the customer in addition to
the assurance that the entity’s past performance was as
specified in the contract.
BC285. A promised warranty that does not meet the criteria in those paragraphs
is not a performance obligation. In effect, those criteria provide a
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different basis for distinguishing between an insurance warranty (which
is a separate performance obligation and is described in this proposed
Update as a “service-type warranty”) and a quality assurance warranty
(which is not a performance obligation and is described in this proposed
Update as an “assurance-type warranty”).
Warranties that are separate performance obligations
(service-type warranties)
BC286. For some types of warranties, the entity either sells separately or
negotiates separately with the customer so that the customer can
choose whether to purchase the warranty coverage. That fact provides
objective evidence that the promised warranty provides a service to the
customer in addition to the promised product. Consequently, the Boards
decided that the promised warranty would be a separate performance
obligation in accordance with paragraphs 28 and 29.
BC287. For warranties that are not sold separately by the entity or negotiated
separately with the customer, the Boards decided that those promised
warranties should also be identified as separate performance
obligations if the facts and circumstances suggest that the warranty (or
a part of the warranty) provides a service to the customer in addition to
the assurance that the entity’s past performance was as specified in the
contract. The Boards noted that this decision would:
(a)
(b)
(c)
Provide a clear principle that allows an entity to account for
economically similar warranties in a similar manner, regardless
of whether the warranties are separately priced or negotiated.
Be consistent with the general principles for identifying separate
performance obligations.
Remove the bright line in existing U.S. GAAP that distinguishes
between different types of warranties based solely on whether
the warranty is separately priced.
BC288. A warranty that meets the criteria in paragraphs IG10–IG15 also meets
the definition of an insurance contract. However, in their insurance
contracts project, the Boards have tentatively decided that warranties
issued directly by a manufacturer, dealer, or retailer should be within the
scope of the revenue standard. Warranties issued by third parties are
within the scope of the insurance contracts project.
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Warranties that are not performance obligations (assurancetype warranties)
BC289. The Boards considered whether an assurance-type warranty should be
accounted for as either of the following:
(a)
(b)
A separate liability to replace or repair a defective product
An unsatisfied performance obligation because the entity has not
provided the customer with a product that is free from defects at
the time of sale.
BC290. The proposals in the 2010 proposed Update would have required an
entity that provides an assurance-type warranty to a customer to
evaluate whether it has satisfied its performance obligation to transfer
the product specified in the contract. The entity would determine the
likelihood and the extent of defective products that it has sold to
customers and, as a consequence, not recognize revenue to the extent
that those performance obligations were not satisfied. An advantage of
that proposal is that an entity would not recognize the entire transaction
price as revenue when the product has transferred to the customer
because a portion of the transaction price would not be recognized as
revenue until the entity has repaired or replaced the products that are
expected to be defective. However, the Boards decided not to retain
that proposal in this proposed Update, mainly for the following practical
reasons:
(a)
(b)
There are complexities associated with an entity being required
to continue to recognize as “inventory” those products that have
been delivered to customers and that are expected to be
defective.
Although an entity would recognize the entire margin for the
product when it is transferred to the customer, any margin
attributable to the repair or replacement of that product in an
assurance-type warranty would be unlikely to significantly distort
the pattern of recognition of the overall contract margin.
BC291. Accordingly, the Boards decided that an entity should recognize
assurance-type warranties as a separate liability to replace or repair a
defective product. This proposed Update would require an entity to
recognize a warranty liability and corresponding expense when it
transfers the product to the customer, and the liability would be
measured in accordance with Topic 450 on contingencies or IAS 37. In
contrast to the accounting for service warranties, an entity would not
attribute any transaction price (and therefore revenue) to an assurancetype warranty. Some warranties may include both assurance features
and service features. If an entity cannot reasonably account for those
assurance features of the warranty separately from the service features,
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the Boards decided that an entity should be allowed to account for the
warranties together as a single performance obligation. That accounting
would ensure that the entity does not overstate the recognition of
revenue at the time the product transfers to the customer and also
relieves the entity from identifying and accounting separately for the two
components of the warranty coverage.
Statutory warranties
BC292. In some jurisdictions, the law requires an entity to provide warranties
with the sale of its products. The law might state that an entity is
required to repair or replace products that develop faults within a
specified period from the time of sale. Consequently, these statutory
warranties may appear to be service-type warranties because they
would cover faults arising after the time of sale, not just defects existing
at the time of sale. However, the Boards decided that the law can be
viewed as simply operationalizing an assurance-type warranty. In other
words, the objective of these statutory warranties is to protect the
customer against the risk of purchasing a defective product. But rather
than requiring the entity to determine whether the product was defective
at the time of sale, the law presumes that if a fault arises within a
specified period (which can vary depending on the nature of the
product), the product was defective at the time of sale. Therefore, these
statutory warranties should be accounted for as assurance warranties.
Product liability laws
BC293. The Boards clarified that product liability laws do not give rise to
performance obligations. These laws typically require an entity to pay
compensation if one of its products causes harm or damage. The
Boards noted that an entity should not recognize a performance
obligation arising from these laws because the performance obligation
in a contract is to transfer the product to the customer. To the extent
that the product is defective, the entity would recognize a liability for the
expected costs to repair or replace the product (as discussed in
paragraph IG15). Any obligation of the entity to pay compensation for
the damage or harm that its product causes is separate from the
performance obligation. The Boards noted that an entity would account
for this obligation separately from the contract with the customer and in
accordance with the guidance on loss contingencies in Subtopic 450-20
or IAS 37.
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Principal versus agent considerations (paragraphs IG16–
IG19)
BC294. Existing standards require an entity to assess whether it is acting as a
principal or an agent when goods or services are transferred to end
customers. That assessment determines whether an entity recognizes
revenue for the gross amount of customer consideration (if the entity is
a principal) or for a net amount after the principal is compensated for its
goods or services (if the entity is an agent). Under the proposed
guidance, principals and agents would have different performance
obligations. A principal controls the goods or services before they are
transferred to customers. Consequently, the principal’s performance
obligation would be to transfer those goods or services to the customer.
In contrast, an agent does not control the goods or services before they
are transferred to customers. The agent facilitates the sale of goods or
services between a principal and the customer. Therefore, an agent’s
performance obligation would be to arrange for another party to provide
the goods or services to the customer. The transaction price attributable
to an agent’s performance obligation would be the fee or commission
that the agent receives for providing those services.
BC295. It may not always be readily apparent whether an entity has obtained
control of goods or services before they are transferred to a customer.
Similar issues arise in consignment sales. For that reason, the Boards
have included in the proposed implementation guidance some
indicators that a performance obligation relates to an agency
relationship. They are based on the indicators specified in the guidance
on principal-agent considerations in Subtopic 605-45 and in the
illustrative examples that accompany IAS 18.
Customer options for additional goods or services
(paragraphs IG20–IG24)
BC296. In some contracts, customers are given an option to purchase additional
goods or services. In developing the proposed guidance, the Boards
considered when those options should be accounted for as a separate
performance obligation. During those discussions, the Boards observed
that it can be difficult to distinguish between the following:
(a)
(b)
An option that the customer pays for (often implicitly) as part of
an existing contract, which would be a performance obligation to
which part of the transaction price is allocated
A marketing or promotional offer that the customer did not pay
for and, although made at the time of entering into a contract, is
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not part of the contract, and which would not be a performance
obligation in that contract.
BC297. Similar difficulties in distinguishing between an option and an offer have
arisen in U.S. GAAP for the software industry. In response to those
practice issues, Section 985-605-15 on scope and scope exceptions for
software indicates that an offer of a discount on future purchases of
goods or services would be presumed to be a separate option in the
contract if that discount is significant and is incremental both to the
range of discounts reflected in the pricing of other elements in that
contract and to the range of discounts typically given in comparable
transactions. The existing notions of significant and incremental form
the basis for the principle of a material right that is used to differentiate
between an option and a marketing or promotional offer. However, the
Boards observed that even if the offered discount is not incremental to
other discounts in the contract, in some cases, it could nonetheless give
rise to a material right to the customer. Therefore, the Boards decided
not to carry forward that part of the guidance in Section 985-605-15 into
the proposed Update.
Allocating the transaction price
BC298. In accordance with the proposed guidance, an entity would be required
to determine the standalone selling price of the option so that part of the
transaction price is allocated to the performance obligation. In some
cases, the standalone selling price of the option may be directly
observable, or it may be indirectly observable by, for example,
comparing the observable prices for the goods or services with and
without the option. In many cases, though, the standalone selling price
of the option would need to be estimated.
BC299. Option pricing models can be used to estimate the standalone selling
price of an option. The price of an option includes the intrinsic value of
the option (that is, the value of the option if it were exercised today) and
its time value (that is, the value of the option that depends on the time
until the expiration and the volatility of the price of the underlying goods
or services). The Boards decided that the benefits to users of allocating
some of the transaction price to the price and availability guarantees
inherent in the time value component of the option price would not
justify the costs and difficulties to do so. However, the Boards decided
that an entity should be able to readily obtain the inputs necessary to
measure the intrinsic value of the option in accordance with paragraph
IG23 and that those calculations should be relatively straightforward and
intuitive. This measurement approach is consistent with the
measurement application guidance for customer loyalty points in IFRIC
13, Customer Loyalty Programmes.
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Renewal options
BC300. A renewal option gives a customer the right to acquire additional goods
or services of the same type as those supplied under an existing
contract. This type of option could be described as a renewal option
within a relatively short contract (for example, a one-year contract with
an option to renew that contract for a further year at the end of the first
and second years) or a cancellation option within a longer contract (for
example, a three-year contract that allows the customer to discontinue
the contract at the end of each year). A renewal option could be viewed
similarly to other options to provide additional goods or services. In
other words, the renewal option could be a separate performance
obligation in the contract if it provides the customer with a material right
that it could not otherwise obtain without entering into that contract.
BC301. However, in cases in which a renewal option provides the customer with
a material right, there typically are a series of options. In other words, to
exercise any option in the contract, the customer must have exercised
all the previous options in the contract. The Boards decided that
determining the standalone selling price of a series of options would be
complex. That is because determining the estimated standalone selling
prices of the options would require an entity to identify various inputs,
such as the standalone selling prices for the goods or services for each
renewal period and the likelihood that customers will renew for the
subsequent period. In other words, the entity would have to consider the
entire potential term of the contract to determine the amount of the
transaction price from the initial period that should be deferred until later
periods.
BC302. For that reason, the Boards decided to provide an entity with a practical
alternative to estimating the standalone selling price of the option. The
practical alternative would require an entity to include the optional goods
or services that it expects to provide (and corresponding expected
customer consideration) in the initial measurement of the transaction
price. In the Boards’ view, it would be simpler for the entity to view a
contract with renewal options as a contract for its expected term (that is,
including the expected renewal periods) rather than as a contract with a
series of options.
BC303. The Boards developed two criteria to distinguish renewal options from
other options to acquire additional goods or services. First, the
additional goods or services underlying the renewal options must be
similar to those provided under the initial contract—that is, the entity
continues to provide what it was already providing. Therefore, it is more
intuitive to view the goods or services underlying such options as part of
the initial contract. In contrast, customer loyalty points and many
discount vouchers would be considered to be separate deliverables in
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the contract because the underlying goods or services may be of a
different nature.
BC304. The second criterion is that the additional goods or services in the
subsequent contracts must be provided in accordance with the terms of
the original contract. Consequently, the entity’s position is constrained
because it cannot change those terms and conditions and, in particular,
it cannot change the pricing of the additional goods or services beyond
the parameters specified in the original contract. That is different from
examples such as customer loyalty points and discount vouchers. For
example, if an airline frequent flyer program offers “free” flights to
customers, the airline is not constrained because it can subsequently
determine the number of points that are required to be redeemed for
any particular “free” flight. Similarly, when an entity grants discount
vouchers, typically it has not constrained itself with respect to the price
of the subsequent goods or services against which the discount
vouchers will be redeemed.
Customers’ unexercised rights (breakage) (paragraphs
IG25–IG28)
BC305. Some respondents to the 2010 proposed Update requested that the
Boards provide guidance on how to account for a customer’s
nonrefundable prepayment for the right to receive goods or services in
the future. Common examples include the purchase of gift cards and
nonrefundable tickets.
BC306. The Boards noted that the guidance on the allocation of the transaction
price to customer options in the 2010 proposed Update implicitly
explained how to account for situations in which the customer does not
exercise all of its contractual rights to those goods or services (that is,
breakage). However, the 2010 proposed Update did not explain how to
account for breakage in situations in which there is only one
performance obligation in the contract (that is, there is no allocation and,
hence, no need to determine a standalone selling price).
BC307. Consequently, the Boards included implementation guidance in this
proposed Update on the accounting for breakage (paragraphs IG25–
IG28). That guidance is consistent with the principles in the proposed
guidance for accounting for customer options. Thus, an entity would
recognize revenue from breakage as it performs under the contract on
the basis of the estimated pattern of customers exercising their rights
(that is, a proportional approach). That approach effectively increases
the selling price of the individual goods or services transferred to the
customer to include the revenue from the entity’s estimate of
unexercised rights. The Boards decided that this approach represents
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the most appropriate pattern of revenue recognition for breakage
because if an entity believed that customers would exercise all of their
rights (that is, if the entity did not expect any breakage), the entity might
increase the price of its goods or services. For example, an airline that
sells nonrefundable tickets would presumably charge a higher price per
ticket if there was no expectation of breakage.
BC308. The Boards also decided that an entity must be reasonably assured of a
breakage amount to recognize revenue. Otherwise, the entity’s
performance obligation to stand ready to provide future goods or
services could be understated.
BC309. The Boards considered, but rejected, the approach that would have
required an entity to recognize estimated breakage as revenue
immediately on the receipt of prepayment from a customer. The Boards
decided that because the entity has not performed under the contract,
recognizing revenue would not be a faithful depiction of the entity’s
performance and also could understate the entity’s obligation to stand
ready to provide future goods or services.
Licensing and rights to use (paragraphs IG33–IG37)
BC310. When developing implementation guidance on licensing and rights to
use for the 2010 proposed Update, the Boards observed that licensing
arrangements often have characteristics that are similar to those of a
lease. The primary similarity is that in both cases a customer purchases
the right to use, but not own, an asset of the entity. Despite those similar
characteristics, the current accounting for leases and licensing
arrangements often differs. Accounting for a lease in accordance with
existing standards often results in a lessor recognizing income over time
as the lessee receives the benefit of the use of the leased asset. In
contrast, accounting for a licensing arrangement in accordance with
existing standards often results in an entity recognizing revenue at a
point in time (typically upon commencement of the license period).
BC311. Consequently, the Boards considered the differences between the
nature of the promised asset in a licensing arrangement and the nature
of the promised asset in a lease to determine whether those differences
justify a different pattern of revenue or income recognition. The Boards
considered differences relating to the following:
(a)
(b)
Tangible versus intangible assets
Exclusive versus nonexclusive rights.
BC312. The Boards decided that it would be difficult to justify why the
accounting for a promised asset should differ depending on whether the
asset is tangible or intangible. Moreover, in the Boards’ conceptual
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frameworks, the discussion on the nature of assets deemphasizes the
physical nature of assets. Hence, the Boards considered the exclusive
versus the nonexclusive nature of rights.
BC313. Leases, by nature, grant a lessee exclusive rights because the lessor
cannot grant the right to use a leased asset to more than one lessee at
the same time. In contrast, for intellectual property, an entity can grant
similar rights to more than one customer at the same time under
substantially similar terms. Hence, the 2010 proposed Update proposed
that an entity’s performance obligation to grant exclusive rights would be
satisfied over time. In contrast, an entity would satisfy a performance
obligation to grant nonexclusive rights at a point in time. The 2010
proposed Update highlighted the fact that rights may be exclusive on
the basis of many factors, such as time, geographical region, medium,
or distribution channel.
BC314. Most respondents to the 2010 proposed Update disagreed with the
proposal that an entity should distinguish between an exclusive license
and a nonexclusive license. Those respondents suggested that
exclusivity does not affect the nature of an entity’s performance
obligation. Therefore, they believe that it is counterintuitive to have
different patterns of revenue recognition depending on whether a
license is exclusive. Respondents suggested that regardless of whether
rights are exclusive, a customer obtains control of a promised asset at
inception of a license period when the customer is able to use and
benefit from the license. In addition, those respondents expressed
concerns about the operability of the proposal and highlighted that any
right to use is arguably exclusive.
BC315. The Boards agreed with those respondents who expressed concerns
about the proposed distinction between exclusive rights and
nonexclusive rights. The Boards considered whether another distinction
would be appropriate and operable but decided that any distinction
would be arbitrary and difficult to apply in practice because of the many
ways in which an entity can grant rights to use intellectual property.
Having decided against distinguishing between types of licenses and
rights to use intellectual property, the Boards considered two alternative
views of the nature of an entity’s performance obligation to grant to a
customer a license or right to use intellectual property:
(a)
(b)
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A license represents a performance obligation that the entity
satisfies at the point in time when the customer obtains control of
the license (that is, the use and benefit of the license).
A license represents access to the entity’s intellectual property
that the entity satisfies continuously over the pattern of use of the
underlying rights to use the entity’s intellectual property by the
customer.
BC316. The Boards decided that a license represents a performance obligation
that an entity satisfies at the point in time when the customer obtains
control of the license. The Boards preferred that view of the
performance obligation because it focuses on the transfer of control of a
promised asset, which is the core principle of the revenue model. That
view also was more consistent with the principles in existing standards
and current practice for accounting for licenses and rights to use
intellectual property. The Boards observed that this conclusion is
consistent with the tentative decision in the leases project. In July 2011,
the Boards decided that, in a lease, the lessor transfers a right of use
asset at the commencement of the lease. In addition, the Boards
observed that a performance obligation for a license satisfied at a point
in time still might result in a pattern of revenue recognition over time in
some circumstances because of the application of the other parts of the
proposed revenue model. Specifically, an entity might recognize
revenue over time because the entity is not reasonably assured to be
entitled to an amount of consideration until an uncertainty is resolved in
the future (for example, a sales-based royalty). A performance
obligation for a license or right to use intellectual property also might
need to be combined with another promised good or service in
accordance with the proposed guidance on identifying separate
performance obligations. In that case, the pattern of revenue recognition
also might be over time.
Repurchase agreements (paragraphs IG38–IG48)
BC317. When developing the proposed guidance on control, the Boards
considered how an entity would apply the proposed guidance to
contracts in which an entity sells an asset and also enters into a
repurchase agreement (either in the same contract or in another
contract).
A forward or a call option (paragraphs IG40–IG42)
BC318. If the entity has an unconditional obligation or right to repurchase an
asset (that is, a forward or call option), the Boards decided that the
customer does not obtain control of the asset and, therefore, no
revenue would be recognized. That is because the customer is
constrained in its ability to direct the use of and obtain substantially all
the remaining benefits from the asset. Because the customer is obliged
to return, or to stand ready to return, the asset to the entity, the
customer cannot use up or consume the entire asset. Moreover, the
customer cannot sell the asset to another party (unless that sale is
subject to a repurchase agreement, in which case the customer’s
benefit from the sale is constrained).
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BC319. In theory, the customer is not constrained in its ability to direct the use
of and obtain substantially all the benefits from the asset if the entity
agrees to repurchase, at the prevailing market price, an asset from the
customer that is substantially the same and is readily available in the
marketplace. However, the Boards noted that an entity would be
unlikely to enter into such a transaction.
BC320. In contrast, if the entity has a conditional right to repurchase an asset,
the customer would obtain control of the asset and, therefore, revenue
would be recognized subject to any sales return liability. Those
agreements are common in the sale of perishable products and in the
pharmaceutical industry to ensure that the customer (that is, dealer or
retailer) does not sell products to consumers beyond the expiration date
and to protect the entity’s reputation in the marketplace. In those
circumstances, the Boards decided that the substance of the
repurchase agreement is the sale of a product with a put option and that
revenue should be recognized accordingly.
A put option (paragraphs IG43–IG48)
BC321. In the 2010 proposed Update, the Boards decided that if the sale and
repurchase agreement resulted in the entity’s unconditional obligation to
repurchase the asset at the customer’s request (that is, a put option),
the customer would obtain control of the asset. That is because the
customer is neither obliged to return the asset nor obliged to stand
ready to do so. Therefore, the customer has the ability to direct the use
of and obtain substantially all the remaining benefits from the asset (that
is, the customer can sell, use up, or consume the entire asset and
choose not to exercise the put option). The Boards decided that the
entity should account for its obligation to stand ready to repurchase the
asset consistently with the accounting for the sale of a product with a
right of return (see paragraphs BC275–BC279). That results in the entity
recognizing the following:
(a)
(b)
(c)
A liability for its obligation to repurchase the asset measured at
the amount of the consideration expected to be paid to the
customer
An asset for the entity’s right to receive the asset upon settling
that liability
Revenue on transfer of the asset for the difference between the
sales price of the asset and the liability recognized for the
obligation to repurchase the asset.
BC322. Some respondents questioned whether that accounting would be
appropriate in all cases in which a customer has a put option. For
instance, some noted that, in some such cases, the contract appears
economically to be similar to a lease (with a purchase option) rather
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than a right of return. That might be the case if the entity is required to
repurchase the asset at a price that is lower than the original sales price
and the surrounding facts and circumstances indicate that the customer
will exercise its put option. In those cases, the difference between the
original sales price and the repurchase price can be viewed as the
amount the customer pays for a right to use the asset, compensating
the entity for the decline in the value of the asset. Some respondents
noted that, in other cases, the contract is in effect a financing
arrangement.
BC323. The Boards agreed with these respondents and decided that if the
customer has an unconditional right to require the entity to repurchase
the asset at a price that is lower than the original sales price and the
customer has a significant economic incentive to exercise that right,
then the customer would not obtain control of the asset. In those cases,
the Boards decided that the existence of the option effectively
constrains the ability of the customer to direct the use of and obtain
substantially all the remaining benefits from the asset. Although the
customer is not obliged to exercise its put option, the fact that it has a
significant economic incentive to exercise that right means that it would
likely incur a loss if it did not do so (for example, the repurchase price
may be set significantly above the expected market value of the asset at
the date of the repurchase). For similar reasons, the Boards decided
that if the customer has the unconditional right to require the entity to
repurchase the asset at a price that is greater than the original sales
price and higher than the expected market value of the asset, the
customer would not obtain control of the asset.
Accounting for repurchase agreements in which the customer
does not obtain control of the asset
BC324. If an entity enters into a contract with a repurchase agreement and the
customer does not obtain control of the asset, the Boards decided that:
(a)
(b)
The contract should be accounted for as a lease in accordance
with Topic 840 or IAS 17, Leases, if the effect is that the
customer is paying for a right to use the asset.
The contract is a financing arrangement if the effect is that the
entity is paying interest.
BC325. To ensure consistent accounting in U.S. GAAP and IFRSs for a
financing arrangement that arises from a contract with a customer, the
Boards decided to provide guidance consistent with Subtopic 470-40 on
product financing arrangements. Consequently, the FASB decided to
replace Subtopic 470-40. It noted that the remaining guidance in
Subtopic 470-40 addresses situations in which an entity arranges for
another party to purchase products on its behalf and agrees to purchase
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those products from the other party. In those cases, the entity is
required to recognize the products as an asset and to recognize a
related liability when the other party purchases the product. The FASB
noted that the proposed model would result in similar accounting when
the other party acts as an agent of the entity (that is, the other party
does not obtain control of the products).
Transition, effective date, and early adoption (paragraphs
131–134)
Transition (paragraphs 132–134)
BC326. The Boards affirmed their proposal in the 2010 proposed Update that an
entity should apply the proposed guidance retrospectively in accordance
with the guidance on accounting changes and error corrections in Topic
250 or IAS 8. Retrospective application would ensure that all contracts
with customers are recognized and measured consistently both in the
current period and in the comparative periods presented regardless of
whether those contracts were entered into before or after the
requirements became effective. Consequently, revenue recognized in
the current period would be understandable and comparable because
an entity would account for all of its contracts with customers on the
same basis. Furthermore, retrospective application would provide users
of financial statements with useful trend information across the current
period and comparative periods. Feedback received from users
confirmed that retrospective application is particularly important for them
to be able to understand trends in revenue, which are significant to the
financial statements.
BC327. Other transition approaches considered by the Boards were for an entity
to apply the proposed guidance on a prospective basis, either for all
new contracts entered into after the effective date or for all contracts
(new and existing) from that date. The Boards rejected those
alternatives because revenue recognized after the effective date would
not be comparable with revenue recognized before that date, thereby
impairing comparability and the usefulness of trend information.
Moreover, if the proposals were applied prospectively only for new
contracts, the recognition and measurement of revenue would not be
comparable in the current period or in any subsequent periods in which
revenue is recognized from contracts that were entered into before and
after the effective date.
BC328. Many respondents to the 2010 proposed Update commented that
applying the proposed guidance retrospectively would be burdensome,
especially for those entities with long-term contracts or with large and
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complex multiple-element arrangements. The main concerns raised by
those respondents were:
(a)
(b)
(c)
(d)
Historical information may be inaccessible because it is retained
in a wide range of systems and manual records that change over
time.
Contracts may have started before the issuance of the standard,
and information to apply the requirements retrospectively may
not have been collected or retained.
The information needed to estimate standalone selling prices of
goods or services in a contract with many performance
obligations may not exist, especially when that good or service
was not sold separately.
Entities make assumptions and estimates throughout a contract’s
life, and it may not be possible to re-create the circumstances
that apply historically without the use of hindsight.
BC329. The Boards decided that although retrospective application would
generally impose increased preparation costs, those would be
outweighed by the increased benefits to users of financial statements.
Consequently, the Boards considered how the burden of retrospective
application could be eased while, at the same time, retaining the
benefits of comparability and consistency that retrospective application
would provide. The Boards noted that some of those concerns would be
addressed by:
(a)
(b)
(c)
The existing guidance in Topic 250 and IAS 8, which limit the
retrospective application of an accounting policy if it is
impracticable
Changes made to the proposed guidance during the
redeliberations on the 2010 proposed Update, which have
brought some of the guidance closer to existing practices (see
Appendix B)
Specifying a long lead time between issuing the standard on
revenue from contracts with customers and its effective date,
which would reduce both the historical information that needs to
be collected and the extent that hindsight is needed to apply that
standard.
BC330. To further ease the burden of transition without sacrificing comparability,
the Boards also decided to modify the retrospective application
requirement by allowing an entity to elect to use one or more of the
following reliefs.
Relief
Rationale
Relief that reduces the number of contracts that require restatement
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Relief
Rationale
For contracts completed before the
date of initial application, an entity
need not restate contracts that
begin and end within the same
annual reporting period.
In considering whether an entity should
be required to review and restate all
contracts completed before the date of
initial application, the Boards decided
that trend information should be
preserved for those completed
contracts that span annual reporting
periods. Therefore, the Boards decided
to limit the relief to only those contracts
that begin and end within the same
annual reporting period because the
amount and timing of revenue
recognition relating to those contracts
would not change between annual
reporting periods. The Boards noted
that this proposed relief would
significantly reduce the transition
burden on those entities that have a
large number of short-term contracts.
A consequence of this relief is that
revenue reported in interim periods
before and after the effective date
would not necessarily be accounted for
on a comparable basis. The Boards
expect that an entity would not use this
relief if it operates in an industry in
which comparability across interim
reporting is particularly important to
users of financial statements.
Relief that simplifies how an entity restates contracts with customers
For contracts completed before the
date of initial application and that
have variable consideration, an
entity is permitted to use the
transaction price at the date the
contract was completed rather
than estimating variable
consideration amounts in the
comparative reporting periods.
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Full retrospective application of the
standard in accordance with Topic 250
or IAS 8 would require an entity to
determine the estimates it would have
made at each of the reporting dates in
the comparative periods. The Boards
considered that making those
estimates in the comparative years
would increase the complexity and
Relief
Rationale
costs of retrospective application.
By allowing an entity to use hindsight in
estimating variable consideration, the
Boards decided that transition would be
simplified for the following reasons:
•
•
The amount of information an
entity would need to collect
contemporaneously through the
transition period would be
reduced.
The entity would not need to
determine the transaction price
at each period end.
Reliefs that simplify retrospective application of other aspects of the proposed
guidance
An entity need not evaluate
whether a performance obligation
is onerous before the date of initial
application unless an onerous
contract liability was recognized
previously for that contract in
accordance with the requirements
that were effective in those
comparative periods.
The Boards propose this relief from
retrospective application for the
following reasons:
•
•
Revenue would not be restated
and, therefore, the trend
information for revenue would
be unaffected.
Under existing guidance, an
entity may not have recognized
a liability for a performance
obligation that would be
onerous under the new
standard. Consequently, it may
be unduly costly and
burdensome for an entity to
evaluate whether a contract
would have been onerous at
each reporting date in the
comparative periods.
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Relief
Rationale
For all periods presented before
the date of initial application, an
entity need not disclose the
amount of the transaction price
allocated to remaining
performance obligations and an
explanation of when the entity
expects to recognize that amount
as revenue (as specified in
paragraph 119).
The Boards decided that the disclosure
of the remaining performance
obligations (as would be required by
paragraph 119) should not be required
for periods presented before the date
of initial application of the revenue
standard for the following reasons:
•
•
The disclosure would be most
useful for the current period.
The disclosure could be
burdensome to prepare for
comparative years, especially
when trying to avoid the use of
hindsight to estimate the
transaction price and the
expected timing of satisfaction
of those performance
obligations.
BC331. Because entities have been granted some relief from applying the
proposed guidance on a fully retrospective basis, the Boards decided
that the existing transitional disclosure requirements of Topic 250 on
accounting changes and error corrections and IAS 8 should be
supplemented by disclosures that explain to users the relief employed
and, to the extent reasonably possible, a qualitative assessment of the
likely effect of applying those reliefs.
Effective date and early adoption (paragraph 131)
BC332. The 2010 proposed Update did not specify a possible effective date or
whether the proposed guidance could be adopted early. At that time, the
Boards decided that they would collectively consider the effective dates
and early adoption of all of the standards they had targeted to issue in
2011, including revenue recognition. Subsequently, the Boards sought
feedback from interested parties through a number of activities,
including the following:
(a)
(b)
(c)
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The IASB’s Request for Views on Effective Dates and Transition
Methods and the FASB’s Discussion Paper, Effective Dates and
Transition Methods (October 2010)
The Boards’ joint investor outreach questionnaire (April 2011)
Consultation with systems providers and preparers.
BC333. The feedback indicated that stakeholders will require some time to
evaluate and plan their individual implementation and transition
processes. For this reason, and the fact that the final standard would
require retrospective application, the Boards decided that they should
allow a long lead time between issuing the final standard and the
effective date.
BC334. The Boards decided that the effective date of the revenue standard
should be set to ensure that the start of the earliest comparative period
for an entity required to present two comparative annual periods (in
addition to the current annual period) would be a few months after the
standard is issued. Consequently, the Boards noted that based on their
current timetable for the project, the effective date of the revenue
standard would be no earlier than annual periods beginning on or after
January 1, 2015.
BC335. The FASB decided not to allow entities to adopt the guidance early
because doing so would reduce the comparability of financial reporting
in the period up to the effective date of the standard. However, the IASB
decided that it would permit early adoption of the standard. The IASB
noted that the standard would improve accounting for revenue and,
thus, entities should not be precluded from adopting the standard before
its effective date. Furthermore, the IASB noted that the standard should
resolve some pressing issues in practice arising from existing guidance.
The Boards observed that the IASB-only decision to permit early
adoption should not result in differences after the effective date in the
accounting of revenue between entities applying U.S. GAAP and those
entities applying IFRSs that adopt the standard early, even for contracts
that straddle the effective date.
Benefits and costs
BC336. The objective of financial statements is to provide information about an
entity’s financial position, financial performance, and cash flows that is
useful to a wide range of users in making economic decisions. To attain
that objective, the Boards try to ensure that the proposed guidance will
meet a significant need and that the overall benefits of the resulting
information justify the costs of providing it. The costs of implementing a
new standard might not be borne evenly; however, both the users of
financial statements and entities benefit from improvements in financial
reporting that facilitate the functioning of markets for capital, including
credit, and the efficient allocation of resources in the economy.
BC337. The evaluation of costs and benefits is necessarily subjective. In making
their judgment, the Boards considered the following:
(a)
The costs incurred by preparers of financial statements
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(b)
(c)
(d)
The costs incurred by users of financial statements when
information is not available
The comparative advantage that preparers have in developing
information, compared with the costs that users would incur to
develop surrogate information
The benefit of better economic decision making as a result of
improved financial reporting.
BC338. The Boards developed guidance that would result in entities recognizing
revenue on a consistent and comparable basis for a wide range of
contracts with customers. By accounting for those contracts
consistently, the proposed guidance would address many of the
weaknesses and inconsistencies inherent in existing revenue guidance,
which have contributed to the existence of diverse practices in the
recognition of revenue and, as a result, in frequent requests for
authoritative guidance on applying existing guidance to specific
transactions or other emerging issues. Furthermore, the proposed
guidance provides a stable and durable framework that should address
revenue recognition issues associated with new types of transactions
and industries that emerge in the future.
BC339. The proposed guidance also would improve comparability in the
recognition, measurement, and disclosure of revenue across
transactions and across entities operating in various industries. Users
have indicated that comparable revenue information is useful when
assessing the financial performance of an entity and assessing financial
performance across a number of entities. Moreover, a common revenue
standard would make the financial reporting of revenue comparable
between entities that prepare financial statements in accordance with
U.S. GAAP or IFRSs.
BC340. In responding to the proposals in the 2010 proposed Update, many
preparers and some users did not perceive significant weaknesses in
some existing revenue guidance or in the financial information resulting
from applying that guidance to some industries. Therefore, those
preparers and users questioned whether the benefits from applying a
new standard in some industries would be justified by the costs involved
in implementing that new standard. However, the Boards decided that
the overall benefits of financial reporting that would result from a
comprehensive revenue standard being applied consistently across
different industries, jurisdictions, and capital markets outweigh the
concerns about cost-benefit assessments in particular industries. In
addition, the Boards noted that the amount of change for some entities
should not be significant. That is because some of the proposed
guidance is broadly consistent with existing revenue recognition
guidance or generally accepted practices.
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BC341. Nevertheless, the proposed guidance would change some existing
revenue recognition practices and, consequently, some entities would
need to make systems and operational changes to comply with that
guidance. For example, some preparers have indicated that systems
and operational changes would be necessary to estimate variable
consideration and to account for the effects of the time value of money
and contract options. The Boards clarified that many entities would not
need to develop systems to account for each contract individually,
especially for entities that have a large volume of similar contracts with
similar classes of customers. In those cases, the Boards noted that
entities should be able to apply the proposed guidance to a portfolio of
similar contracts. In addition, some practical expedients have been
added to the proposed guidance to simplify compliance with that
guidance in circumstances in which the Boards determined that the
expedient would have a limited effect on the amount or timing of
revenue recognition. As a result of those changes and clarifications, the
Boards expect that the costs of the systems and operational changes
would be incurred primarily during the transition from existing standards
to the new revenue standard, whereas the benefits resulting from
increased consistency and comparability in the recognition of revenue
would be ongoing. To ease those preparation costs and complexities
associated with the transition to the new standard, the Boards proposed
a series of reliefs that the entity can choose to use when applying the
proposed guidance retrospectively.
BC342. The proposed disclosures are more robust than disclosure requirements
in existing standards. Therefore, the proposed disclosures should result
in an entity disclosing additional information to users that explains more
clearly the relationship between an entity’s contracts with customers
and the revenue recognized by the entity in a reporting period. Many
users commented that the proposed disclosures would address
deficiencies that currently exist in revenue disclosures. In contrast,
many preparers expressed concerns about the volume and specificity of
the proposed disclosures. The Boards noted that each of the proposed
disclosures would provide useful information to users of financial
statements if that information disclosed is material to understanding the
entity’s financial position, performance, and cash flows. Consequently,
the Boards clarified that, in accordance with existing guidance on
materiality, an entity would not be required to disclose information that is
not material.
BC343. Respondents to the 2010 proposed Update also indicated that although
they did not disagree with some of the proposals, they perceived that, in
some cases, the costs of implementing them would outweigh the
benefits that would be received. As a result of these comments,
members and staff of the Boards have consulted extensively across a
wide range of industries and jurisdictions (see paragraphs BC7–BC9) to
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better understand some of the operational issues arising from those
proposals. The Boards considered that feedback in their redeliberations
and, as a result, decided to modify or clarify many aspects of the
proposed revenue recognition model to reduce the burden of
implementing and applying the proposed guidance. Discussion of these
considerations and the resulting changes in different aspects of the
model is included throughout the basis for conclusions. (For example,
paragraphs BC131–BC138 include discussion of the feedback received
and changes made to the principles for measuring the transaction price
when it includes variable consideration.) The Boards will continue to
consult with representatives from various industries and jurisdictions
following publication of the proposed guidance.
BC344. On balance, the Boards decided that the proposed guidance would
improve financial reporting under U.S. GAAP and IFRSs at a
reasonable cost. In arriving at that conclusion, the Boards
acknowledged that the assessments of costs versus benefits would be
different under U.S. GAAP and IFRSs.
Consequential amendments
Sales of assets that are not an output of an entity’s ordinary
activities
BC345. Subtopic 360-20 on real estate sales provides guidance for recognizing
profit on all real estate sales, regardless of whether real estate is an
output of an entity’s ordinary activities.
BC346. A contract for the sale of real estate that is an output of an entity’s
ordinary activities meets the definition of a contract with a customer and,
therefore, would be within the scope of the proposed guidance.
Consequently, the FASB considered the implications of retaining the
guidance in Subtopic 360-20 for other contracts. The FASB noted that
retaining the existing requirements could result in an entity recognizing
the profit or loss on a real estate sale differently depending on whether
the transaction is a contract with a customer. However, economically
there is little difference between the sale of real estate that is an output
of the entity’s ordinary activities and the sale of real estate that is not.
Hence, the difference in accounting should relate only to the
presentation of the profit or loss in the statement of comprehensive
income—revenue and expense or gain or loss.
BC347. Therefore, the FASB decided to amend Subtopic 360-20 to require an
entity to apply the recognition and measurement principles of the
proposed guidance to contracts for the sale of real estate that is not the
output of the entity’s ordinary activities. However, the entity would not
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recognize revenue but instead would recognize a gain or a loss. The
gain or loss would be recognized when the entity transfers control of the
promised asset to the purchaser. The amount of gain or loss would be
determined using the proposals for determining the transaction price
(including the constraint to amounts to which the entity is reasonably
assured to be entitled).
BC348. The FASB also decided to specify that an entity should apply the
recognition and measurement principles of the proposed guidance to
contracts for the derecognition of nonfinancial assets (including insubstance real estate) in nonrevenue transactions, such as tangible
assets within the scope of Topic 360 on property, plant, and equipment
and intangible assets within the scope of Topic 350 on goodwill and
other intangibles. The primary reason for that decision was the lack of
clear guidance in U.S. GAAP on accounting for the derecognition of
those assets when they are not an output of an entity’s ordinary
activities and do not constitute a business or nonprofit activity.
BC349. In IFRSs, an entity selling an asset within the scope of IAS 16, Property,
Plant and Equipment, IAS 38, or IAS 40, Investment Property, applies
the recognition principles of IAS 18 to determine when to derecognize
the asset and, in determining the gain or loss on the sale, measures the
consideration at fair value. However, the IASB understands that there is
diversity in practice when the sale of those assets involves contingent
consideration. Accordingly, to improve the accounting in IFRSs and
ensure consistency with U.S. GAAP, the IASB decided to amend those
standards to require an entity to apply the recognition and measurement
principles of the proposed guidance to sales of assets within the scope
of those standards. The IASB decided that a reasonably assured
constraint on the amount of consideration used in determining the gain
or loss recognized also should apply to the sale of assets that are not
an output of the entity’s ordinary activities. This is because an entity
faces similar if not greater challenges in determining the transaction
price when the asset is not an output of the entity’s ordinary activities
than when the asset is an output of its ordinary activities.
[Note: Paragraphs BC350 and BC351 in the basis for conclusions on the IASB’s
Exposure Draft are not used in the basis for conclusions in the FASB’s Exposure
Draft. Those paragraphs discuss the transition for first-time IFRS adopters.]
BC350. Paragraph not used.
BC351. Paragraph not used.
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Application to nonpublic entities
BC352. This section summarizes the FASB’s considerations in modifying the
application of the proposed guidance for revenue from contracts with
customers for nonpublic entities. This section considers the FASB’s
decisions on the following topics:
(a)
(b)
(c)
Onerous performance obligations (paragraph BC353)
Disclosure (paragraphs BC354–BC367)
Transition (paragraph BC369).
Onerous performance obligations and not-for-profit contracts
(paragraph 90)
BC353. Not-for-profit entities also enter into contracts with customers; however,
those contracts may not always have a profit-making objective because
they are intended to provide a social benefit or charitable purpose.
Because the latter contracts are usually loss making, applying the
onerous test to them would result in recognition of a loss when the
contract is entered into, which may be in advance of when the service is
provided and the costs incurred. That result would be inconsistent with
the objective of financial reporting for not-for-profit entities, particularly in
providing information about the relation of services provided to the
resources used to provide them (paragraphs 38, 39, 51, and 52 of
FASB Concepts Statement No. 4, Objectives of Financial Reporting by
Nonbusiness Organizations). Thus, the FASB observed that applying
the onerous test to those contracts would not provide meaningful
information to a not-for-profit entity’s donors and other resource
providers when the objective is not to achieve a profit on the contract.
Therefore, the FASB decided that when a not-for-profit entity enters into
a contract with a customer for a social benefit or charitable purpose,
those contracts should be exempt from applying the onerous test.
Disclosures (paragraph 130)
BC354. The FASB considered the input received from preparers, auditors, and
users of nonpublic entity financial statements and the differential needs
of users of nonpublic entity financial statements compared with users of
public entity financial statements.
BC355. On the basis of the input received and differential user considerations,
including the common types of users of nonpublic entity financial
statements and the ability of many of those users to access
management and cost-benefit considerations, the FASB decided that
some of the disclosure requirements should differ for nonpublic entities
and that nonpublic entities should be exempt from some of the
disclosure requirements.
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BC356. The FASB considered the input received from respondents to the 2010
proposed Update who stated that nonpublic entities should not be
required to provide the level of disclosures proposed because some of
the proposed disclosures would:
(a)
(b)
(c)
Provide information that is too detailed for many users of
nonpublic entity financial statements and would result in
disclosure overload.
Not provide useful information to users of nonpublic entity
financial statements. While respondents stated that some of the
proposed disclosures would provide useful information, they
noted that many users of nonpublic entity financial statements
already receive supplemental revenue information on the basis
of their individual needs in addition to what is required by existing
guidance. Also, many of these users stated that they have direct
access to management; therefore, they often are able to obtain
additional information from management if requested.
Not provide benefits that will outweigh the costs due to the efforts
involved to prepare and audit the increased volume of
disclosures.
BC357. To address the concerns raised by users, preparers, and auditors of
nonpublic entity financial statements, the FASB specifically considered
the costs and benefits of the following disclosure requirements:
(a)
(b)
(c)
(d)
Disaggregation of revenue
Disclosure of asset and liability account reconciliations
Disclosure of remaining performance obligations
Disclosure of judgments, assumptions, methods, and inputs.
Disaggregation of revenue
BC358. The FASB considered feedback from preparers and auditors of
nonpublic entity financial statements that indicated concerns about
disclosing disaggregated revenue information, including the costs to
audit this information and the potential competitive disadvantage of
disclosing proprietary information.
BC359. Feedback from users of nonpublic entity financial statements indicated
that information about disaggregation of revenue could provide useful
information depending on what information is conveyed; however, some
indicated concerns that the disclosures may not provide useful
information in all circumstances on the basis of the flexibility allowed
under the proposal. Some users who require disaggregated revenue
information indicated that they already receive this type of information
directly from management outside of the financial statements.
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BC360. After considering the cost and benefit concerns raised by preparers,
auditors, and users of nonpublic entity financial statements, the FASB
decided that nonpublic entities should be exempt from disclosing the
quantitative aspects of disaggregation of revenue except for disclosing
the amount of revenue recognized from goods or services transferred at
a point in time and goods or services transferred to customers over
time. This type of disaggregated information would provide users with
information about satisfaction of performance obligations and when
control of goods or services is transferred and would help users
understand the portion of revenue that is related to the qualitative
disclosures around measuring progress. The FASB observed that, in
most cases, disclosing quantitative information about goods or services
should not result in a significant amount of costs to preparers while
providing decision-useful information to users.
Disclosure of asset and liability account reconciliations
BC361. Many users of nonpublic entity financial statements stated that the
disclosure of asset and liability account reconciliations is not decision
useful and they are concerned about the volume of required
disclosures. The majority of preparers and auditors of nonpublic entity
financial statements indicated concerns about the level of detail and the
costs associated with compiling and auditing roll-forward information.
Because most users of nonpublic entity financial statements are able to
access management, they typically can request additional information
about the changes in a particular account, if necessary.
BC362. An exemption from these proposed disclosure requirements is
consistent with the decisions reached by the FASB when deliberating
potential account reconciliation disclosures for various other projects.
The FASB observed that the benefits of providing roll-forward
information to users of nonpublic entity financial statements would not
outweigh the costs to preparers; therefore, the FASB decided that
nonpublic entities should be exempt from the disclosure of asset and
liability account reconciliations.
Disclosure of remaining performance obligations
BC363. Feedback received from many nonpublic entity preparers and auditors
indicated concerns that, in many cases, it would be difficult and costly to
prepare and audit the disclosure of the transaction price allocated to
remaining performance obligations and the expected timing of their
satisfaction. Many preparers of nonpublic entity financial statements
also indicated concerns about disclosing forward-looking information
that may be proprietary. Some users of nonpublic entity financial
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statements stated that when it is necessary, they receive similar
information directly from management in greater detail than what is
required. Therefore, requiring this disclosure for all nonpublic entities
could result in redundant information that may not provide additional
benefit to some users of nonpublic entity financial statements.
BC364. The FASB considered the feedback received from nonpublic entity
stakeholders and observed that providing information about the amount
of the transaction price allocated to an entity’s remaining performance
obligations could likely increase costs for many nonpublic entities
without providing significant benefits to users. Therefore, the FASB
decided that nonpublic entities should be exempt from disclosing the
amount of the transaction price allocated to remaining performance
obligations and the expected timing of their satisfaction.
Disclosure of judgments, assumptions, methods, and inputs
BC365. The disclosures in paragraphs 124–127 about significant judgments are
generally consistent with the guidance in Topic 235 on notes to financial
statements and Topic 275 on risks and uncertainties, which most
nonpublic entity stakeholders have indicated are beneficial. However,
the specific guidance in subparagraph 124(a) and (b) and paragraphs
125 and 127 to disclose the judgments, and changes in judgments, and
to disclose information about methods, inputs, and assumptions would
require additional detail that some users of nonpublic entity financial
statements may not consider relevant to their decision making, and
many other users can obtain this information directly from management,
if necessary.
BC366. Many users of nonpublic entity financial statements stated that the
current guidance to disclose accounting policy information does not
provide them with useful information unless (a) the entity has an option
to select among acceptable alternatives, (b) the entity has a significant
policy change, or (c) it is the year of initial adoption of a new standard.
Some users indicated that this type of information would contribute to
the high volume of required disclosures and may not provide useful
information. Other users, particularly lenders, stated that they do not
require details about the underlying accounting because they rely on
management’s views and estimates and the auditor’s report (if provided)
to ensure that the financial statements are not materially misstated and
that the financial statements are reported in accordance with U.S.
GAAP.
BC367. Therefore, the FASB decided that nonpublic entities should be exempt
from the proposed disclosures required by subparagraph 124(a) and (b)
and paragraphs 125 and 127 of the proposed guidance.
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Disclosure in the interim financial statements of an nonpublic
entity
BC368. The FASB decided not to specify disclosures about revenue and
contracts with customers that a nonpublic entity should include in its
interim financial statements. The FASB noted that nonpublic entities
typically do not prepare interim financial statements and many users of
the financial statements of nonpublic entities have direct access to
management and can obtain supplemental information about interim
period revenues. Furthermore, most of the information that the Boards
are proposing that a public entity disclose in its interim financial
statements is information that a nonpublic entity does not need to
disclose in its annual financial statements.
Transition
BC369. The FASB decided that a nonpublic entity should initially apply the
guidance in the proposed Update on revenue recognition on a
retrospective basis. The FASB acknowledged that nonpublic entities are
not required under U.S. GAAP to include comparable periods in their
financial statements. However, the FASB noted that if a nonpublic entity
includes comparable periods in its financial statements, then it is
important that revenue be recognized consistently for both periods
presented. The FASB noted that nonpublic entities would be afforded
the specified reliefs noted in paragraph 133 of the proposed guidance.
BC370. The FASB decided that the effective date of the new revenue standard
for nonpublic entities should be a minimum of one year after the
effective date for public entities. The FASB acknowledged that some
preparers and auditors of nonpublic entity financial statements rely on
the experience of public entities and their auditors in implementing a
new standard. In addition, nonpublic entities generally have fewer
resources than public entities and, consequently, would benefit from
additional time to evaluate the effects of the new revenue standard.
Alternative View
BC371. Mr. Linsmeier disagrees with the publication of this proposed Update for
three primary reasons:
(a)
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First, he believes that the proposed model has introduced
exceptions that permit revenue to be recognized in a manner that
is inconsistent with the core principle on which the entire
standard is purportedly based. That core principle is that an
entity should recognize revenue to depict the transfer of
promised goods or services to customers. Under this principle,
(b)
(c)
revenue is recognized if and when a customer receives a good
or service promised under the contract. Exceptions to this core
principle call into question whether the objectives of the
proposed standard are being met, which include the
development of a robust and consistent framework that improves
the comparability of revenue recognition practices across
entities, markets, and jurisdictions.
Second, Mr. Linsmeier objects to the publication of the proposed
guidance because he believes that it results in inconsistent
guidance for similar economic circumstances within and across
standards. The existence of significant inconsistencies within and
across standards makes it difficult to apply the proposed model
to specific fact patterns that are not addressed in this proposed
Update and increases the likelihood that additional circumstancespecific implementation guidance will be needed. In addition, it
suggests that the proposed model again fails to meet the
objectives for issuing one standard for recognizing revenue from
contracts with customers by failing to provide a consistent
recognition framework.
Third, Mr. Linsmeier objects to the publication of this proposed
Update because it fails to provide operable, auditable guidance
for determining either the amounts or timing of certain items
required to be recognized under the proposed guidance.
BC372. Mr. Linsmeier believes that there are multiple examples in the standard
that support each of his concerns. The items discussed below are
included only to illustrate the potential nature and extent of these issues.
Exceptions to the core revenue recognition principle
BC373. One of the most substantive revisions made to the model in this
proposed Update is the introduction of criteria for determining when
performance obligations are satisfied over time. One of these new
criteria specifies that a performance obligation should be considered
satisfied and revenue should be recognized over time by the selling
entity when it has the right to payment for performance completed to
date as long as it expects to fulfill the contract as promised and the
activity under the contract is not creating an asset with an alternate use
to the selling entity (for example, it is not building inventory that the
entity could sell to another customer). This criterion permits recognition
of revenue over time, even when the selling entity has not transferred to
the customer any promised goods or services under the contract. For
example, it permits an architectural design firm to recognize revenue
before the completion of its design drawings and the delivery of its
unique work product to a specific customer as long as the design firm
has the right to payments for design activities undertaken to date.
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BC374. This outcome is inconsistent with a revenue recognition model based on
the transfer of a promised good or service to the customer and calls into
question whether there is one core principle underlying the proposed
guidance or whether the proposed model has introduced a different
principle for recognizing revenue in certain situations that is based only
on activities being performed by the selling entity under the contract.
Inconsistencies within the proposed Update and across Topics
BC375. Three illustrative examples of significant inconsistencies in the
accounting for similar circumstances both within the proposed Update
and across related or proposed guidance in other standards include (a)
the accounting for revenue to be recognized under licensing
arrangements, sales-based royalty arrangements for use of intellectual
property, and leasing arrangements, (b) the accounting for certain put
options as leases under the proposed Update regardless as to whether
the contract meets the definition of a lease, and (c) the accounting for
onerous revenue contracts with customers.
(a)
(b)
(c)
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The economics of licenses, royalty arrangements, and leases are
very similar; each of these contracts provides a customer with
the right to use an asset for a period of time. Within this
proposed Update, the timing and amount of revenue that is
recognized differ for licenses and sales-based royalty payments
for intellectual property and that guidance differs still from the
guidance for recognizing revenue in the leasing standard being
developed by the two Boards. The comparability and consistency
of accounting for similar economic circumstances are impaired
by these differences, reducing the decision usefulness of the
information provided to users of financial statements.
This proposed Update also indicates that a put option that
requires the selling entity to repurchase an asset at the
customer’s request at a price that is lower than the original
selling price of an asset should be accounted for as a lease, if at
contract inception the customer has a significant economic
incentive to exercise its right. The scope of the revenue standard
excludes contracts that meet the definition of a lease. This
guidance, therefore, effectively overrides the scope requirements
in both the proposed revenue standard and the proposed leasing
standard by requiring contracts that are in the scope of the
proposed revenue standard that do not meet the definition of
lease to be accounted for as a lease.
Mr. Linsmeier also finds it inconsistent that the proposed Update
only addresses the accounting for losses on onerous contracts
for contracts with revenue being recognized over time and then
only for those contracts that at inception are expected to have
performance obligations that are satisfied over periods of time
greater than one year. For other contracts in the scope of this
proposed Update, the basis for conclusions (paragraph BC210)
indicates that contracts with performance obligations satisfied at
a point in time typically result in the creation of related assets
that would be the subject of impairment testing in other
standards. However, existing U.S. GAAP provides inadequate
guidance on the impairment of inventory that is promised in a
sales contract when an entity does not have such inventory in
stock and does not yet have a purchase commitment for the
inventory. Hence, Mr. Linsmeier believes that the scope of the
onerous test will fail to require the immediate recognition of a
loss on some performance obligations that an entity expects to
be loss making. In addition, he believes that existing and
proposed impairment guidance, in its totality, will result in
arbitrary differences in the timing and amount of recognition of
impairment losses that could significantly challenge the ability of
users seeking to compare and understand the nature of the
onerous contract issues for different types of revenue contracts.
Concerns about operability and auditability of the proposed
guidance
BC376. Finally, the following three circumstances provide examples of situations
in which Mr. Linsmeier believes that additional guidance is needed to
make this proposed Update both operable and auditable:
(a)
(b)
(c)
First, guidance is needed for evaluating whether the appropriate
amortization period is being employed for contract costs
recognized as assets. The proposed Update fails to provide
robust conditions for evaluating when the amortization period is
permitted to extend beyond existing contracts to include
anticipated contract periods, thereby providing a significant
earnings management opportunity by permitting the entity to
either assert or not assert that an existing contract will be
renewed.
Second, under the proposed guidance, variable consideration
should be recognized only when it is reasonably assured, a term
that suggests that a recognition threshold must be exceeded for
recognition to occur. No guidance is provided in the proposed
Update that specifies the threshold that must be exceeded for
revenue to be considered reasonably assured. Is that threshold
consistent with the high confidence threshold used by accounting
firms when implementing the concept of reasonable assurance in
the U.S. auditing literature, or if no threshold need be met,
should not a better term be used?
Third, additional guidance is needed for determining when an
expected value or most likely amount should be used to estimate
207
variable consideration in a transaction price. The proposed
model provides a measurement objective and then suggests
possible circumstances in which these alternative measurement
methods may (and by implication may not) be used. This
challenges the ability of auditors to determine whether the
appropriate method to meet the measurement objective has
been selected.
Conclusion
BC377. Mr. Linsmeier believes that many of the issues he has identified have
arisen in an effort to minimize differences with current practice by
including in the proposed standard past guidance in existing literature.
Mr. Linsmeier believes that the proposed model for revenue recognition
could be made suitable for issuance if it were to eliminate specific
guidance that is inconsistent or contradictory and, instead, rely on core
principles without exception to provide a consistent framework for
recognizing revenue. In addition, Mr. Linsmeier believes that to best
capture the economics of revenue transactions, the revenue recognition
standard also must address cost recognition comprehensively, including
the recognition of losses when costs are expected to exceed revenues
in onerous contracts. Finally, efforts need be undertaken to ensure that
the guidance in the proposed standard are made operable and
auditable by specifying the conditions that must be met when key
judgments are required.
The following alternative view expressed by an IASB Board member is not part of
the FASB’s Exposure Draft but has been included for informational purposes.
BC378. Mr. Engström voted against publication of the Exposure Draft.
BC379. Mr. Engström strongly supports the objective of taking a step towards
global convergence by developing a common revenue standard for
IFRSs and U.S. GAAP. He also strongly supports the core principle
proposed in paragraph 4 of the Exposure Draft and he supports the
proposed requirements that would give effect to that principle. However,
Mr. Engström is concerned about the extent of the proposed disclosure
requirements in the Exposure Draft. Mr. Engström questions whether
the benefits to users of the resulting disclosures would justify the costs
that preparers would incur to provide those disclosures.
208
BC380. Mr. Engström’s decision to vote against publication is triggered by the
proposal to amend IAS 34, Interim Financial Reporting, to specify that
an entity would be required to provide in its interim financial report some
of the disclosures about revenue and contracts with customers
proposed for annual financial statements. Mr. Engström believes that it
is inappropriate to require such disclosures in interim financial reports
without undertaking a holistic review of IAS 34.
209
Amendments to the
FASB Accounting Standards Codification®
Note: These proposed amendments do not replace or affect guidance issued by
the SEC or its staff for public companies in their filings with the SEC.
Furthermore, the content labeled as SEC staff guidance does not constitute rules
or interpretations of the SEC, nor does such guidance bear official Commission
approval. Content in the SEC Sections is expected to change over time in
accordance with the SEC’s normal procedures for making changes to SEC rules,
regulations, interpretive releases, and staff guidance.
Summary of Proposed Amendments to the Accounting
Standards Codification
1.
This proposed Accounting Standards Update describes a revenue model
applicable to a wide range of industries and transactions. Consequently, the
Board proposes to supersede or amend various Subtopics of the Accounting
Standards Codification. Those proposed amendments are summarized below.
2.
The following Topic would be superseded:
•
3.
The following Subtopics would be superseded:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
210
430 Deferred Revenue
340-20 Other Assets and Deferred Costs—Capitalized Advertising
Costs
360-20 Property, Plant, and Equipment—Real Estate Sales
605-15 Revenue Recognition—Products
605-20 Revenue Recognition—Services
605-25 Revenue Recognition—Multiple-Element Arrangements
605-28 Revenue Recognition—Milestone Method
605-30 Revenue Recognition—Rights to Use
605-35 Revenue Recognition—Construction-Type and Production-Type
Contracts
605-45 Revenue Recognition—Principal Agent Considerations
605-50 Revenue Recognition—Customer Payments and Incentives
908-605 Airlines—Revenue Recognition
910-605 Contractors—Construction—Revenue Recognition
912-210 Contractors—Federal Government—Balance Sheet
912-235 Contractors—Federal Government—Notes to Financial
Statements
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
4.
The following Subtopics would be added:
•
•
.
912-605 Contractors—Federal Government—Revenue Recognition
915-605 Development Stage Entities—Revenue Recognition
920-310 Entertainment—Broadcasters—Receivables
920-605 Entertainment—Broadcasters—Revenue Recognition
920-845 Entertainment—Broadcasters—Nonmonetary Transactions
922-430 Entertainment—Cable Television—Deferred Revenue
926-430 Entertainment—Films—Deferred Revenue
926-605 Entertainment—Films—Revenue Recognition
926-845 Entertainment—Films—Nonmonetary Transactions
928-430 Entertainment—Music—Deferred Revenue
928-605 Entertainment—Music—Revenue Recognition
932-605 Extractive Activities—Oil and Gas—Revenue Recognition
940-605
Financial
Services—Broker
and
Dealers—Revenue
Recognition
942-605 Financial Services—Depository and Lending—Revenue
Recognition
948-605 Financial Services—Mortgage Banking—Revenue Recognition
952-340 Franchisors—Other Assets and Deferred Costs
952-720 Franchisors—Other Expenses
954-430 Health Care Entities—Deferred Revenue
970-605 Real Estate—General—Revenue Recognition
972-430 Real Estate—Common Interest Realty Associations—Deferred
Revenue
976-605 Real Estate—Retail Land—Revenue Recognition
978-250 Real Estate—Time-Sharing Activities—Accounting Changes
and Error Corrections
978-605 Real Estate—Time-Sharing Activities—Revenue Recognition
985-605 Software—Revenue Recognition
•
340-40 Other Assets and Deferred Costs—Contracts with Customers
705-20 Cost of Sales and Services—Accounting for Consideration
Received from a Vendor
974-720 Real Estate—Real Estate Investment Trusts—Other Expenses
211
5.
The following Subtopics would be amended as described:
Codification
Subtopic
Description of the Proposed Amendments
105-10
Generally
Accepted
Accounting
Principles—
Overall
Amend paragraph 105-10-65-1 to reflect the removal
of Subtopic 985-605.
210-10 Balance
Sheet—Overall
Supersede paragraph 210-10-60-2 to reflect the
removal of Subtopic 605-35.
270-10 Interim
Reporting—
Overall
Amend paragraph 270-10-50-1 to include the
disclosures about revenue from contracts with
customers that an entity should include in its interim
financial statements.
275-10 Risks
and
Uncertainties—
Overall
Supersede paragraph 275-10-60-7 to reflect the
removal of Subtopic 605-35.
310-10
Receivables—
Overall
Amend paragraph 310-10-35-11 and add paragraph
310-10-35-11A to reflect revisions regarding a
customer’s credit risk made to Subtopic 605-10.
Amend the references in paragraphs 310-10-40-4
through 40-5 to reflect the removal of Subtopic 36020.
Amend paragraph 310-10-60-4 to reflect the removal
of Subtopic 605-20.
310-40
Receivables—
Troubled Debt
Restructurings
by Creditors
212
Amend paragraph 310-40-40-6 and supersede
paragraphs 310-40-40-6A through 40-7 and 310-4055-11 through 55-12 to reflect the removal of
Subtopic 970-605.
Codification
Subtopic
Description of the Proposed Amendments
330-10
Inventory—
Overall
Supersede paragraphs 330-10-30-19 and 330-10-452 to reflect the removal of Subtopic 605-35.
340-10 Other
Assets and
Deferred
Costs—Overall
Supersede paragraphs 340-10-60-5 through 60-6 to
reflect the removal of Subtopics 605-20 and 605-35.
340-20 Other
Assets and
Deferred
Costs—
Capitalized
Advertising
Costs
Supersede Subtopic 340-20. However, paragraphs
340-20-25-4 through 25-11 are amended and moved
to paragraphs 944-30-25-1A and 944-30-25-1C
through 25-1I.
350-30
Intangibles—
Goodwill and
Other—General
Intangibles
Other than
Goodwill
Add paragraph 350-30-40-1 to reflect the proposed
guidance on the derecognition of nonfinancial assets.
360-10
Property, Plant,
and
Equipment—
Overall
Supersede paragraph 360-10-05-1 and amend
paragraph 360-10-40-3 to reflect the proposed
guidance on the derecognition of nonfinancial assets.
360-20
Property, Plant,
and
Equipment—
Real Estate
Sales
Supersede Subtopic 360-20. However, paragraph
360-20-15-2 is amended and moved to paragraph
605-40-15-4 and paragraphs 360-20-15-4 through 158 are moved to paragraphs 605-40-15-5 through 159.
Amend paragraphs 330-10-35-21 through 35-22 to
reflect the removal of Subtopic 605-50.
Supersede paragraph 340-10-60-8 to reflect the
removal of paragraph 912-20-45-1.
Amend paragraph 360-10-60-1 to reflect the moving
of paragraph 974-605-25-2 to paragraph 974-720-252.
213
Codification
Subtopic
Description of the Proposed Amendments
405-10
Liabilities—
Overall
Amend paragraph 405-10-05-2 to reflect the removal
of Topic 430.
410-20 Asset
Retirement and
Environmental
Obligations—
Asset
Retirement
Obligations
Amend paragraph 410-20-55-28 to reflect the
removal of Subtopic 605-25.
440-10
Commitments—
Overall
Amend paragraph 440-10-15-4 to clarify the scope for
repurchase agreements.
Supersede paragraph 440-10-60-5 and amend
paragraph 440-10-60-16 to reflect the removal of
Subtopics 605-35 and 948-605.
Supersede paragraphs 440-10-60-19 through 60-20
to reflect the removal of Subtopic 976-605 and
amendments made to Subtopic 980-605.
450-10
Contingencies
—Overall
Amend paragraph 450-10-60-3 to reflect the removal
of Subtopic 605-15.
460-10
Guarantees—
Overall
Amend paragraph 460-10-15-7 to include content
amended and moved from paragraph 460-10-5517(e).
Amend paragraph 450-10-60-12 to reflect the
removal of Subtopic 985-605.
Amend paragraphs 460-10-15-9, 460-10-25-8, 46010-50-8, and 460-10-60-41 to reflect the proposed
guidance on warranties.
Amend paragraph 460-10-55-17 and supersede
paragraph 460-10-60-3 to reflect the removal of
Subtopic 360-20.
Supersede paragraphs 460-10-60-8 through 60-10
and 460-10-60-38 to reflect the removal of Subtopics
605-15, 605-20, 605-35, and 926-605.
214
Codification
Subtopic
Description of the Proposed Amendments
470-40 Debt—
Product
Financing
Arrangements
Amend paragraphs 470-40-05-3, 470-40-15-2
through 15-3, 470-40-25-1 through 25-3, and 470-4055-1 through 55-2, and supersede paragraphs 47040-55-3 through 55-5 to remove certain guidance on
product financing arrangements that are in the scope
of Subtopic 605-10.
505-50 Equity—
Equity-Based
Payments to
Non-Employees
Amend paragraphs 505-50-05-2 through 05-3, 50550-30-1, 505-50-30-9 through 30-10, 505-50-35-1,
505-50-35-3, and 505-50-55-17 through 55-18 to
reflect the removal of the guidance on the accounting
by the goods or service provider or grantee for
shared-based payment transactions.
Supersede paragraphs 505-50-05-4 through 05-5,
505-50-25-5, 505-50-30-8, 505-50-30-18 through 3019, 505-50-30-29, 505-50-35-13 through 35-16, 50550-50-2, and 505-50-55-25 through 55-27 to reflect
the removal of the guidance on the accounting by the
goods or service provider or grantee for share-based
payment transactions.
605-10
Revenue
Recognition—
Overall
Supersede all paragraphs in the Subtopic and replace
that guidance with the proposed revenue guidance.
605-20
Revenue
Recognition—
Services
Supersede Subtopic 605-20. However, paragraph
605-20-25-12 is moved to paragraph 942-825-15-3.
215
Codification
Subtopic
605-40
Revenue
Recognition—
Gains and
Losses
Description of the Proposed Amendments
Amend to require an entity to apply the proposed
control and measurement guidance to account for the
gain or loss for:
• The derecognition of nonfinancial assets that are
within the scope of Topics 350 and 360 and are
not an output of an entity’s ordinary activities. An
exchange of a group of assets that constitute a
business or nonprofit activity (except for a sale of
in substance real estate and conveyance of oil
and mineral rights) would continue to be
accounted for in accordance with Subtopic 81010.
• A transfer of a financial asset that is in substance
real estate.
Add paragraph 605-40-15-4 to include guidance
amended and moved from paragraph 360-20-15-2,
and add paragraphs 605-40-15-5 through 15-9 to
include guidance moved from paragraphs 360-20-15-4
through 15-8.
605-50
Revenue
Recognition—
Customer
Payments and
Incentives
216
Supersede Subtopic 605-50. However, paragraph
605-50-25-12 is amended and moved to paragraph
705-20-25-3.
Codification
Subtopic
705-10 Cost of
Sales and
Services—
Overall
Description of the Proposed Amendments
Amend paragraph 705-10-05-1 and add paragraph
705-10-05-1A to include guidance added to Subtopic
705-20.
Amend paragraph 705-10-05-2 to reflect the removal
of Section 705-10-45.
Amend paragraph 705-10-25-4, and supersede
paragraphs 705-10-25-6 and 705-10-25-8 to reflect
the removal of Subtopics 360-20, 605-15, and 60520.
Supersede paragraphs 705-10-25-09 through 25-12
to reflect the removal of Subtopic 605-50.
Supersede Section 705-10-45 to reflect the removal
of Subtopic 605-45.
720-15 Other
Expenses—
Start-Up Costs
Amend paragraph 720-15-15-4 to reflect the removal
of Subtopic 605-35.
720-25 Other
Expenses—
Contributions
Made
Amend paragraph 720-25-15-2 to reflect the revision
made to the paragraph reference.
720-35 Other
Expenses—
Advertising
Costs
Amend paragraphs 720-35-05-2, 720-35-15-2
through 15-3, 720-35-25-5, and 720-35-35-1 to reflect
the removal of Subtopic 340-20.
730-10
Research and
Development—
Overall
Amend paragraph 730-10-60-5 to reflect the moving
of paragraphs 985-605-25-86 through 25-87.
730-20
Research and
Development—
Research and
Development
Arrangements
Add paragraph 730-20-15-1A to include guidance
amended and moved from paragraph 985-605-25-86.
Amend paragraph 720-15-55-7 to reflect the removal
of Subtopic 605-50.
Amend paragraph 730-20-15-4 to clarify when
arrangements are not within the scope of Subtopic
730-20.
217
Codification
Subtopic
805-20
Business
Combinations—
Identifiable
Assets and
Liabilities, and
Any
Noncontrolling
Interest
Amend paragraph 805-20-35-7 to reflect the removal
of Subtopic 605-20.
808-10
Collaborative
Arrangements—
Overall
Amend paragraphs 808-10-45-1 through 45-2 and
paragraphs 808-10-55-16 through 55-18 to reflect the
removal of Subtopic 605-45.
810-10
Consolidation—
Overall
Amend paragraphs 810-10-40-3A and 810-10-45-21A
to reflect the removal of Subtopics 360-20 and 976605.
815-10
Derivatives and
Hedging—
Overall
Amend paragraph 815-10-55-62 to reflect the
removal of Subtopic 605-45.
820-10 Fair
Value
Measurement—
Overall
Amend paragraph 820-10-15-2 to reflect the removal
of Subtopics 985-605 and 605-25.
835-30
Interest—
Imputation of
Interest
218
Description of the Proposed Amendments
Amend paragraph 808-10-55-9 to reflect the removal
of Subtopics 605-50 and 926-605.
Amend paragraph 820-10-15-3 to reflect the removal
of Subtopic 605-20 and to refer to Subtopic 605-10
(as amended by the proposed guidance).
Amend paragraph 835-30-15-3 to reflect the
proposed guidance on the time value of money.
Codification
Subtopic
840-10
Leases—
Overall
840-30
Leases—
Capital Leases
Description of the Proposed Amendments
Amend paragraph 840-10-55-14 to reflect the
proposed guidance on repurchase arrangements.
Additional amendments will be considered as part of
the Boards’ ongoing joint project on leases.
840-40
Leases—SaleLeaseback
Transactions
845-10
Nonmonetary
Transactions—
Overall
Supersede paragraphs 845-10-30-17 through 30-18
and amend paragraph 845-10-60-2 to reflect the
proposed noncash consideration guidance.
Amend paragraphs 845-10-05-11 and 845-10-30-25
to reflect the removal of Subtopics 360-20 and 976605.
Supersede paragraphs 845-10-15-15 through 15-17,
845-10-25-7 through 25-8, 845-10-30-23, 845-10-5529 through 55-37, and 845-10-60-2 through 60-3 to
reflect the removal of Subtopics 360-20, 976-605, and
605-20.
Amend paragraph 845-10-15-4 to reflect revisions
made to Subtopic 605-40.
Amend paragraphs 845-10-15-8, 845-10-15-14, and
845-10-15-20 to reflect the removal of Subtopics 36020 and 976-605.
Amend paragraph 845-10-30-15 to reflect the
proposed guidance.
Supersede paragraph 845-10-50-2 to reflect revisions
made to Subtopic 505-50.
850-10 Related
Party
Disclosures—
Overall
Amend paragraph 850-10-60-8 to update the
reference for content that was moved from Subtopic
952-605.
219
Codification
Subtopic
220
Description of the Proposed Amendments
855-10
Subsequent
Events—
Overall
Supersede paragraph 855-10-60-4 to reflect the
removal of Subtopic 985-605.
860-10
Transfers and
Servicing—
Overall
Amend paragraph 860-10-55-3 to reflect the
amendments made to Subtopic 605-40.
905-310
Agriculture—
Receivables
Supersede paragraphs 905-310-25-1 through 25-2
and 905-310-35-1 to reflect the partial removal of
guidance from Subtopic 905-605.
905-330
Agriculture—
Inventory
Supersede paragraph 905-330-30-3 and Section 905330-40 to reflect the partial removal of guidance from
Subtopic 905-605.
905-605
Agriculture—
Revenue
Recognition
Supersede the Cooperatives—Patrons Subsections.
908-360
Airlines—
Property, Plant,
and Equipment
Amend paragraph 908-360-55-1 to reflect the
amendments made to Subtopic 605-50.
908-720
Airlines—Other
Expenses
Amend paragraph 908-720-25-1 to reflect the
removal of Subtopic 340-20.
910-10
Contractors—
Construction—
Overall
Amend paragraphs 910-10-15-4 and 910-10-60-1 to
reflect the removal of Subtopic 605-35.
910-20
Contractors—
Construction—
Contract Costs
Supersede paragraph 910-20-25-5 to reflect the
removal of Subtopic 605-35.
Codification
Subtopic
Description of the Proposed Amendments
912-10
Contractors—
Federal
Government—
Overall
Amend paragraph 912-10-15-3 to reflect the removal
of the guidance related to contracts subject to
renegotiation.
912-20
Contractors—
Federal
Government—
Contract Costs
Supersede paragraph 912-20-45-1 to reflect the
removal of Subtopic 912-210.
912-225
Contractors—
Federal
Government—
Income
Statement
Amend paragraph 912-225-05-1 and supersede
paragraphs 912-225-45-1 through 45-2 to remove the
guidance related to contracts subject to renegotiation.
912-275
Contractors—
Federal
Government—
Risks and
Uncertainties
Amend paragraph 912-275-05-1 and supersede
paragraph 912-275-50-1 to remove the guidance
related to contracts subject to renegotiation.
912-310
Contractors—
Federal
Government—
Receivables
Supersede paragraphs 912-310-25-6, 912-310-25-8
through 25-9, and 912-310-45-9 through 45-10 to
remove the guidance related to unbilled amounts,
progress payments, and advance payments.
912-405
Contractors—
Federal
Government—
Liabilities
Amend paragraph 912-405-05-1 and supersede
paragraphs 912-405-25-1 through 25-2, 912-405-45-1
through 45-2, and 912-405-50-1 to remove the
guidance related to contracts subject to renegotiation.
Amend paragraph 912-20-45-4 to reflect the removal
of paragraphs 912-225-45-1 through 45-2.
Supersede paragraph 912-225-45-4 to remove the
presentation guidance for sales related to terminated
contracts.
Supersede paragraph 912-405-45-6 to remove the
guidance related to advance payments.
221
Codification
Subtopic
222
Description of the Proposed Amendments
912-450
Contractors—
Federal
Government—
Contingencies
Supersede paragraph 912-450-25-1 to reflect the
removal of Subtopic 912-605.
912-705
Contractors—
Federal
Government—
Cost of Sales
and Services
Supersede paragraph 912-705-25-1 to reflect the
removal of Subtopic 912-605.
912-730
Contractors—
Federal
Government—
Research and
Development
Amend paragraphs 912-730-15-2 through 15-3 to
reflect the removal of Subtopic 605-35.
920-10
Entertainment—
Broadcasters—
Overall
Amend paragraph 920-10-15-3 to reflect the removal
of barter transactions from Subtopic 845-10.
920-405
Entertainment—
Broadcasters—
Liabilities
Supersede paragraph 920-405-25-2 to reflect the
removal of Subtopic 920-845.
922-350
Entertainment—
Cable
Television—
Intangibles—
Goodwill and
Other
Amend paragraphs 922-350-25-3 and 922-350-35-4
to reference acquisition costs in Subtopic 340-40.
922-360
Entertainment—
Cable
Television—
Property, Plant,
and Equipment
Amend paragraph 922-360-25-1 to include content
moved from paragraph 922-605-25-1.
Amend paragraph 922-350-40-1 to reflect the
proposed cost guidance.
Codification
Subtopic
922-605
Entertainment—
Cable
Television—
Revenue
Recognition
Description of the Proposed Amendments
Supersede the guidance relating to hook-up revenue.
Move the guidance relating to the prematurity period
to Subtopic 922-360.
922-720
Entertainment—
Cable
Television—
Other Expenses
Amend paragraph 922-720-25-4 to reflect the
proposed acquisition cost guidance.
924-405
Entertainment—
Casinos—
Liabilities
Amend Subtopic 924-405 to include content moved
from Subtopic 924-605 on the accounting for jackpot
liabilities.
924-605
Entertainment—
Casinos—
Revenue
Recognition
Supersede Subtopic 924-605. However, paragraphs
924-605-25-2 and 924-605-55-1 through 55-2 are
moved to Subtopic 924-405.
926-10
Entertainment—
Films—Overall
Amend paragraphs 926-10-05-1 and 926-10-15-3 to
reflect the removal of Subtopic 985-605.
926-20
Entertainment—
Films—Other
Assets—Film
Costs
Amend paragraphs 926-20-35-6 and 926-20-35-14 to
reflect the removal of Subtopic 926-605.
926-405
Entertainment—
Films—
Liabilities
Amend paragraph 926-405-55-2 to remove the
reference to the term revenue.
932-835
Extractive
Activities—Oil
and Gas
Interest
Amend paragraph 932-835-25-2 to reflect the
proposed guidance on the time value of money.
Amend paragraphs 926-20-25-6 and 926-20-55-2 to
remove the reference to the term revenue.
223
Codification
Subtopic
224
Description of the Proposed Amendments
940-20
Financial
Services—
Broker and
Dealers—
Broker-Dealer
Activities
Amend paragraph 940-20-15-4 to reflect the removal
of Subtopic 940-605.
942-825
Financial
Services—
Depository and
Lending—
Financial
Instruments
Add paragraph 942-825-15-3 to include content
moved from paragraph 605-20-25-12.
944-30
Financial
Services—
Insurance—
Acquisition
Costs
Amend paragraph 944-30-25-1A to reflect the
removal of Subtopic 340-20.
944-80
Financial
Services—
Insurance—
Separate
Accounts
Amend paragraph 944-80-35-4 to reflect the removal
of Subtopic 360-20.
946-605
Financial
Services—
Investment
Companies—
Revenue
Recognition
Supersede the guidance relating to:
Amend paragraph 942-825-50-2 to reflect the
removal of Subtopic 605-20.
Add paragraphs 944-30-25-1C through 25-1I to
include content amended and moved from Subtopic
340-20 on direct-response advertising.
• Distributor transfer of rights to certain future
distribution fees
• Distribution fees and costs for mutual funds with
no front-end sales fee.
Amend paragraphs 946-605-25-1 and 946-605-25-3
to link to the proposed acquisition cost guidance in
Subtopic 340-40.
Codification
Subtopic
Description of the Proposed Amendments
952-10
Franchisors—
Overall
Add paragraph 952-10-50-1 to include content
amended and moved from paragraph 952-605-50-3.
952-605
Franchisors—
Revenue
Recognition
Supersede Subtopic 952-605. However, paragraph
952-605-50-3 is moved to paragraph 952-10-50-1.
954-310 Health
Care Entities—
Receivables
Supersede Section 954-310-30 to reflect the
amendment of Subtopic 954-605.
954-340 Health
Care Entities—
Other Assets
and Deferred
Costs
Amend paragraphs 954-340-25-1 through 25-2 and
954-340-35-1 to reference acquisition costs to the
proposed guidance.
954-405 Health
Care Entities—
Liabilities
Amend paragraph 954-405-25-3 to reflect the
removal of Subtopic 954-430.
954-440 Health
Care Entities—
Commitments
Supersede Sections 954-440-25, 954-440-35, and
954-440-55 on the obligation to provide future
services to reflect the proposed guidance on onerous
performance obligations.
954-450 Health
Care Entities—
Contingencies
Supersede paragraphs 954-450-30-3 through 30-4 on
losses on prepaid health care services contracts to
reflect the proposed guidance on onerous
performance obligations.
225
Codification
Subtopic
954-605 Health
Care Entities—
Revenue
Recognition
Description of the Proposed Amendments
Amend paragraph 954-605-05-12 to reflect the
removal of Subtopic 954-430.
Supersede the revenue recognition guidance in
paragraphs 954-605-25-2 through 25-8, 954-605-2511, 954-605-45-4 through 45-5, 954-605-50-4, and
Section 954-605-55.
Amend paragraph 954-605-25-1 to reflect the
removal of the revenue recognition guidance.
226
954-720 Health
Care Entities—
Other Expenses
Amend paragraphs 954-720-25-6 through 25-7 to link
to the proposed acquisition guidance in Subtopic 34040.
958-605 Notfor-Profit
Entities—
Revenue
Recognition
Amend the guidance on the recognition of exchange
transactions in paragraphs 958-605-05-2 and 958605-25-1.
958-720 Notfor-Profit
Entities—Other
Expenses
Supersede paragraph 958-720-25-8 to eliminate the
inconsistency between that paragraph and the
proposed guidance.
970-10 Real
Estate—
General—
Overall
Amend paragraphs 970-10-05-1 through 05-2 to
reflect the removal of Subtopics 360-20 and 970-605.
970-323 Real
Estate—
General—
Investments—
Equity Method
and Joint
Ventures
Amend paragraphs 970-323-30-3 through 30-4 and
970-323-40-1 to reflect the removal of Subtopic 36020.
Supersede paragraph 958-605-45-2 relating to the
presentation of revenue.
Amend paragraph 970-10-15-9 and supersede
paragraph 970-10-15-10 to reflect the removal of
Subtopic 970-605 and amendments made to
Subtopic 970-340.
Amend paragraph 970-323-30-6 to reflect the
removal of Subtopic 970-605.
Codification
Subtopic
970-340 Real
Estate—
General—
Other Assets
and Deferred
Costs
Description of the Proposed Amendments
Supersede paragraph 970-340-25-14 and Section
970-340-40 to reflect the proposed guidance.
Amend paragraphs 970-340-25-13 and 970-340-2515 to reference acquisition costs to the proposed
guidance.
Amend paragraphs 970-340-35-1 through 35-2 to
reflect the removal of Subtopics 970-605 and 976605.
Add paragraphs 970-340-25-18 through 25-19 to
include content moved from paragraphs 970-605-251 through 25-2.
970-360 Real
Estate—
General—
Property, Plant,
and Equipment
Amend paragraph 970-360-25-4 to reflect the
relocation of Section 974-605-25 to Section 974-72025.
970-470 Real
Estate—
General—Debt
Amend paragraph 970-470-25-5 to reflect the
relocation of Section 974-605-25 to Section 974-72025.
970-605 Real
Estate—
General—
Revenue
Recognition
Supersede Subtopic 970-605. However, paragraphs
970-605-25-1 through 25-2 are moved to paragraphs
970-340-25-18 through 25-19.
972-235 Real
Estate—
Common
Interest Realty
Associations—
Notes to
Financial
Statements
Add paragraph 972-235-50-1A to include content
moved from paragraph 972-605-50-1.
Supersede paragraphs 970-360-55-4 through 55-5 to
reflect the removal of Subtopic 360-20.
227
Codification
Subtopic
Description of the Proposed Amendments
972-605 Real
Estate—
Common
Interest Realty
Associations—
Revenue
Recognition
Supersede Subtopic 972-605. However, paragraph
972-605-50-1 is moved to paragraph 972-235-50-1A.
974-605 Real
Estate—Real
Estate
Investment
Trusts—
Revenue
Recognition
Supersede Subtopic 974-605 and move all
paragraphs to Subtopic 974-720 because the
guidance does not relate to revenue recognition.
976-10 Real
Estate—Retail
Land—Overall
Supersede paragraph 976-10-15-2 to reflect the
removal of Subtopic 360-20.
976-310 Real
Estate—Retail
Land—
Receivables
Supersede Section 976-310-30 to reflect the
proposed guidance.
976-705 Real
Estate—Retail
Land—Cost of
Sales and
Services
Supersede paragraph 976-705-30-1 to reflect the
removal of the term full accrual method.
978-10 Real
Estate—TimeSharing
Activities—
Overall
Amend paragraphs 978-10-05-1 through 05-2 to
reflect the removal of Subtopic 360-20 and the
guidance related to revenue.
Supersede paragraph 976-310-35-3 to reflect the
removal of Subtopic 976-605.
Amend paragraph 976-705-30-2 to reflect the
removal of Section 970-340-40.
Supersede paragraph 978-10-05-4 to reflect the
removal of Subtopic 360-20.
Amend paragraph 978-10-15-4 to reflect the
relocation of paragraphs 360-20-15-2 and 360-20-154 through 15-8 to paragraphs 605-40-15-4 through
15-9.
228
Codification
Subtopic
Description of the Proposed Amendments
978-310 Real
Estate—TimeSharing
Activities—
Receivables
Amend paragraphs 978-310-35-4 through 35-6 and
978-310-50-1 and supersede paragraph 978-310-357 to reflect the removal of Subtopic 360-20 and the
guidance related to revenue.
978-330 Real
Estate—TimeSharing
Activities—
Inventory
Amend paragraph 978-330-15-3 and supersede
paragraph 978-330-15-4 to reflect the removal of
guidance in Subtopic 360-20.
978-340 Real
Estate—TimeSharing
Activities—
Other Assets
and Deferred
Costs
Amend paragraph 978-340-25-1 to reference the
proposed cost guidance in Subtopic 340-40.
Supersede Sections 978-310-30, 978-310-40, and
978-310-45 to reflect the removal of Subtopic 360-20
and the guidance related to revenue.
Amend paragraphs 978-330-30-1, 978-330-35-1
through 35-2, and 978-330-35-4 and supersede
paragraph 978-330-30-2 to reflect the removal of
Subtopic 978-605 and Section 978-310-30.
Supersede paragraphs 978-340-25-2 through 25-3
and Section 978-340-40 to remove the guidance
related to costs to sell time-sharing intervals.
Amend paragraph 978-340-60-1 to reflect the
removal of the guidance related to costs to sell timesharing intervals.
978-720 Real
Estate—TimeSharing
Activities—
Other Expenses
Amend paragraphs 978-720-25-1 through 25-2 to
reference acquisition costs to the proposed guidance.
980-340
Regulated
Operations—
Other Assets
and Deferred
Costs
Amend paragraphs 980-340-55-10, 980-340-55-13,
and 980-340-55-16 to reflect the removal of Subtopic
360-20.
229
Codification
Subtopic
Description of the Proposed Amendments
980-350
Regulated
Operations—
Intangibles—
Goodwill and
Other
Supersede paragraph 980-350-35-3 to reflect the
proposed guidance on onerous performance
obligations.
980-605
Regulated
Operations—
Revenue
Recognition
Amend paragraph 980-605-05-01 and supersede
paragraphs 980-605-15-2 through 15-3 and
paragraphs 980-605-25-5 through 25-18 relating to
long-term power supply contracts.
Amend paragraph 980-350-35-5 and add paragraphs
980-350-35-6 through 35-7 to include content moved
from paragraphs 978-605-25-14 through 25-16.
Move paragraphs 980-605-25-14 through 25-16 to
paragraphs 980-350-35-5 through 35-7.
Amend paragraph 980-605-30-2 to reflect
amendments made to Section 460-10-25.
Add Section 980-605-45 to reflect the proposed
guidance on the presentation of alternative revenue
programs.
985-10
Software—
Overall
230
Amend paragraph 985-10-05-1 to reflect the removal
of Subtopic 985-605.
Amend paragraph 985-10-15-3 to reflect the removal
of Subtopics 605-35 and 985-605.
985-20
Software—
Costs of
Software to Be
Sold, Leased, or
Marketed
Amend paragraphs 985-20-15-3, 985-20-55-2, and
985-20-60-3 to reflect the removal of Subtopics 60535 and 985-605.
985-605
Software—
Revenue
Recognition
Supersede Subtopic 985-605. However, paragraph
985-605-25-86 is moved to paragraph 730-20-15-1A,
and paragraph 985-605-25-87 is moved to paragraph
985-20-25-12.
Add paragraph 985-20-25-12 to include content
amended and moved from paragraph 985-605-25-87.
Introduction
6.
The Codification is amended as described in paragraphs 7–276. In some
cases, to put the change in context, not only are the amended paragraphs shown
but also the preceding and following paragraphs. Terms from the Master
Glossary are in bold type. Added text is underlined, and deleted text is struck
out.
Amendments to Master Glossary
7.
Supersede the following Master Glossary terms, with a link to transition
paragraph 605-10-65-1.
•
Affinity Program
•
Cooperative Advertising
•
Air Cargo
•
Core Software
•
Airbill
•
•
Assumption
Cost-Plus-Award-Fee
Contract
•
Authorization Code
•
•
B Shares
Cost-Plus-Incentive-Fee
Contract (Incentive Based
on Cost)
•
Bargain Purchase
•
•
Barter
Cost-Plus-Incentive-Fee
Contract (Incentive Based
on Performance)
•
Buydowns
•
Cost Recovery Method
(first definition)
•
Cash Consideration
•
Cost-Sharing Contract
•
Consideration
•
Cost-Type Contracts
•
Continuing Investments
•
Cost-Without-Fee Contract
•
Continuing Involvement
(second definition)
•
Cross-Collateralized
•
Contractor
•
Customer (second
definition)
231
•
Fixed-Price Contract with
Economic Price
Adjustment
•
Fixed-Price Contracts
•
Fixed-Price Level-of-Effort
Term Contract
Enhancement
•
Flip Transactions
•
Extended Warranty
•
Front-End Sales Fee
•
Fare
•
Front-End Sales Load
•
Firm Fixed-Price Contract
•
Full Accrual Method
•
Fixed Fee
•
Half-Turn
•
Fixed-Price Contract
Providing for Firm Target
Cost Incentives
•
Handling Costs
•
Hosting Arrangement
Fixed-Price Contract
Providing for Performance
Incentives
•
Incentive
•
Independent Third Party
Fixed-Price Contract
Providing For Prospective
Periodic Redetermination
Of Price
•
Inducement
•
Initial Franchise Fee
•
Initial Services
•
Installment Method
•
Investor Notes
•
Licensing
•
Lifted Flight Coupon
•
Lump-Sum Contract
•
Delivery
•
Deposit Method (first and
second definitions)
•
Direct Selling Costs
•
Distributor (first definition)
•
•
•
•
•
232
Fixed-Price Contract
Providing For Retroactive
Redetermination Of Price
Fixed-Price Contract
Providing for Successive
Target Cost Incentives
•
Milestone (both definitions)
•
Reduced-Profit Method
•
Nonutility Generators
•
Reload
•
Off-the-Shelf Software
•
Rescission
•
On-Line Lifts
•
Reseller (first definition)
•
On-Line Sale and Off-Line
Sale
•
Retrospective Insurance
Arrangements
•
Other than Retail Land
Sales
•
Revenue Passenger Mile
•
•
OTRLS
Right-to-Use
•
•
Ownership Interests
Round-Turn
•
•
Partnership Notes
RPM
•
•
PCS
RTU
•
•
Percentage-of-Completion
Method
Sales Value
•
•
Permanent Investor
Separately Priced
Contracts
•
•
Planned Amenities
Shipping Costs
•
•
Platform
Site License
•
•
Platform-Transfer Right
Slotting Fees
•
•
Postcontract Customer
Support
Street Date
•
Syndication Fees
•
Prepaid Health Care Plan
•
•
Product Maintenance
Contracts
Time-and-Material
Contracts
•
Unit
•
Profit Center
233
•
Unit-Price Contracts
•
User
•
Upgrade (second
definition)
•
Vacation Club
•
•
Upgrade Right
Win
•
Upgrade Transaction
8.
Add the following Master Glossary terms, with a link to transition
paragraph 605-10-65-1.
Contract
An agreement between two or more parties that creates enforceable rights and
obligations.
Contract Asset
An entity’s right to consideration in exchange for goods or services that the entity
has transferred to a customer, when that right is conditioned on something other
than the passage of time (for example, the entity’s future performance).
Contract Liability
An entity’s obligation to transfer goods or services to a customer for which the
entity has received consideration from the customer.
Performance Obligation
A promise in a contract with a customer to transfer a good or service to the
customer.
Standalone Selling Price
The price at which an entity would sell a promised good or service separately to
a customer.
Transaction Price
The amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties (for example, sales taxes).
9.
Amend the following Master Glossary terms, with a link to transition
paragraph 605-10-65-1, as follows:
234
Amenities
Features that enhance the attractiveness or perceived value of a time-sharing
interval. Examples of amenities include golf courses, utility plants, clubhouses,
swimming pools, tennis courts, indoor recreational facilities, and parking facilities.
See also Planned Amenities and Promised Amenities.
Customer
A user or reseller.A party that has contracted with an entity to obtain goods or
services that are an output of the entity’s ordinary activities.
Revenue
Revenue earned by an entity from its direct distribution, exploitation, or licensing
of a film, before deduction for any of the entity’s direct costs of distribution. For
markets and territories in which an entity’s fully or jointly-owned films are
distributed by third parties, revenue is the net amounts payable to the entity by
third party distributors. Revenue is reduced by appropriate allowances, estimated
returns, price concessions, or similar adjustments, as applicable.Inflows or other
enhancements of assets of an entity or settlements of its liabilities (or a
combination of both) from delivering or producing goods, rendering services, or
other activities that constitute the entity’s ongoing major or central operations.
Amendments to Subtopic 105-10
10.
Amend paragraph 105-10-65-1, with a link to transition paragraph 605-1065-1, as follows:
Generally Accepted Accounting Principles—Overall
Transition and Open Effective Date Information
> Transition Related to FASB Statement No. 168, The FASB Accounting
®
Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles
105-10-65-1 The following represents the transition and effective date
information related to FASB Statement No. 168, The FASB Accounting
®
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles:
235
a.
b.
c.
d.
e.
f.
236
The pending content that links to this paragraph shall be effective for
financial statements issued for interim and annual periods ending after
September 15, 2009.
The Financial Accounting Standards Board (FASB) Accounting
®
Standards Codification shall become the source of authoritative
generally accepted accounting principles (GAAP) recognized by the
FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC)
under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants.
As of the effective date stated in paragraph 105-10-65-1(a), all thenexisting non-SEC accounting and reporting standards that had been
included in levels (a) through (d) GAAP are superseded, except as
noted in paragraph 105-10-65-1(d) and as described in Section 105-1070. Concurrently, all nongrandfathered, non-SEC accounting literature
not included in the Codification is deemed nonauthoritative.
The following standards shall remain authoritative until such time that
each is integrated into the Codification:
1. FASB Statement No. 164, Not-for-Profit Entities: Mergers and
Acquisitions
2. FASB Statement No. 166, Accounting for Transfers of Financial
Assets
3. FASB Statement No. 167, Amendments to FASB Interpretation No.
46(R)
4. FASB Statement No. 168, The FASB Accounting Standards
®
Codification and the Hierarchy of Generally Accepted Accounting
Principles.
Nonpublic nongovernmental entities that previously have not applied
the guidance in the paragraphs listed below shall account for the
adoption of that guidance as a change in accounting principle on a
prospective basis for revenue arrangements entered into or materially
modified in those fiscal years beginning on or after December 15, 2009,
and interim periods within those years:
1. Subparagraph superseded by Accounting Standards Update 201XXX.Paragraph 855-10-60-4
2. Subparagraph superseded by Accounting Standards Update 201XXX.Paragraphs 985-605-15-3 through 15-4
3. Subparagraph superseded by Accounting Standards Update 201XXX.Paragraphs 985-605-55-4 through 55-118
4. Subparagraph superseded by Accounting Standards Update 201XXX.Paragraphs 985-605-55-186 through 55-203
5. Paragraphs 985-845-25-1 through 25-7
6. Paragraphs 985-845-55-1 through 55-8.
The appropriate disclosures related to that adoption shall be made in
accordance with Section 250-10-50.
Amendments to Subtopic 210-10
11.
Supersede paragraph 210-10-60-2 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Balance Sheet—Overall
Relationships
> Revenue Recognition
210-10-60-2 Paragraph superseded by Accounting Standards Update 201XXX.For guidance on the presentation of provisions for losses on contracts, see
paragraph 605-35-45-2.
Amendments to Subtopic 270-10
12.
Amend paragraph 270-10-50-1 by adding item r, with a link to transition
paragraph 605-10-65-1, as follows:
Interim Reporting—Overall
Disclosure
> Disclosure of Summarized Interim Financial Data by Publicly Traded
Companies
270-10-50-1 Many publicly traded companies report summarized financial
information at periodic interim dates in considerably less detail than that provided
in annual financial statements. While this information provides more timely
information than would result if complete financial statements were issued at the
end of each interim period, the timeliness of presentation may be partially offset
by a reduction in detail in the information provided. As a result, certain guides as
to minimum disclosure are desirable. (It should be recognized that the minimum
disclosures of summarized interim financial data required of publicly traded
companies do not constitute a fair presentation of financial position and results of
operations in conformity with generally accepted accounting principles [GAAP]).
If publicly traded companies report summarized financial information at interim
dates (including reports on fourth quarters), the following data should be
reported, as a minimum:
237
r.
The information about revenue and costs from contracts with
customers in paragraphs 605-10-50-6, 605-10-50-9, 605-10-50-12,
605-10-50-15 through 50-16, and 340-40-50-1.
Amendments to Subtopic 275-10
13.
Supersede paragraph 275-10-60-7 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Risks and Uncertainties—Overall
Relationships
> Revenue Recognition
275-10-60-7 Paragraph superseded by Accounting Standards Update 201XXX.See Example 1 (paragraph 605-35-55-2) for an illustration of the kinds of
disclosures for risks and uncertainties related to long-term construction contracts.
Amendments to Subtopic 310-10
14.
Amend paragraph 310-10-35-11 and add paragraph 310-10-35-11A, with
a link to transition paragraph 605-10-65-1, as follows:
Receivables—Overall
Subsequent Measurement
310-10-35-11 The inability to make a reasonable estimate of the amount of loss
from uncollectible receivables because of a customer’s credit risk (that is, failure
to satisfy the condition in paragraph 450-20-25-2(b)) precludes accrual and may,
if there is significant uncertainty as to collection, suggest that the installment
method, the cost recovery method, or some other method of revenue recognition
be used. See paragraphs 605-10-25-3 through 25-4 for further guidance.does not
affect the amount of revenue that the entity recognizes. However, if there is
significant uncertainty about collection because of the customer’s credit risk at
contract inception, that uncertainty may indicate that the parties are not
committed to perform their respective obligations under the contract and, thus,
the criterion in paragraph 605-10-25-8(b) may not be met.
310-10-35-11A Generally, a loss from uncollectible receivables shall be charged
to operations. However, a reserve shall be recorded against the related contract
238
liability when payment from the customer is due in a noncancellable contract
and the entity has not yet transferred the promised goods or services.
15.
Amend paragraphs 310-10-40-4 through 40-5, with a link to transition
paragraph 605-10-65-1, as follows:
Derecognition
Acquisition, Development, and Construction Arrangements
310-10-40-4 If an acquisition, development, and construction arrangement is
accounted for as an investment in real estate or joint venture and the expected
residual profit is sold, gain recognition, if any, is appropriate only if the criteria in
Section 360-20-40Subtopic 605-40 are met after giving consideration to the
entire acquisition, development, and construction arrangement including the
continuing relationship between the financial institution and the project.
310-10-40-5 If a financial institution was the seller of the property at the initiation
of the project, gain recognition, if any, should be determined by reference to
Section 360-20-40.Subtopic 605-40.
16.
Amend paragraph 310-10-60-4, with a link to transition paragraph 605-1065-1, as follows:
Relationships
> Revenue Recognition
310-10-60-4 For guidance on loan guarantees, in which an entity (guarantor)
lends its creditworthiness to another party (borrower) for a fee, thereby
enhancing that other party’s ability to borrow funds, see Subtopic 605-20.605-10.
Amendments to Subtopic 310-40
17.
Amend paragraph 310-40-40-6 and supersede paragraphs 310-40-40-6A
through 40-7, with a link to transition paragraph 605-10-65-1, as follows:
Receivables—Troubled Debt Restructurings by Creditors
Derecognition
> Foreclosure
239
310-40-40-6 Except in the circumstances described in the following paragraph,
aA troubled debt restructuring that is in substance a repossession or foreclosure
by the creditor, that is, the creditor receives physical possession of the debtor’s
assets regardless of whether formal foreclosure proceedings take place, or in
which the creditor otherwise obtains one or more of the debtor’s assets in place
of all or part of the receivable, shall be accounted for according to the provisions
of paragraphs 310-40-35-7; 310-40-40-2 through 40-4 and;310-40-35-7, 310-4040-2 through 40-4, and, if appropriate, 310-40-40-8.
310-40-40-6A Paragraph superseded by Accounting Standards Update 201XXX.The guidance in the following paragraph applies to initial measurement of a
foreclosed property in a transaction having all of the following characteristics:
a.
b.
c.
d.
e.
f.
A sale of real estate was financed by the seller.
The buyer’s initial investment was not sufficient for recognition of profit
under the full accrual method.
The seller met the conditions of Subtopic 970-605 to record a sale and
recognized profit on the installment or cost recovery methods.
Subsequently, the buyer defaulted on the mortgage to the seller.
The seller forecloses on the property.
At the time of foreclosure, fair value of the property is less than the
seller’s gross receivable but greater than the seller’s net receivable, that
is, the principal and interest receivable less the deferred profit on the
sale and related allowances.
310-40-40-7 Paragraph superseded by Accounting Standards Update 201XXX.In a transaction having all of the characteristics set forth in the preceding
paragraph, the foreclosed property shall be recorded at the lower of the net
amount of the receivable or fair value of the property. The net receivable
assumes that the accrual of interest income on the financing, if any, is
appropriate under the circumstances. This Topic would be applied to a
foreclosure related to a sale accounted for under the full accrual method, and if
appropriate, the repossessed property would be recorded at its fair value. The
Impairment or Disposal of Long-Lived Assets Subsections of 360-10 require a
foreclosed asset that is newly acquired and that is classified as held for sale to
be recognized at the lower of its carrying value or fair value less cost to sell.
18.
Supersede paragraphs 310-40-55-11 through 55-12 and their related
heading, with a link to transition paragraph 605-10-65-1, as follows:
Implementation Guidance and Illustrations
> Illustrations
> > Example 1: Fair Value in Excess of the Seller’s Net Receivable
240
310-40-55-11 Paragraph superseded by Accounting Standards Update 201X-XX.
This Example illustrates the guidance in paragraph 310-40-40-7.
310-40-55-12 Paragraph superseded by Accounting Standards Update 201XXX.In this Example, the foreclosed property would be recorded at the amount of
the net receivable of $63 and $50, respectively, as illustrated in the following
table.
Original sale:
Seller financing
Buyer's initial investment (a)
Sales value
Sales value
Cost
Gain
Amount recognized
Deferred gain
Foreclosure at the end of Year 1:
Original note principal balance
Interest accrued for Year 1 at 10%
Gross receivable at foreclosure
Less deferred profit
Net receivable
Fair value of property at foreclosure
Installment
Method
Cost Recovery
Method
$
90
10
100
$
100
(60)
40
(4)
36
$
$
$
$
$
$
$
$
90
10
100
100
(60)
40
40
$
90
9
99
(36)
63
$
90
90
40
50
$
80
$
80
(b)
(a) Initial investment is inadequate for full accrual method.
(b) For purposes of this Example, assume that accrual of interest is inappropriate.
Amendments to Subtopic 330-10
19.
Supersede paragraph 330-10-30-19 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Inventory—Overall
Initial Measurement
> Costs of Certain Construction-Type and Production-Type Contracts
241
330-10-30-19 Paragraph superseded by Accounting Standards Update 201XXX.See Section 605-35-25 for a discussion of accounting for contract and
precontract costs of certain construction-type and production-type contracts.
20.
Amend paragraphs 330-10-35-21 through 35-22 and the related heading,
with a link to transition paragraph 605-10-65-1, as follows:
Subsequent Measurement
> Vendor Accounting for Consideration Given to a Customer or Reseller
330-10-35-21 See Subtopic 605-50605-10 for a discussion of consideration given
by a vendor to a {add glossary link}customer{add glossary link}.
> Customer or Reseller Accounting for Consideration Received from a
Vendor
330-10-35-22 See Section 605-50 Subtopic 705-20 for a discussion of
accounting by a customeran entity (including a {add glossary link to second
definition}reseller{add glossary link to second definition}) for consideration
received from a {add glossary link}vendor{add glossary link}.
21.
Supersede paragraph 330-10-45-2 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Other Presentation Matters
> Costs of Certain Construction-Type and Production-Type Contracts
330-10-45-2 Paragraph superseded by Accounting Standards Update 201XXX.See paragraphs 605-35-45-3 through 45-5 for guidance on presenting
contract costs of certain construction-type and production-type contracts.
Amendments to Subtopic 340-10
22.
Amend paragraph 340-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
Other Assets and Deferred Costs—Overall
Overview and Background
340-10-05-1 The Other Assets and Deferred Costs Topic includes the following
Subtopics:
242
a.
b.
c.
d.
Overall
Subparagraph superseded by Accounting Standards Update 201XXX.Capitalized Advertising Costs
Insurance Contracts thatThat Do Not Transfer Insurance RiskRisk.
Contracts with Customers.
23.
Supersede paragraphs 340-10-60-5 through 60-6 and 340-10-60-8 and
their related headings, with a link to transition paragraph 605-10-65-1, as follows:
Relationships
> Revenue Recognition
340-10-60-5 Paragraph superseded by Accounting Standards Update 201XXX.For the deferral of costs directly related to the acquisition of a contract, see
paragraphs 605-20-25-1 through 25-6.
340-10-60-6 Paragraph superseded by Accounting Standards Update 201XXX.For accounting for costs incurred in anticipation of future construction and
certain production-type contract sales, see paragraphs 605-35-25-39 through 2541.
> Contractors—Federal Government
340-10-60-8 Paragraph superseded by Accounting Standards Update 201XXX.For allocation of general and administrative costs to government contract
inventories and cost-reimbursement contracts, see paragraphs 912-20-45-1
through 45-2.
Amendments to Subtopic 340-20
24.
Supersede Subtopic 340-20, with a link to transition paragraph 605-10-651. [Paragraphs 340-20-25-4 through 25-11 amended and moved to
paragraphs 944-30-25-1A and 944-30-25-1C through 25-1I]
Addition of Subtopic 340-40
25.
Add Subtopic 340-40, with a link to transition paragraph 605-10-65-1, as
follows:
[For ease of readability, the new Subtopic is not underlined.]
Other Assets and Deferred Costs—Contracts with Customers
Overview and Background
243
General
340-40-05-1 This Subtopic provides accounting guidance for the following costs
related to a contract with a customer in the scope of Subtopic 605-10:
a.
b.
Costs incurred in fulfilling a contract with a customer that are not in the
scope of another Topic
Incremental costs of obtaining a contract with a customer.
340-40-05-2 Paragraphs presented in bold type in this Subtopic state the main
principles. All paragraphs have equal authority.
Scope and Scope Exceptions
General
> Overall Guidance
340-40-15-1 This Subtopic follows the same Scope and Scope Exceptions as
outlined in the Overall Subtopic (see Section 340-10-15), with specific
qualifications and exceptions noted below.
> Transactions
340-40-15-2 If the costs incurred in fulfilling a contract with a customer in the
scope of Subtopic 605-10 are in the scope of another Topic (for example, Topic
330, Topic 360, or Topic 985), an entity shall account for those costs in
accordance with those other Topics. Otherwise, an entity shall apply this
Subtopic.
340-40-15-3 The guidance in this Subtopic applies to the incremental costs of
obtaining a contract with a customer in the scope of Subtopic 605-10.
Recognition
General
> Costs to Fulfill a Contract
340-40-25-1 An entity shall recognize an asset from the costs to fulfill a
{add glossary link}contract{add glossary link} only if those costs meet all
of the following criteria:
a.
244
The costs relate directly to a contract or a specific anticipated
contract.
b.
c.
The costs generate or enhance resources of the entity that will be
used in satisfying {add glossary link}performance obligations{add
glossary link} in the future.
The costs are expected to be recovered.
340-40-25-2 Costs that relate directly to a contract or a specific anticipated
contract include any of the following:
a.
b.
c.
d.
e.
Direct labor (for example, salaries and wages of employees who provide
services directly to the customer)
Direct materials (for example, supplies used in providing services to the
customer)
Allocations of costs that relate directly to the contract or to contract
activities (for example, costs of contract management and supervision,
insurance, and depreciation of tools and equipment used in fulfilling the
contract)
Costs that are explicitly chargeable to the customer under the contract
Other costs that are incurred only because the entity entered into the
contract (for example, payments to subcontractors).
340-40-25-3 An entity shall recognize any of the following costs as expenses
when incurred:
a.
b.
c.
d.
General and administrative costs (unless those costs are explicitly
chargeable to the customer under the contract, in which case an entity
shall evaluate those costs in accordance with the criteria in paragraph
340-40-25-1)
Costs of wasted materials, labor, or other resources to fulfill the contract
that were not reflected in the price of the contract
Costs that relate to satisfied performance obligations (or partially
satisfied performance obligations) in the contract (that is, costs that
relate to past performance)
Costs that relate to remaining performance obligations but that the entity
cannot distinguish from costs that relate to satisfied performance
obligations.
> Incremental Costs of Obtaining a Contract
340-40-25-4 An entity shall recognize as an asset the incremental costs of
obtaining a contract with a customer if the entity expects to recover those
costs, subject to the practical expedient in paragraph 340-40-25-7.
340-40-25-5 The incremental costs of obtaining a contract are those costs that
an entity incurs in its efforts to obtain a contract with a customer and that it would
not have incurred if the contract had not been obtained (for example, a sales
commission).
245
340-40-25-6 Costs to obtain a contract that would have been incurred regardless
of whether the contract was obtained shall be recognized as an expense when
incurred, unless those costs are explicitly chargeable to the customer regardless
of whether the contract is obtained.
340-40-25-7 As a practical expedient, an entity may recognize the incremental
costs of obtaining a contract as an expense when incurred if the amortization
period of the asset that the entity otherwise would have recognized is one year or
less.
340-40-25-8 See Example 1 (paragraphs 340-40-55-1 through 55-6) for an
illustration of the guidance in paragraphs 340-40-25-1 through 25-7 on
accounting for costs incurred to obtain and fulfill a contract.
Subsequent Measurement
General
> Amortization and Impairment of Contract Costs
340-40-35-1 An asset recognized in accordance with paragraph 340-40-25-1 or
340-40-25-4 shall be amortized on a systematic basis consistent with the pattern
of transfer of the goods or services to which the asset relates. The asset may
relate to goods or services to be transferred under an anticipated contract that
the entity can identify specifically (for example, services to be provided under
renewal of an existing contract or costs of designing an asset to be transferred
under a specific contract that has not yet been approved).
340-40-35-2 An entity shall update the amortization to reflect a significant change
in the entity’s expected pattern of transfer of the goods or services to which the
asset relates. Such a change shall be accounted for as a change in accounting
estimate in accordance with Subtopic 250-10.
340-40-35-3 An entity shall recognize an impairment loss in profit or loss to the
extent that the carrying amount of an asset recognized in accordance with
paragraph 340-40-25-1 or 340-40-25-4 exceeds the remaining amount of
consideration to which an entity expects to be entitled in exchange for the goods
or services to which the asset relates, less the costs that relate directly to
providing those goods or services (as described in paragraph 340-40-25-2).
340-40-35-4 To determine the amount to which an entity expects to be entitled,
an entity shall use the principles in paragraphs 605-10-30-2 through 30-21 for
determining the transaction price.
340-40-35-5 Before an entity recognizes an impairment loss for an asset
recognized in accordance with paragraph 340-40-25-1 or 340-40-25-4, the entity
shall recognize any impairment loss for assets related to the contract that are
246
recognized in accordance with another Topic (for example, Topic 330), except for
impairment losses of asset groups recognized in accordance with Topic 360, and
impairments of goodwill and intangible assets recognized in accordance with
Topic 350.
340-40-35-6 An entity shall not recognize a reversal of an impairment loss
previously recognized.
340-40-35-7 See Example 2 (paragraphs 340-40-55-7 through 55-10) for an
illustration of the guidance in paragraph 340-40-35-1 on amortizing an asset
recognized from the costs to fulfill a contract.
Disclosure
General
> Assets Recognized from the Costs to Obtain or Fulfill a Contract with a
Customer
340-40-50-1 An entity shall disclose a reconciliation of the opening and closing
balances of assets recognized from the costs incurred to obtain or fulfill a
contract with a customer (in accordance with paragraphs 340-40-25-1 and 34040-25-4), by main category of asset (for example, costs to obtain contracts with
customers, precontract costs, and setup costs). The reconciliation shall include
amounts related to each of the following, if applicable:
a.
b.
c.
d.
Additions
Amortization
Impairment losses
Any additional line items that may be needed to understand the change
in the reporting period.
340-40-50-2 An entity shall describe the method it uses to determine the
amortization for each reporting period.
> Nonpublic Entity Disclosure
340-40-50-3 A nonpublic entity may elect not to disclose a reconciliation of asset
balances recognized from the costs to obtain or fulfill a contract with a customer
(paragraph 340-40-50-1).
247
Implementation Guidance and Illustrations
General
> Illustrations
> > Incremental Costs of Obtaining a Contract and Costs to Fulfill a
Contract
> > > Example 1: Costs That Give Rise to an Asset
340-40-55-1 The following Example illustrates the guidance in paragraphs 34040-25-1 through 25-7 on accounting for costs incurred to obtain and fulfill a
contract that do not give rise to an asset eligible for recognition in accordance
with another Topic (for example, inventory; property, plant, and equipment; and
capitalized software).
340-40-55-2 An entity enters into a contract to outsource a customer’s
information technology data center for five years. The entity incurs selling
commission costs of $10,000 to obtain the contract. Before providing the
services, the entity designs and builds a technology platform that interfaces with
the customer’s systems. That platform is not transferred to the customer.
340-40-55-3 The customer promises to pay a fixed fee of $20,000 per month.
340-40-55-4 The $10,000 incremental costs of obtaining the contract are
recognized as an asset in accordance with paragraph 340-40-25-4. The asset is
amortized over the term of the contract.
340-40-55-5 The initial costs incurred to set up the technology platform are as
follows.
Design services
$
40,000
Hardware
120,000
Software
90,000
Migration and testing of data center
Total costs
$
100,000
350,000
340-40-55-6 The initial setup costs relate primarily to activities to fulfill the
contract but do not transfer goods or services to the customer. The entity would
account for the initial setup costs as follows:
a.
b.
248
Hardware costs would be accounted for in accordance with Topic 360.
Software costs would be accounted for in accordance with Topic 350.
c.
Costs of the design, migration, and testing of the data center would be
considered for capitalization in accordance with paragraph 340-40-25-1.
Any resulting asset would be amortized on a systematic basis over five
years as the entity provides the services outsourced by the customer.
> > Amortization of an Asset Recognized from Costs to Fulfill a Contract
> > > Example 2: Amortization
340-40-55-7 The following Example illustrates the guidance in paragraph 340-4035-1 on amortizing an asset recognized from the costs to fulfill a contract if that
asset relates to goods or services to be provided under future contracts with the
same customer.
340-40-55-8 An entity enters into a contract with a customer for one year of
transaction-processing services. The entity charges the customer a
nonrefundable upfront fee in part as compensation for the initial activities of
setting up the customer on the entity’s systems and processes. The customer
can renew the contract each year without paying the initial fee.
340-40-55-9 The entity’s setup activities do not transfer any service to the
customer and, therefore, do not give rise to a performance obligation.
Therefore, the entity recognizes as revenue the initial fee over the period that it
expects to provide services to the customer, which may exceed the one year of
the initial contract term.
340-40-55-10 The incurred setup costs enhance resources of the entity that will
be used in satisfying performance obligations in the future, and those costs are
expected to be recovered. Therefore, the entity would recognize the setup costs
as an asset, which would be amortized over the period that the entity expects to
provide services to the customer (consistent with the pattern of revenue
recognition), which may exceed the one year of the initial contract term.
Amendments to Subtopic 350-30
26.
Add Section 350-30-40, with a link to transition paragraph 605-10-65-1, as
follows:
Intangibles—Goodwill and Other—General Intangibles Other
than Goodwill
Derecognition
General
249
350-30-40-1 An entity shall account for the derecognition of nonfinancial assets
within the scope of this Topic in accordance with Subtopic 605-40 if those
nonfinancial assets do not constitute a business or a nonprofit activity.
Amendments to Subtopic 360-10
27.
Supersede paragraph 360-10-05-1, with a link to transition paragraph 60510-65-1, as follows:
Property, Plant, and Equipment—Overall
Overview and Background
360-10-05-1 Paragraph superseded by Accounting Standards Update 201XXX.The Property, Plant, and Equipment Topic includes the following Subtopics:
a.
b.
Overall
Real Estate Sales.
28.
Amend paragraph 360-10-40-3 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Derecognition
> Sale of Property, Plant, and EquipmentReal Estate with Property
Improvements or Integral Equipment
360-10-40-3 For a discussion of the applicability of Subtopic 360-20 to all sales
of real estate, including real estate with property improvements or integral
equipment, and the definition of those terms, see paragraphs 360-20-15-3 and
360-20-15-10. An entity shall account for the derecognition of nonfinancial assets
within the scope of this Topic in accordance with Subtopic 605-40 if those
nonfinancial assets do not constitute a business or a nonprofit activity.
29.
Amend paragraph 360-10-60-1, with a link to transition paragraph 605-1065-1, as follows:
Relationships
> Real Estate—Real Estate Investment Trusts
360-10-60-1 For a discussion of the appropriate accounting affecting property,
plant, and equipment by a real estate investment trust for operating support from
its adviser, see paragraph 974-605-25-2.974-720-25-2.
250
Amendments to Subtopic 360-20
30.
Supersede Subtopic 360-20, with a link to transition paragraph 605-10-651. [Paragraph 360-20-15-2 amended and moved to paragraph 605-40-15-4
and paragraphs 360-20-15-4 through 15-8 moved to paragraphs 605-40-15-5
through 15-9]
Amendments to Subtopic 405-10
31.
Amend paragraph 405-10-05-2, with a link to transition paragraph 605-1065-1, as follows:
Liabilities—Overall
Overview and Background
405-10-05-2 This Subtopic does not contain any accounting guidance. Instead,
its purpose is to identify the locations in the Codification that provide guidance for
liabilities. The following Topics directly discuss the recognition of liabilities:
a.
b.
c.
d.
e.
f.
g.
h.
Asset Retirement and Environmental Obligations, see Topic 410
Exit or Disposal Cost Obligations, see Topic 420
Subparagraph superseded by Accounting Standards Update 201XXX.Deferred Revenue, see Topic 430
Commitments, see Topic 440
Contingencies, see Topic 450
Guarantees, see Topic 460
Debt, see Topic 470
Distinguishing Liabilities from Equity, see Topic 480.
Amendments to Subtopic 410-20
32.
Amend paragraph 410-20-55-28, with a link to transition paragraph 60510-65-1, as follows:
Asset Retirement and Environmental Obligations—Asset
Retirement Obligations
Implementation Guidance and Illustrations
410-20-55-28 The new asset should be measured as the residual amount (the
excess of the price paid over the fair value of the asset retirement obligation
transferred). That amount should be used in determining the new asset’s cost
basis. The commercial user should derecognize the liability from its balance
251
sheet and recognize a gain or loss based on the difference between the carrying
amount of the liability at the date of the sale and the portion of the sales price
that relates to the obligation. The producer of the new asset should recognize
revenue for the total amount received reduced by the fair value of the obligation
upon the transfer of the obligation from the commercial user (that is, on a net
basis). The requirements for the producer to measure the revenue from the sale
of the new asset as the residual amount and recognize revenue only for the sale
of the new asset are applicable for those producers for which the recycling of
electronic waste equipment is not a revenue-generating business activity. In
situations in which the recycling of equipment is a revenue-generating business
activity for the producer, that producer should measure the revenue from the sale
of the new asset and the assumption of the obligation in accordance with the
provisions of Subtopic 605-25605-10.
Amendments to Topic 430
33.
Supersede Topic 430, with a link to transition paragraph 605-10-65-1.
Amendments to Subtopic 440-10
34.
Amend paragraph 440-10-15-4, with a link to transition paragraph 605-1065-1, as follows:
Commitments—Overall
Scope and Scope Exceptions
> Transactions
440-10-15-4 The guidance in the Unconditional PurchasingPurchase Obligations
Subsections does not apply to product financing and repurchase
arrangementsarrangements, which that are within the scope of Section 470-4015. 470-40-15 and Subtopic 605-10. See paragraph 470-40-05-5 for a discussion
of the distinction between a product financing arrangement and an unconditional
purchase obligation.
35.
Supersede paragraph 440-10-60-5 and its related heading and amend
paragraph 440-10-60-16, with a link to transition paragraph 605-10-65-1, as
follows:
252
Relationships
> Revenue Recognition
440-10-60-5 Paragraph superseded by Accounting Standards Update 201XXX.For disclosures of commitments to complete contracts in process, see
paragraph 605-35-50-11.
440-10-60-16 For recognition of loan and commitment fees, see Section 948605-25605-10-25 and paragraph 948-310-35-7.
36.
Supersede paragraphs 440-10-60-19 through 60-20 and their related
headings, with a link to transition paragraph 605-10-65-1, as follows:
> Real Estate—Retail Land
440-10-60-19 Paragraph superseded by Accounting Standards Update 201XXX.For commitments for future improvement costs in a retail land sale, see
paragraph 976-605-30-3.
> Regulated Operations
440-10-60-20 Paragraph superseded by Accounting Standards Update 201XXX.For long-term power sales contracts, see Section 980-605-25.
Amendments to Subtopic 450-10
37.
Amend paragraph 450-10-60-3 and 450-10-60-12, with a link to transition
paragraph 605-10-65-1, as follows:
Contingencies—Overall
Relationships
> Revenue Recognition
450-10-60-3 For recognition of {add glossary link}revenue{add glossary
link} when uncertainties exist about possible returns, see Subtopic 605-15the
implementation guidance in paragraphs 605-10-55-1 through 55-9.
> Software
450-10-60-12 For revenue recognition when uncertainties exist if licensing,
selling, leasing, or otherwise marketing computer software, see Subtopic 985605605-10.
253
Amendments to Subtopic 460-10
38.
Amend paragraph 460-10-15-7 and its related heading and amend
paragraph 460-10-15-9, with a link to transition paragraph 605-10-65-1, as
follows:
Guarantees—Overall
Scope and Scope Exceptions
General
> > Transactions thatThat Are Excluded from the Scope of thisThis
Subtopic
460-10-15-7 The guidance in this Topic does not apply to the following types of
guarantee contracts:
a.
b.
c.
d.
e.
f.
g.
h.
254
A guarantee or an indemnification that is excluded from the scope of
Topic 450 (see paragraph 450-20-15-2—primarily employment-related
guarantees)
A lessee’s guarantee of the residual value of the leased property at the
expiration of the lease term, if the lessee (guarantor) accounts for the
lease as a capital lease under Subtopic 840-30
A contract that meets the characteristics in paragraph 460-10-15-4(a)
but is accounted for as contingent rent under Subtopic 840-30
A guarantee (or an indemnification) that is issued by either an insurance
entity or a reinsurance entity and accounted for under Topic 944
(including guarantees embedded in either insurance contracts or
investment contracts)
A contract that meets the characteristics in paragraph 460-10-15-4(a)
but provides for payments that constitute a vendor rebate (by the
guarantor) based on either the sales revenues of, or the number of units
sold by, the guaranteed party
A contract that provides for payments that constitute a vendor rebate
(by the guarantor) based on the volume of purchases by the buyer
(because the underlying relates to an asset of the seller, not the buyer
who receives the rebates)
A guarantee or an indemnification whose existence prevents the
guarantor from being able to either account for a transaction as the sale
of an asset that is related to the guarantee’s underlying or recognize in
earnings the profit from that sale transaction
A registration payment arrangement within the scope of Subtopic 82520 (see Section 825-20-15)
i.
j.
k.
A guarantee or an indemnification of an entity’s own future performance
(for example, a guarantee that the guarantor will not take a certain
future action)
A guarantee that is accounted for as a credit derivative at fair value
under Topic 815.815
A sales incentive program in which a manufacturer contractually
guarantees that the purchaser will receive a minimum resale amount at
the time the equipment is disposed of.of, The manufacturer provides the
guarantee by agreeing to do either of the following:
1. Reacquire the equipment at a guaranteed price at specified time
periods as a means to facilitate its resale.
2. Pay the purchaser for the deficiency, if any, between the sales
proceeds received for the equipment and the guaranteed minimum
resale value.if that guarantee prevents the manufacturer from being
able to account for a transaction as a sale of an asset, as described
in paragraphs 840-10-55-12 through 55-25. (Because a
manufacturer continues to recognize the residual value of the
equipment it guaranteed [it is included in the seller-lessor’s net
investment in the lease], if the sales incentive program qualified to
be reported as a sales-type lease, it still would not be within the
scope of this Topic because this Topic does not apply to a
guarantee for which the underlying is related to an asset of the
guarantor.) [Content amended as shown and moved from
paragraph 460-10-55-17(e)]
That program shall be evaluated in accordance with paragraphs 605-1055-43 through 55-53.
For related implementation guidance, see Section 460-10-55.
Product Warranties
> Transactions
460-10-15-9 The guidance in the Product Warranties Subsections applies only to
product warranties, which include all of the following:
a.
b.
c.
Product warranties issued by the guarantor, regardless of whether the
guarantor is required to make payment in services or cash
Separately priced extended warranty or product maintenance
contracts.contracts and warranties that provide a customer with a
service in addition to the assurance that the product complies with
agreed-upon specifications
Warranty obligations that are incurred in connection with the sale of the
product, that is, obligations in which the customer does not have the
option to purchase the warranty separately and that do not provide the
customer with a service in addition to the assurance that the product
255
complies with agreed-upon specifications. that are not separately priced
or sold but are included in the sale of the product.
39.
Amend paragraph 460-10-25-8, with a link to transition paragraph 605-1065-1, as follows:
Recognition
Product Warranties
> Separately Priced Extended Warranty or Product Maintenance Contracts
460-10-25-8
Paragraphs
605-20-25-1
through
25-6Subtopic
605-10
providesprovide guidance on revenue recognition by sellers of extended warranty
or product maintenance contracts.contracts and warranties that provide a
customer with a service in addition to the assurance that the product complies
with agreed-upon specifications.
40.
Amend paragraph 460-10-50-8, with a link to transition paragraph 605-1065-1, as follows:
Disclosure
Product Warranties
460-10-50-8 A guarantor shall disclose all of the following information for product
warranties and other guarantee contracts described in paragraph 460-10-15-9:
a.
b.
c.
256
The information required to be disclosed by paragraph 460-10-50-4
except that a guarantor is not required to disclose the maximum
potential amount of future payments specified in paragraph 460-10-504(b)
The guarantor’s accounting policy and methodology used in determining
its liability for product warranties (including any liability [such as deferred
revenue] associated with extended warranties)
A tabular reconciliation of the changes in the guarantor’s aggregate
product warranty liability for the reporting period. That reconciliation
shall include all of the following amounts:
1. The beginning balance of the aggregate product warranty liability
2. The aggregate reductions in that liability for payments made (in
cash or in kind) under the warranty
3. The aggregate changes in the liability for accruals related to
product warranties issued during the reporting period
4.
5.
The aggregate changes in the liability for accruals related to
preexisting warranties (including adjustments related to changes in
estimates)
The ending balance of the aggregate product warranty liability.
41.
Amend paragraph 460-10-55-17 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Implementation Guidance and Illustrations
> Implementation Guidance
> > Scope Guidance—Guarantees Outsideoutside the Scope of This Topic
Entirely
> > > Guarantees thatThat Prevent Sale Accounting
460-10-55-17 The following are examples of contracts that are outside the scope
of this Topic because they are of the type described in paragraph 460-10-157(g):
a.
b.
c.
d.
e.
Subparagraph superseded by Accounting Standards Update 201X-XX.A
seller’s guarantee of the return of a buyer’s investment or return on
investment of a real estate property as discussed in paragraph 360-2040-41.
Subparagraph superseded by Accounting Standards Update 201X-XX.A
seller’s guarantee of a specified level of operations of a real estate
property, as discussed in paragraphs 360-20-40-42 through 40-44.
A transaction that involves sale of a marketable security to a third-party
buyer with the buyer’sbuyer having an option to put the security back to
the seller at a specified future date or dates for a fixed price, if the
existence of the put option prevents the transferor from accounting for
the transaction as a sale, as described in paragraphs 860-20-55-20
through 55-23.
A seller-lessee’s residual value guarantee if that guarantee results in the
seller-lessee deferring profit from the sale greater than or equal to the
gross amount of the guarantee (see paragraphs 840-40-55-26 through
55-28).
Subparagraph superseded by Accounting Standards Update 201X-XX.A
sales incentive program in which a manufacturer contractually
guarantees that the purchaser will receive a minimum resale amount at
the time the equipment is disposed of, if that guarantee prevents the
manufacturer from being able to account for a transaction as a sale of
an asset, as described in paragraphs 840-10-55-12 through 55-25.
(Because a manufacturer continues to recognize the residual value of
257
the equipment it guaranteed [it is included in the seller-lessor’s net
investment in the lease], if the sales incentive program qualified to be
reported as a sales-type lease, it still would not be within the scope of
this Topic because this Topic does not apply to a guarantee for which
the underlying is related to an asset of the guarantor.) [Content
amended and moved to paragraph 460-10-15-7(k)]
42.
Supersede paragraphs 460-10-60-3, 460-10-60-8 through 60-10, and 46010-60-38 and their related headings, with a link to transition paragraph 605-1065-1, as follows:
Relationships
> Property, Plant, and Equipment
460-10-60-3 Paragraph superseded by Accounting Standards Update 201XXX.For a seller’s guarantee of a return of the buyer’s investment in real estate or
a seller’s guarantee of a return on that investment for an extended period, see
paragraph 360-20-40-41.
> Revenue Recognition
460-10-60-8 Paragraph superseded by Accounting Standards Update 201XXX.For recognition of guarantee fees, see paragraphs 605-20-25-8 through 2512.
460-10-60-9 Paragraph superseded by Accounting Standards Update 201XXX.For guaranteed sales (arrangements in which customers buy products for
resale with the right to return products), see paragraphs 605-15-25-1 through 254.
460-10-60-10 Paragraph superseded by Accounting Standards Update 201XXX.For guaranteed maximum reimbursable costs of construction contracts or
production contracts, see Subtopic 605-35.
> Entertainment—Films
460-10-60-38 Paragraph superseded by Accounting Standards Update 201XXX.For nonrefundable minimum guarantees contained in certain film licensing
arrangements, see paragraphs 926-605-25-19 through 25-21.
43.
Amend paragraph 460-10-60-41, with a link to transition paragraph 60510-65-1, as follows:
258
Product Warranties
> Revenue Recognition
460-10-60-41 For recognition of revenue, costs, and losses resulting from
separately priced extendeda warranty in which the customer has the option to
purchase the warranty separately or a warranty, or a part of the warranty, that
provides the customer with a service in addition to the assurance that the product
complies with agreed-upon specifications, and product maintenance contracts,
see paragraphs 605-20-25-1 through 25-6.605-10-55-10 through 55-15.
Amendments to Subtopic 470-40
44.
Amend paragraph 470-40-05-3, with a link to transition paragraph 605-1065-1, as follows:
Debt—Product Financing Arrangements
Overview and Background
470-40-05-2 Product financing arrangements include agreements in which a
sponsor (the entity seeking to finance product pending its future use or resale)
does any of the following:
a.
b.
c.
Sells the product to another entity (the entity through which the
financing flows), and in a related transaction agrees to repurchase the
product (or a substantially identical product)
Arranges for another entity to purchase the product on the sponsor’s
behalf and, in a related transaction, agrees to purchase the product
from the other entity
Controls the disposition of the product that has been purchased by
another entity in accordance with the arrangements described in either
(a) or (b).
470-40-05-3 In all of the foregoing cases, the sponsor agrees to purchase the
product, or processed goods of which the product is a component, from the other
entity at specified prices over specified periods or, to the extent that it does not
do so, guarantees resale prices to third parties (see paragraph 470-40-152(a)(1)). The Implementation Guidance in Section 470-40-55 illustrates each of
the types of arrangementsthe arrangement described in (a) and (b) of the
preceding paragraph.
45.
Amend paragraphs 470-40-15-2 through 15-3, with a link to transition
paragraph 605-10-65-1, as follows:
259
Scope and Scope Exceptions
> Transactions
470-40-15-2 The guidance in this Subtopic applies to product financing
arrangements for products that have been produced by or were originally
purchased by the sponsor or purchased by another entity on behalf of the
sponsor and have both of the following characteristics:
a.
b.
The financing arrangement requires the sponsor to purchase the
product, a substantially identical product, or processed goods of which
the product is a component at specified prices. The specified prices are
not subject to change except for fluctuations due to finance and holding
costs. This characteristic of predetermined prices also is present if any
of the following circumstances exist:
1. The specified prices in the financing arrangement are in the form of
resale price guarantees under which the sponsor agrees to make
up any difference between the specified price and the resale price
for products sold to third parties.
2. The sponsor is not required to purchase the product but has an
option to purchase the product, the economic effect of which
compels the sponsor to purchase the product;product, for example,
an option arrangement that provides for a significant penalty if the
sponsor does not exercise the option to purchase.
3. The sponsor is not required by the agreement to purchase the
product but the other entity has an option whereby it can require the
sponsor to purchase the product.
The payments that the other entity will receive on the transaction are
established by the financing arrangement, and the amounts to be paid
by the sponsor will be adjusted, as necessary, to cover substantially all
fluctuations in costs incurred by the other entity in purchasing and
holding the product (including interest). This characteristic ordinarily is
not present in purchase commitments or contractor-subcontractor
relationships.
470-40-15-3 The guidance in this Subtopic does not apply to the following
transactions and activities:
a.
b.
c.
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Ordinary purchase commitments in which the risks and rewards of
ownership are retained by the seller (for example, a manufacturer or
other supplier) until the product is transferred to a purchaserpurchaser.
Typical contractor-subcontractor relationships in which the contractor is
not in substance the owner of product held by the subcontractor and the
obligation of the contractor is contingent on substantial performance on
the part of the subcontractor.
Long-term unconditional purchase obligations (for example, take-or-pay
contracts) specified by Subtopic 440-10. At the time a take-or-pay
d.
e.
f.
contract is entered into, which is an unconditional purchase obligation,
either the product does not yet exist (for example, electricity) or the
product exists in a form unsuitable to the purchaser (for example,
unmined coal); the purchaser has a right to receive future product but is
not the substantive owner of existing product.
Unmined or unharvested natural resources and financial instruments.
Transactions within the scopefor which sales revenue is recognized
currently in accordance with the provisions of Topic 605.
Typical purchases by a subcontractor on behalf of a contractor. In a
typical contractor-subcontractor relationship, the purchase of product by
a subcontractor on behalf of a contractor ordinarily leaves a significant
portion of the subcontractor’s obligation unfulfilled. The subcontractor
has the risks of ownership of the product until it has met all the terms of
a contract. Accordingly, the typical contractor-subcontractor relationship
shall not be considered a product financing arrangement.
46.
Amend paragraphs 470-40-25-1 through 25-3, with a link to transition
paragraph 605-10-65-1, as follows:
Recognition
470-40-25-1 This Subtopic requires that a product financing arrangement
within the scope of this Subtopic be accounted for as a borrowing rather than as
a sale. The sponsor is in substance the owner of the product and the sponsor
shall, therefore, report the product as an asset and the related obligation as a
liability.
470-40-25-2 If the sponsor is a party to an arrangement whereby another entity
purchases a product on the sponsor’s behalf and, in a related transaction, the
sponsor agrees to purchase the product or processed goods of which the product
is a component from the entity, the sponsor shall record the asset and the related
liability when the product is purchased by the other entity.Product and obligations
under product financing arrangements that have both of the characteristics
described in paragraphs 470-40-15-2 through 15-3 shall be accounted for by the
sponsor as follows:
a.
Subparagraph superseded by Accounting Standards Update 201X-XX.If
a sponsor sells a product to another entity and, in a related transaction,
agrees to repurchase the product (or a substantially identical product) or
processed goods of which the product is a component, the sponsor
shall record a liability at the time the proceeds are received from the
other entity to the extent that the product is covered by the financing
arrangement. The sponsor shall not record the transaction as a sale and
shall not remove the covered product from its balance sheet.
261
b.
Subparagraph superseded by Accounting Standards Update 201X-XX.If
the sponsor is a party to an arrangement whereby another entity
purchases a product on the sponsor’s behalf and, in a related
transaction, the sponsor agrees to purchase the product or processed
goods of which the product is a component from the entity, the sponsor
shall record the asset and the related liability when the product is
purchased by the other entity.
470-40-25-3 Costs of the product, excluding processing costs, in excess of the
sponsor’s original production or purchase costs or the other entity’s purchase
costs represent financing and holding costs. The sponsor shall account for such
costs in accordance with the sponsor’s accounting policies applicable to
financing and holding costs as those costs are incurred by the other entity. For
example, if insurance costs ordinarily are accounted for as period costs by the
sponsor, similar costs associated with the product covered by financing
arrangements shall be expensed by the sponsor as those costs are incurred by
the other entity.
47.
Amend paragraphs 470-40-55-1 through 55-2 and their related heading,
supersede paragraphs 470-40-55-3 through 55-5 and their related heading, and
amend the heading preceding paragraph 470-40-55-6, with a link to transition
paragraph 605-10-65-1, as follows:
Implementation Guidance and Illustrations
> Illustrations
> > Example 1: Common Product Financing ArrangementsSponsor
Arranges for an Entity to Purchase Product, Sponsor to Repurchase from
That Entity
470-40-55-1 The following Cases illustrate Example illustrates how the guidance
in paragraphs 470-40-15-2 through 15-3 470-40-25-1 through 25-4 applies to
product financing arrangements in which a sponsor arranges for another entity
to purchase the product on the sponsor’s behalf and, in a related transaction,
agrees to purchase the product from the other entitytwo common product
financing arrangements:
a.
b.
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Subparagraph superseded by Accounting Standards Update 201XXX.Entity sells product with repurchase agreement (Case A).
Subparagraph superseded by Accounting Standards Update 201XXX.Sponsor arranges for third party to purchase product, sponsor to
repurchase (Case B).
470-40-55-2 The facts assumed in the Cases Example are illustrative only and
are not intended to modify or limit in any way the provisions of this Subtopic. The
facts assumed in each Case could vary in one or more respects without altering
the application of the provisions of this Subtopic.
> > > Case A: Entity Sells Product with Repurchase Agreement
470-40-55-3 Paragraph superseded by Accounting Standards Update 201XXX.An entity (sponsor) sells a portion of its inventory to another entity (the entity
through which the financing flows), and in a related transaction agrees to
repurchase the inventory.
470-40-55-4 Paragraph superseded by Accounting Standards Update 201XXX.The sponsor arranges for the other entity to acquire a portion of the sponsor’s
inventory. The other entity’s sole asset is the transferred inventory that is, in turn,
used as collateral for bank financing. The proceeds of the bank financing are
then remitted to the sponsor. The debt of the other entity is guaranteed by the
sponsor. The inventory is stored in a public warehouse during the holding period.
The sponsor, in connection with the sale (legal title passes to the entity), enters
into a financing arrangement under which all of the following conditions are met:
a.
b.
c.
d.
The sponsor agrees to pay all costs of the other entity associated with
the inventory, including holding and storage costs.
The sponsor agrees to pay the other entity interest on the purchase
price of the inventory equivalent to the interest and fees incurred in
connection with the bank financing.
The sponsor agrees to repurchase the inventory from the other entity at
a specified future date for the same price originally paid by the entity to
purchase the inventory irrespective of changes in market prices during
the holding period.
The other entity agrees not to assign or otherwise encumber the
inventory during its ownership period, except to the extent of providing
collateral for the bank financing.
470-40-55-5 Paragraph superseded by Accounting Standards Update 201XXX.In this product financing arrangement, both of the characteristics in
paragraphs 470-40-15-2 through 15-3 are present; accordingly, the sponsor
neither records the transaction as a sale of inventory nor removes the inventory
from its balance sheet. The sponsor recognizes a liability when the proceeds are
received from the other entity. Financing and holding costs are accrued by the
sponsor as incurred by the other entity and accounted for in accordance with the
sponsor’s accounting policies for such costs. Interest costs are separately
identified and accounted for in accordance with Topic 835.
263
> > > Case B: Sponsor Arranges for Third Party to Purchase Product,
Sponsor to Repurchase
470-40-55-6 A sponsor arranges for another an entity to buy product on the
sponsor’s behalf with a related agreement to purchase the product from the other
that entity.
Amendments to Subtopic 505-50
48.
Amend paragraphs 505-50-05-2 through 05-3, with a link to transition
paragraph 605-10-65-1, as follows:
Equity—Equity-Based Payments to Non-Employees
Overview and Background
505-50-05-2 This Subtopic addresses the accounting and reporting for both the
issuer (that is, the purchaser or grantor) and recipient (that is, the goods or
service provider or grantee) for a subset of share-based payment
transactions.transactions in which the recipient (that is, the goods or service
provider or grantee) is not an employee. When the grantee is an employee in a
share-based payment transaction, the grantor and grantee shall apply Topic 718.
The grantee of a share-based payment in accordance with a contract with a
customer shall apply the guidance in Subtopic 605-10. Topic 718 also
addresses a subset of these transactions. The applicable accounting and
reporting requirements for a specific transaction substantially depend on whether
the grantee meets the definition of an employee (see the definition for
determining which guidance to apply to a particular transaction). The accounting
and reporting required may differ significantly depending on whether that
definition of employee is met for the grantee. With certain exceptions, this
Subtopic provides guidance when the grantee does not meet that definition of an
employee.
505-50-05-3 The guidance in this Subtopic addresses the transactions described
in this Section in which the grantee receivesgrantor issues shares of stock, stock
options, or other equity instruments in settlement of the entire transaction or, if
the transaction is part cash and part equity instruments, in settlement of the
portion of the transaction for which the equity instruments constitute the
consideration.
49.
Supersede paragraphs 505-50-05-4 through 05-5, with a link to transition
paragraph 605-10-65-1, as follows:
505-50-05-4 Paragraph superseded by Accounting Standards Update 201XXX.While certain transactions that involve the contemporaneous exchange of
equity instruments for goods or services do not create practice issues, others are
264
more complex in that the exchange spans several periods and the issuance of
the equity instruments is contingent on service or delivery of goods that must be
completed by the grantee in order to vest in the equity instrument. Additionally,
sometimes a fully vested, nonforfeitable equity instrument issued to a grantee
contains terms that may vary based on the achievement of a performance
condition or certain market conditions. Performance conditions are those
conditions that relate to the achievement of a specified performance target, such
as attaining a specified level of sales, as contrasted with market conditions,
which relate to the achievement of a specified market target such as attaining a
specified stock price or amount of intrinsic value.
505-50-05-5 Paragraph superseded by Accounting Standards Update 201XXX.For example, a fully vested stock option may be issued to a grantee that
contains a provision that the exercise price will be reduced if the grantee
completes a project by a specified date. In certain cases, the fair value of the
equity instruments to be received may be more reliably measurable than the fair
value of the goods or services to be given as consideration. The guidance in this
Subtopic addresses this situation, including the appropriate date or dates to be
used by the grantee to measure revenue under such complex transactions.
50.
Supersede paragraph 505-50-25-5, with a link to transition paragraph 60510-65-1, as follows:
Recognition
505-50-25-5 Paragraph superseded by Accounting Standards Update 201XXX.In the situation in which an entity is the recipient (the goods or service
provider or grantee) of the equity instrument, this guidance also does not address
when revenue is recognized other than to require that a liability (deferred
revenue) or revenue be recognized in the same period(s) and in the same
manner as it would if the grantee was to receive cash for the goods or services
instead of the equity instruments.
51.
Amend paragraph 505-50-30-1, supersede paragraphs 505-50-30-8, and
supersede paragraphs 505-50-30-18 through 30-19 and paragraph 505-50-30-29
and related headings, and amend paragraphs 505-50-30-9 through 30-10, with a
link to transition paragraph 605-10-65-1, as follows:
Initial Measurement
505-50-30-1 This Section provides measurement guidance for transactions that
involve the issuance or receipt of equity instruments in exchange for goods or
services with nonemployees. This Section identifies the measurement date for
such exchange transactions and addresses issues associated with the
265
measurement of the transactions before and as of the measurement date.
Measurement issues associated with these transactions after the measurement
date are addressed in Section 505-50-35.
> Determining the Fair Value of the Equity Instruments Issued or Received
505-50-30-8 Paragraph superseded by Accounting Standards Update 201XXX.As noted in paragraph 505-50-05-5 for transactions involving the receipt of
equity instruments in exchange for providing goods or services, in certain cases,
the fair value of the equity instruments to be received may be more reliably
measurable than the fair value of the goods or services to be given as
consideration.
505-50-30-9 The following guidance addresses measurement issues associated
with determining the fair value of the equity instruments issued or received if it
has been determined that the fair value of the equity instruments issued or
received in a share-based payment transaction within the scope of this Subtopic
is more reliably measurable than the fair value of the consideration received or
provided in exchange as follows:
a.
b.
c.
d.
Determining the measurement date
Measuring before the measurement date
Measuring at the measurement date
Measuring after the measurement date.
> > Determining the Measurement Date
505-50-30-10 The following guidance identifies a measurement date, which
determines some of the inputs in the determination of the fair value of equity
instruments issued or received in a share-based payment transaction with
nonemployees. Guidance is provided separately for the grantor-purchaser and
grantee-provider.
> > > Grantee-Provider
505-50-30-18 Paragraph superseded by Accounting Standards Update 201X-XX.
An entity (the grantee or provider) may enter into transactions to provide goods
or services in exchange for equity instruments. The grantee shall measure the
fair value of the equity instruments in these transactions using the stock price
and other measurement assumptions as of the earlier of either of the following
dates referred to as the measurement date:
a.
266
The date the parties come to a mutual understanding of the terms of the
equity-based compensation arrangement and a commitment for
performance by the grantee to earn the equity instruments (a
performance commitment) is reached
b.
The date at which the grantee’s performance necessary to earn the
equity instruments is complete (that is, the vesting date).
505-50-30-19 Paragraph superseded by Accounting Standards Update 201X-XX.
The term performance commitment as it relates to the accounting by a grantee
describes the same conditions as for a grantor in paragraph 505-50-30-12. That
is, a performance commitment is a commitment under which performance by the
grantee to earn the equity instruments is probable because of sufficiently large
disincentives for nonperformance. The disincentives must result from the
relationship between the grantor and the grantee. Forfeiture of the equity
instruments as the sole remedy in the event of the grantee’s nonperformance is
not considered a sufficiently large disincentive for purposes of applying the
guidance. In addition, the ability to sue for nonperformance, in and of itself, does
not represent a sufficiently large disincentive to ensure that performance is
probable. (A granting entity may always be able to sue for nonperformance but it
is not always clear whether any significant damages would result.)
505-50-30-29 Paragraph superseded by Accounting Standards Update 201XXX.As it relates to a grantee, if on the measurement date the quantity or any of
the terms of the equity instrument are dependent on the achievement of a market
condition, then the grantee shall measure revenue based on the fair value of the
equity instruments inclusive of the adjustment provisions. That fair value would
be calculated as the fair value of the equity instruments without regard to the
market condition plus the fair value of the commitment to change the quantity or
terms of the equity instruments if the market condition is met. That is, the
existence of a market condition that, if achieved, results in an adjustment to an
equity instrument generally affects the value of the instrument. Pricing models
have been adapted to value many of those path-dependent equity instruments.
52.
Amend paragraphs 505-50-35-1 and 505-50-35-3 and the related heading,
with a link to transition paragraph 605-10-65-1, as follows:
Subsequent Measurement
505-50-35-1 Section 505-50-30 addresses the measurement of equity
instruments issued or received if it has been determined that the fair value of the
equity instruments issued or received in a share-based payment transaction
within the scope of this Subtopic is more reliably measurable than the fair value
of the consideration received or provided in exchange, including cases in which
the quantity or any of the terms of the equity instruments are not known up front.
The measurement guidance in that Section addresses time periods before and
as of the measurement date. This Section provides guidance on the
measurement of those same equity instruments after the measurement date.
267
> Transactions in Which Quantity or Any Terms Not Known upUp Front
505-50-35-3 The following guidance addresses measurement by the grantor and
the grantee, in periods after the measurement date, of equity instruments issued
or received in a share-based payment transaction within the scope of this
Subtopic in which the quantity or any of the terms were not known up front.
53.
Supersede paragraphs 505-50-35-13 through 35-16 and their related
heading, with a link to transition paragraph 605-10-65-1, as follows:
> > Grantee Accounting
505-50-35-13 Paragraph superseded by Accounting Standards Update 201XXX.A grantee may be party to an arrangement in which the terms of the equity
instruments are subject to adjustment after the measurement date. The following
two paragraphs address transactions in which any of the terms of the equity
instruments are subject to adjustment after the measurement date (that is, the
terms of the equity instrument are subject to adjustment based on performance
above the level committed to in a performance commitment, performance after
the instrument is earned, or market conditions) and how the grantee shall
account for an increase in fair value as a result of an adjustment (upon resolution
of the contingency after the measurement date) as revenue.
505-50-35-14 Paragraph superseded by Accounting Standards Update 201XXX.If, on the measurement date, the quantity or any of the terms of the equity
instruments are dependent on the achievement of grantee performance
conditions (beyond those conditions for which a performance commitment
exists), then changes in fair value of the equity instrument that result from an
adjustment to the instrument upon the achievement of a performance condition
shall be measured as additional revenue from the transaction using a
methodology consistent with modification accounting described in paragraphs
718-20-35-3 through 35-4. That is, the adjustment shall be measured at the date
of the revision of the quantity or terms of the equity instrument as the difference
between the then-current fair value of the revised instruments utilizing the thenknown quantity and terms and the then-current fair value of the old equity
instruments immediately before the adjustment.
505-50-35-15 Paragraph superseded by Accounting Standards Update 201XXX.Changes in fair value of the equity instruments after the measurement date
unrelated to the achievement of performance conditions shall be accounted for in
accordance with any relevant guidance on the accounting and reporting for
investments in equity instruments, such as that in Topic 323; 325; 320; and 815.
505-50-35-16 Paragraph superseded by Accounting Standards Update 201XXX.Example 4, Case C (see paragraph 505-50-55-25) illustrates grantee
accounting if the terms of the equity instrument are dependent on performance.
268
54.
Supersede paragraph 505-50-50-2 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Disclosure
> Grantee Disclosures
505-50-50-2 Paragraph superseded by Accounting Standards Update 201XXX.In accordance with paragraphs 845-10-50-1 through 50-2, entities shall
disclose, in each period’s financial statements, the amount of gross operating
revenue recognized as a result of nonmonetary transactions addressed by the
guidance in this Subtopic.
55.
Amend paragraphs 505-50-55-17 through 55-18 and their related heading
and supersede paragraphs 505-50-55-25 through 55-27 and their related
heading, with a link to transition paragraph 605-10-65-1, as follows:
Implementation Guidance and Illustrations
> > Example 4: Accounting Afterafter the Performance Commitment Date
Throughthrough Completion of Performance
505-50-55-17 This Example illustrates the guidance in paragraph 505-50-30-30.
The Cases in this Example illustrate grantor and grantee accounting for
transactions that have a performance commitment before counterparty
performance is complete. In Case A, both the quantity and all the terms of the
equity instruments are known up front, whereas in CasesCase B and C they are
not. The Cases illustrate the following:
a.
b.
c.
Grantor accounting—all terms known up front (Case A)
Grantor accounting—terms dependent on performance (Case B)(Case
B).
Subparagraph superseded by Accounting Standards Update 201XXX.Grantee accounting—terms dependent on performance (Case C).
505-50-55-18 Cases A, B, and CA and B share the assumption that a
performance commitment has been achieved before the counterparty’s
performance is complete.
> > > Case C: Grantee Accounting—Terms Dependent on Performance
505-50-55-25 Paragraph superseded by Accounting Standards Update 201XXX.This Case illustrates the application of measurement date guidance for a
transaction in which a performance commitment exists before the time that the
grantee’s performance is complete and the terms of the equity instrument are
269
subject to adjustment after the measurement date based on the achievement of
specified performance conditions. This Case does not address when revenue is
recognized. However, a liability (deferred revenue) or revenue would be
recognized in the same period(s) and in the same manner as it would if the entity
was to receive cash for the goods or services instead of the equity instruments.
505-50-55-26 Paragraph superseded by Accounting Standards Update 201XXX.On January 1, X2, Entity B grants Service Provider 100,000 options with a life
of 2 years. The options vest if Service Provider advertises products of Entity B on
Service Provider’s website for 18 months ending June 30, X3. Entity B also
agrees that if Service Provider provides 3 million hits or clickthroughs during the
first year of the agreement, the life of the options will be extended from 2 years to
5 years. If Service Provider fails to provide the agreed upon minimum of 18
months of advertising through June 30, X3, Service Provider will pay Entity B
specified monetary damages that, in the circumstances, constitute a sufficiently
large disincentive for nonperformance.
505-50-55-27 Paragraph superseded by Accounting Standards Update 201XXX.Service Provider would measure the 100,000 stock options for revenue
recognition purposes on the performance commitment date of January 1, X2,
using the 2-year option life. Assume that at the measurement date (January 1,
X2) the fair value of the options is $400,000. On December 1, X2, Service
Provider has provided 3 million hits and the life of the option is adjusted to 5
years. Service Provider would measure additional revenue pursuant to the
achievement of the performance condition as the difference between the fair
value of the adjusted instrument at December 1, X2 (that is, the option with the 5year life assumed to be $700,000), and the then fair value of the old instrument
at December 1, X2 (that is, the option with the 2-year life, which is assumed to be
$570,000). Accordingly, additional revenue of $130,000 would be measured. The
remaining $170,000 increase in fair value of the instrument should be accounted
for in accordance with the relevant guidance on the accounting and reporting for
investments in equity instruments, such as that in Topics 320; 323; 325; and 815.
Amendments to Subtopic 605-10
56. Supersede paragraph 605-10-05-1 and add paragraphs 605-10-05-2
through 05-6, with a link to transition paragraph 605-10-65-1, as follows:
270
Revenue Recognition—Overall
Overview and Background
General
605-10-05-1 Paragraph superseded by Accounting Standards Update 201XXX.The Revenue Recognition Topic provides guidance for transaction-specific
revenue recognition and certain matters related to revenue-generating activities
that are not addressed specifically in other Topics. Other Topics may contain
transaction-specific revenue recognition guidance related to transactions in those
Topics. This Topic includes the following Subtopics:
a.
b.
c.
d.
e.
f.
g.
h.
Overall. The Overall Subtopic provides guidance on the following:
1. Revenue and gains
2. Installment and cost recovery methods of revenue recognition.
Products. The Products Subtopic provides guidance on the following:
1. Sales with a right of return
2. Repurchases of product sold subject to an operating lease.
Services. The Services Subtopic provides guidance on the following:
1. Separately priced extended warranty and product maintenance
contracts
2. Commissions from certain experience-rated or retrospective
insurance arrangements
3. Certain loan guarantee fees
4. In-transit freight service
5. Advertising barter transactions.
Multiple-Element Arrangements. The Multiple-Element Arrangements
Subtopic provides guidance on arrangements under which a vendor will
perform multiple revenue-generating activities (that is, provide multiple
deliverables).
Rights to Use.
Construction-Type and Production-Type Contracts. The ConstructionType and Production-Type Contracts Subtopic provides guidance on
contracts for which specifications are provided by the customer for the
performance of contracts for the construction of facilities or the
production of goods.
Gains and Losses. The Gains and Losses Subtopic provides guidance
on miscellaneous gains and losses not addressed in other Topics in the
Codification.
Principal-Agent Considerations. The Principal-Agent Considerations
Subtopic provides guidance on reporting revenue gross or net of certain
amounts paid to others.
271
i.
j.
Customer Payments and Incentives. The Customer Payments and
Incentives Subtopic provides guidance on accounting by vendors and
customers for consideration given by a vendor to a customer.
Milestone Method. The Milestone Method Subtopic provides guidance
on the application of the milestone method of revenue recognition in
arrangements that include research or development deliverables.
605-10-05-2 The core principle of the guidance in this Subtopic is that an entity
shall recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.
605-10-05-3 To achieve the core principle in the preceding paragraph, an entity
shall apply all of the following steps:
a.
b.
c.
d.
e.
Identify the contract with a customer
Identify the separate performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the separate performance obligations in
the contract
Recognize revenue when (or as) the entity satisfies a performance
obligation.
605-10-05-4 An entity shall consider the terms of the contract and all related
facts and circumstances when using judgment in applying the guidance in this
Subtopic. An entity shall apply the guidance in this Subtopic consistently to
contracts with similar characteristics and in similar circumstances.
605-10-05-5 The guidance in this Subtopic specifies the accounting for an
individual contract with a customer. However, as a practical expedient, an entity
may apply the guidance in this Subtopic to a portfolio of contracts (or
performance obligations) with similar characteristics if the entity reasonably
expects that the result of doing so would not differ materially from the result of
applying the guidance in this Subtopic to the individual contracts (or performance
obligations).
605-10-05-6 Paragraphs in bold type in this Subtopic state the main principles.
All paragraphs have equal authority.
57. Add Section 605-10-10, with a link to transition paragraph 605-10-65-1, as
follows:
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Objectives
General
605-10-10-1 The objective of the guidance in this Subtopic is to establish the
principles that an entity shall apply to report useful information to users of
financial statements about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from a contract with a customer.
58. Amend paragraphs 605-10-15-2 through 15-3 and add paragraphs 605-1015-2A through 15-2B, with a link to transition paragraph 605-10-65-1, as follows:
Scope and Scope Exceptions
> Entities
605-10-15-1 The guidance in this Subtopic applies to all entities.
> Transactions
605-10-15-2 The guidance in this Subtopic applies to the following types of
transactions and revenue recognition considerations:An entity shall apply the
guidance in this Subtopic to all contracts with customers, except the following:
a.
b.
c.
d.
e.
Revenue and gainsLease contracts within the scope of Topic 840
Installment and cost recovery methods of revenue recognitionInsurance
contracts within the scope of Topic 944
Contractual rights or obligations within the scope of the following Topics:
1. Topic 310
2. Topic 320
3. Topic 405
4. Topic 470
5. Topic 815
6. Topic 825
7. Topic 860.
Guarantees (other than product or service warranties) within the scope
of Topic 460
Nonmonetary exchanges between entities in the same line of business
to facilitate sales to customers, or to potential customers, other than the
parties to the exchange (for example, an exchange of oil to fulfill
demand on a timely basis in a specified location).
605-10-15-2A An entity shall apply the guidance in this Subtopic to a contract
(other than a contract listed in paragraph 605-10-15-2) only if the counterparty to
the contract is a customer. For some contracts, the counterparty to the contract
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might not be a customer but rather a collaborator or a partner that shares with
the entity the risks and benefits of developing a product to be marketed. Such
contracts are not in the scope of this Subtopic.
605-10-15-2B A contract with a customer may be partially within the scope of this
Subtopic and partially within the scope of other Topics.
a.
b.
If the other Topics specify how to separate and/or initially measure one
or more parts of the contract, then an entity shall first apply those
separation and/or measurement requirements.
If the other Topics do not specify how to separate and/or initially
measure one or more parts of the contract, then the entity shall apply
the guidance in this Subtopic to separate and/or initially measure the
part(s) of the contract.
> Other Considerations
> > Contributions Received
605-10-15-3 Paragraph 958-605-15-4 states that accounting for contributions is
an issue primarily for not-for-profit entities (NFPs) because contributions are a
significant source of {add glossary link}revenues{add glossary link} for many
of those entities. However, that paragraph states that the guidance in the
Contributions Received Subsections applies to all entities (NFPs and business
entities) that receive contributions.
59. Supersede paragraphs 605-10-25-1 through 25-5 and their related
headings, with a link to transition paragraph 605-10-65-1, as follows:
Recognition
> Revenue and Gains
605-10-25-1 Paragraph superseded by Accounting Standards Update 201XXX.The recognition of revenue and gains of an entity during a period involves
consideration of the following two factors, with sometimes one and sometimes
the other being the more important consideration:
a.
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Being realized or realizable. Revenue and gains generally are not
recognized until realized or realizable. Paragraph 83(a) of FASB
Concepts Statement No. 5, Recognition and Measurement in Financial
Statements of Business Enterprises, states that revenue and gains are
realized when products (goods or services), merchandise, or other
assets are exchanged for cash or claims to cash. That paragraph states
that revenue and gains are realizable when related assets received or
held are readily convertible to known amounts of cash or claims to
cash.
b.
Being earned. Paragraph 83(b) of FASB Concepts Statement No. 5,
Recognition and Measurement in Financial Statements of Business
Enterprises, states that revenue is not recognized until earned. That
paragraph states that an entity’s revenue-earning activities involve
delivering or producing goods, rendering services, or other activities that
constitute its ongoing major or central operations, and revenues are
considered to have been earned when the entity has substantially
accomplished what it must do to be entitled to the benefits represented
by the revenues. That paragraph states that gains commonly result from
transactions and other events that involve no earning process, and for
recognizing gains, being earned is generally less significant than being
realized or realizable.
605-10-25-2 Paragraph superseded by Accounting Standards Update 201XXX.See paragraphs 605-10-25-3 through 25-4 for the limited circumstances in
which revenue and gains may be recognized using the installment or costrecovery methods.
605-10-25-2A Paragraph superseded by Accounting Standards Update 201XXX.See Subtopic 605-28 for guidance on the application of the milestone method
of revenue recognition.
> Installment and Cost Recovery Methods of Revenue Recognition
605-10-25-3 Paragraph superseded by Accounting Standards Update 201XXX.Revenue should ordinarily be accounted for at the time a transaction is
completed, with appropriate provision for uncollectible accounts. Paragraph 60510-25-1(a) states that revenue and gains generally are not recognized until being
realized or realizable and until earned. Accordingly, unless the circumstances are
such that the collection of the sale price is not reasonably assured, the
installment method of recognizing revenue is not acceptable.
605-10-25-4 Paragraph superseded by Accounting Standards Update 201XXX.There may be exceptional cases where receivables are collectible over an
extended period of time and, because of the terms of the transactions or other
conditions, there is no reasonable basis for estimating the degree of collectibility.
When such circumstances exist, and as long as they exist, either the installment
method or the cost recovery method of accounting may be used. As defined in
paragraph 360-20-55-7 through 55-9, the installment method apportions
collections received between cost recovered and profit. The apportionment is in
the same ratio as total cost and total profit bear to the sales value. Under the cost
recovery method, equal amounts of revenue and expense are recognized as
collections are made until all costs have been recovered, postponing any
recognition of profit until that time.)
605-10-25-5 Paragraph superseded by Accounting Standards Update 201XXX.In the absence of the circumstances referred to in this Subtopic or other
275
guidance, such as that in Sections 360-20-40 and 360-20-55, the installment
method is not acceptable.
60. Add paragraphs 605-10-25-6 through 25-62 and their related headings,
with a link to transition paragraph 605-10-65-1, as follows:
> Identifying the Contract
605-10-25-6 An entity shall apply the guidance in this Subtopic to each {add
glossary link}contract{add glossary link} identified in accordance with
paragraphs 605-10-25-7 through 25-17.
605-10-25-7 The definition of contract uses the phrase enforceable rights.
Enforceability is a matter of law. Contracts can be written, oral, or implied by an
entity’s customary business practices. The practices and processes for
establishing contracts with customers vary across legal jurisdictions, industries,
and entities. Additionally, they may vary within an entity (for example, they may
depend on the class of customer or the nature of the promised goods or
services). An entity shall consider those practices and processes in determining
when an agreement with a customer creates enforceable rights and obligations
of the entity.
605-10-25-8 An entity shall apply the guidance in this Subtopic to a contract with
a customer only if all of the following criteria are met:
a.
b.
c.
d.
The contract has commercial substance (that is, the risk, timing, or
amount of the entity’s future cash flows is expected to change as a
result of the contract).
The parties to the contract have approved the contract (in writing, orally,
or in accordance with other customary business practices) and are
committed to perform their respective obligations.
The entity can identify each party’s rights regarding the goods or
services to be transferred.
The entity can identify the payment terms for the goods or services to
be transferred.
605-10-25-9 For the purpose of applying the guidance in this Subtopic, a contract
does not exist if each party to the contract has the unilateral enforceable right to
terminate a wholly unperformed contract without compensating the other party
(parties). A contract is wholly unperformed if both of the following criteria are met:
a.
b.
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The entity has not yet transferred any promised goods or services to the
customer.
The entity has not yet received, and is not yet entitled to receive, any
consideration in exchange for promised goods or services.
> > Combination of Contracts
605-10-25-10 An entity shall apply the guidance in this Subtopic to each contract
with a customer except as specified in paragraphs 605-10-05-5 and 605-10-2511.
605-10-25-11 An entity shall combine two or more contracts entered into at or
near the same time with the same customer (or related parties) and account for
the contracts as a single contract if one or more of the following criteria are met:
a.
b.
c.
The contracts are negotiated as a package with a single commercial
objective.
The amount of consideration to be paid in one contract depends on the
price or performance of the other contract.
The goods or services promised in the contracts (or some goods or
services promised in the contracts) are a single performance
obligation in accordance with paragraphs 605-10-25-22 through 25-26.
> > Contract Modifications
605-10-25-12 A contract modification exists if the parties to a contract approve a
change in the scope or price of a contract (or both). If a contract modification has
not been approved by the parties to a contract, an entity shall continue to apply
the guidance in this Subtopic to the existing contract until the contract
modification is approved.
605-10-25-13 If the parties to a contract have approved a change in the scope of
the contract but have not yet determined the corresponding change in price, an
entity shall apply the guidance in this Subtopic to the modified contract if the
entity has an expectation that the price of the modification will be approved. To
estimate the transaction price in such cases, the entity shall apply the guidance
in paragraphs 605-10-30-2 through 30-21.
605-10-25-14 If a contract modification results only in a change to the transaction
price, an entity shall account for the modification as a change in the transaction
price in accordance with paragraphs 605-10-30-33 through 30-36.
605-10-25-15 An entity shall account for a contract modification as a separate
contract if the contract modification results in the addition to the contract of both
of the following:
a.
b.
Promised goods or services that are distinct in accordance with
paragraphs 605-10-25-22 through 25-26
An entity’s right to receive an amount of consideration that reflects the
entity’s standalone selling price of the promised goods or services
and any appropriate adjustments to that price to reflect the
circumstances of the particular contract. For example, an entity would
adjust the standalone selling price for a discount that the customer
277
receives because it is not necessary for the entity to incur the sellingrelated costs that it would incur when selling a similar good or service to
a new customer.
605-10-25-16 For a contract modification that is not a separate contract in
accordance with the preceding paragraph, an entity shall evaluate the remaining
goods or services in the modified contract (that is, the promised goods or
services not yet transferred at the date of the contract modification) and shall
account for the modified contract in whichever of the following ways is applicable:
a.
b.
c.
If the remaining goods or services are distinct from the goods or
services transferred on or before the date of the contract modification,
then the entity shall allocate to the remaining separate performance
obligations the amount of consideration received from the customer but
not yet recognized as revenue plus the amount of any remaining
consideration that the customer has promised to pay. In effect, the entity
shall account for the contract modification as a termination of the
original contract and the creation of a new contract.
If the remaining goods or services are not distinct and are part of a
single performance obligation that is partially satisfied at the date of the
contract modification, then the entity shall update the transaction price
and the measure of progress toward complete satisfaction of the
performance obligation. The entity shall recognize the effect of the
contract modification as revenue (or as a reduction of revenue) at the
date of the contract modification on a cumulative catch-up basis. In
effect, the entity shall account for the contract modification as if it were a
part of the original contract.
If the remaining goods or services are a combination of items (a) and
(b), then the entity shall allocate to the unsatisfied (including partially
unsatisfied) separate performance obligations the amount of
consideration received from the customer but not yet recognized as
revenue plus the amount of any remaining consideration that the
customer has promised to pay. For a performance obligation satisfied
over time, an entity shall update the transaction price and the measure
of progress toward complete satisfaction of the performance obligation.
An entity shall not reallocate consideration to, and adjust the amount of
revenue recognized for, separate performance obligations that are
completely satisfied on or before the date of the contract modification.
605-10-25-17 See Examples 1–3 (paragraphs 605-10-55-65 through 55-73) for
illustrations of the guidance in paragraphs 605-10-25-12 through 25-16 on
contract modifications.
> Identifying Separate Performance Obligations
605-10-25-18 An entity shall evaluate the goods or services promised in a
contract and shall identify which goods or services (or which bundles of
278
goods or services) are distinct and, therefore, shall be accounted for as a
separate performance obligation.
605-10-25-19 Performance obligations include promises that are implied by an
entity’s customary business practices, published policies, or specific statements if
those promises provide the customer with a valid expectation that the entity will
transfer a good or service.
605-10-25-20 Performance obligations do not include activities that an entity
must undertake to fulfill a contract unless the entity transfers a good or service to
the customer as those activities occur. For example, a service provider may need
to perform various administrative tasks to set up a contract. The performance of
those tasks does not transfer a service to the customer as the tasks are
performed. Therefore, those promised setup activities are not a performance
obligation.
605-10-25-21 Depending on the contract, promised goods or services may
include any of the following:
a.
b.
c.
d.
e.
f.
g.
h.
Goods produced by an entity for sale (for example, inventory of a
manufacturer)
Goods purchased by an entity for resale (for example, merchandise of a
retailer)
Providing a service of arranging for another party to transfer goods or
services to the customer (for example, acting as an agent of another
party in accordance with paragraphs 605-10-55-17 through 55-20)
Standing ready to provide goods or services (for example, when-and-ifavailable software products)
Constructing, manufacturing, or developing an asset on behalf of a
customer
Granting licenses or rights to use intangible assets
Granting options to purchase additional goods or services (when those
options provide the customer with a material right in accordance with
paragraphs 605-10-55-21 through 55-23)
Performing a contractually agreed-upon task (or tasks) for a customer.
605-10-25-22 If an entity promises to transfer more than one good or service, the
entity shall account for each promised good or service as a separate
performance obligation only if it is distinct. If a promised good or service is not
distinct, an entity shall combine that good or service with other promised goods
or services until the entity identifies a bundle of goods or services that is distinct.
In some cases, that could result in an entity accounting for all the goods or
services promised in a contract as a single performance obligation.
605-10-25-23 Except as specified in the following paragraph, a good or service is
distinct if either of the following criteria is met:
a.
The entity regularly sells the good or service separately.
279
b.
The customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer.
Readily available resources are goods or services that are sold
separately (by the entity or by another entity) or resources that the
customer already has obtained (from the entity or from other
transactions or events).
605-10-25-24 Notwithstanding the requirements in the preceding paragraph, a
good or service in a bundle of promised goods or services is not distinct and,
therefore, the entity shall account for the bundle as a single performance
obligation if both of the following criteria are met:
a.
b.
The goods or services in the bundle are highly interrelated and
transferring them to the customer requires that the entity also provide a
significant service of integrating the goods or services into the combined
item(s) for which the customer has contracted.
The bundle of goods or services is significantly modified or customized
to fulfill the contract.
605-10-25-25 As a practical expedient, an entity may account for two or more
distinct goods or services promised in a contract as a single performance
obligation if those goods or services have the same pattern of transfer to the
customer. For example, if an entity promises to transfer two or more distinct
services to a customer over the same period of time, the entity could account for
those promises as one performance obligation if applying one method of
measuring progress (in accordance with paragraphs 605-10-25-40 through 2551) would faithfully depict the pattern of transfer of those services to the
customer.
605-10-25-26 See Examples 4 and 5 (paragraphs 605-10-55-74 through 55-79)
for illustrations of the guidance in paragraphs 605-10-25-22 through 25-24 on
determining whether to account for a bundle of goods or services as one
performance obligation.
> Satisfaction of Performance Obligations
605-10-25-27 An entity shall recognize revenue when (or as) the entity
satisfies a performance obligation by transferring a promised good or
service (that is, an asset) to a customer. An asset is transferred when (or
as) the customer obtains control of that asset.
605-10-25-28 Goods and services are assets, even if only momentarily, when
they are received and used (as in the case of many services). Control of an asset
refers to the ability to direct the use of and obtain substantially all of the
remaining benefits from the asset. Control includes the ability to prevent other
entities from directing the use of and obtaining the benefits from an asset. The
benefits of an asset are the potential cash flows that can be obtained directly or
indirectly in many ways, such as by:
280
a.
b.
c.
d.
e.
f.
Using the asset to produce goods or provide services (including public
services)
Using the asset to enhance the value of other assets
Using the asset to settle liabilities or reduce expenses
Selling or exchanging the asset
Pledging the asset to secure a loan
Holding the asset.
605-10-25-29 When evaluating whether a customer obtains control of an asset,
an entity shall consider any agreement to repurchase the promised asset or a
component of the promised asset. (See the guidance on repurchase agreements
in paragraphs 605-10-55-43 through 55-53.)
605-10-25-30 For each separate performance obligation identified in paragraphs
605-10-25-18 through 25-26, an entity shall apply the guidance in paragraphs
605-10-25-31 through 25-32 to determine at contract inception whether the entity
satisfies the performance obligation over time by transferring control of a
promised good or service over time. If an entity does not satisfy a performance
obligation over time, the performance obligation is satisfied at a point in time.
> > Performance Obligations Satisfied over Time
605-10-25-31 An entity transfers control of a good or service over time and,
therefore, satisfies a performance obligation and recognizes revenue over time if
at least one of the following two criteria is met:
a.
b.
The entity’s performance creates or enhances an asset (for example,
work in process) that the customer controls as the asset is created or
enhanced. An entity shall apply the guidance on control in paragraphs
605-10-25-27 through 25-29 and paragraph 605-10-25-33 to determine
whether the customer controls an asset as it is created or enhanced.
The entity’s performance does not create an asset with an alternative
use to the entity (see paragraph 605-10-25-32) and at least one of the
following criteria is met:
1. The customer simultaneously receives and consumes the benefits
of the entity’s performance as the entity performs.
2. Another entity would not need to substantially reperform the work
the entity has completed to date if that other entity were to fulfill the
remaining obligation to the customer. In evaluating this criterion, the
entity shall presume that another entity fulfilling the remainder of
the contract would not have the benefit of any asset (for example,
work in process) presently controlled by the entity. In addition, an
entity shall disregard potential limitations (contractual or practical)
that would prevent it from transferring a remaining performance
obligation to another entity.
3. The entity has a right to payment for performance completed to
date, and it expects to fulfill the contract as promised. The right to
payment for performance completed to date does not need to be for
281
a fixed amount. However, the entity must be entitled to an amount
that is intended to at least compensate the entity for performance
completed to date even if the customer can terminate the contract
for reasons other than the entity’s failure to perform as promised.
Compensation for performance completed to date includes
payment that approximates the selling price of the goods or
services transferred to date (for example, recovery of the entity’s
costs plus a reasonable profit margin) rather than compensation for
only the entity’s potential loss of profit if the contract is terminated.
605-10-25-32 When evaluating whether an asset has an alternative use to the
entity, an entity shall consider at contract inception the effects of contractual and
practical limitations on the entity’s ability to readily direct the promised asset to
another customer. A promised asset would not have an alternative use to an
entity if the entity is unable, either contractually or practically, to readily direct the
asset to another customer. For example, an asset would have an alternative use
to an entity if the asset is largely interchangeable with other assets that the entity
could transfer to the customer without breaching the contract and without
incurring significant costs that otherwise would not have been incurred in relation
to that contract. Conversely, the asset would not have an alternative use if the
contract has substantive terms that preclude the entity from directing the asset to
another customer or if the entity would incur significant costs (for example, costs
to rework the asset) to direct the asset to another customer.
> > Performance Obligations Satisfied at a Point in Time
605-10-25-33 If a performance obligation is not satisfied over time in accordance
with paragraphs 605-10-25-31 through 25-32, an entity satisfies the performance
obligation at a point in time. To determine the point in time when a customer
obtains control of a promised asset and an entity satisfies a performance
obligation, the entity shall consider the guidance on control in paragraphs 60510-25-27 through 25-29. In addition, an entity shall consider indicators of the
transfer of control, which include all of the following:
a.
b.
c.
d.
e.
The entity has a present right to payment for the asset (see paragraph
605-10-25-34).
The customer has legal title to the asset (see paragraph 605-10-25-35).
The entity has transferred physical possession of the asset (see
paragraph 605-10-25-36).
The customer has the significant risks and rewards of ownership of the
asset (see paragraph 605-10-25-37).
The customer has accepted the asset (see paragraph 605-10-25-38).
605-10-25-34 If a customer presently is obliged to pay for an asset, then that
indicates that the customer has obtained control of the asset in exchange.
605-10-25-35 Legal title often indicates which party to a contract has the ability to
direct the use of and obtain the benefits from an asset or to restrict the access of
282
other entities to those benefits. Therefore, the transfer of legal title of an asset
indicates that a customer has obtained control of the asset. If an entity retains
legal title solely as protection against the customer’s failure to pay, those entity’s
rights are protective rights and do not preclude a customer from obtaining control
of an asset.
605-10-25-36 A customer’s physical possession of an asset indicates that the
customer has the ability to direct the use of and obtain the benefits from the
asset or to restrict the access of other entities to those benefits. However,
physical possession may not coincide with control of an asset. For example, in
some repurchase agreements and in some consignment arrangements, a
customer or consignee may have physical possession of an asset that the entity
controls. Conversely, in some bill-and-hold arrangements, the entity may have
physical possession of an asset that the customer controls. To account for a
repurchase, consignment, or bill-and-hold arrangement, an entity shall apply the
guidance in paragraphs 605-10-55-43 through 55-59.
605-10-25-37 The transfer of the significant risks and rewards of ownership of an
asset to a customer indicates that control of the asset has been transferred.
However, when evaluating the risks and rewards of ownership of a promised
asset, an entity shall consider any risks that may give rise to a separate
performance obligation in addition to the performance obligation to transfer the
asset. For example, an entity may have transferred control of an asset to a
customer but not yet satisfied an additional separate performance obligation to
provide maintenance services related to the transferred asset.
605-10-25-38 The customer’s acceptance of an asset indicates that it has
obtained the ability to direct the use of and obtain the benefits from the asset. To
evaluate the effect of a contractual customer acceptance clause on when control
of an asset is transferred, an entity shall consider the guidance in paragraphs
605-10-55-60 through 55-63.
605-10-25-39 See Examples 6 and 7 (paragraphs 605-10-55-80 through 55-89)
for illustrations of the guidance in paragraphs 605-10-25-27 through 25-38 on
determining when a performance obligation is satisfied.
> > Measuring Progress toward Complete Satisfaction of a Performance
Obligation That Is Satisfied over Time
605-10-25-40 For each separate performance obligation that an entity satisfies
over time in accordance with paragraphs 605-10-25-31 through 25-32, an entity
shall recognize revenue over time by measuring the progress toward complete
satisfaction of that performance obligation. The objective when measuring
progress is to depict the transfer of control of goods or services to the
customer—that is, to depict an entity’s performance. As circumstances change
over time, an entity shall update its measure of progress to depict the entity’s
performance completed to date. Such changes shall be accounted for as a
change in accounting estimate in accordance with Subtopic 250-10.
283
605-10-25-41 In accordance with the objective of measuring progress, an entity
shall exclude from a measure of progress any goods or services for which the
entity does not transfer control to the customer. Conversely, an entity shall
include in the measure of progress any goods or services for which the entity
does transfer control to the customer.
605-10-25-42 For each separate performance obligation satisfied over time, an
entity shall apply a method of measuring progress that is consistent with the
objective in paragraph 605-10-25-40 and shall apply that method consistently to
similar performance obligations and in similar circumstances. Appropriate
methods of measuring progress include output methods and input methods.
> > > Output Methods
605-10-25-43 Output methods recognize revenue on the basis of direct
measurements of the value to the customer of the goods or services transferred
to date (for example, surveys of performance completed to date, appraisals of
results achieved, milestones reached, or units produced) and can be the most
faithful depiction of the entity’s performance.
605-10-25-44 If an entity has a right to invoice a customer in an amount that
corresponds directly with the value to the customer of the entity’s performance
completed to date (for example, a services contract in which an entity bills a fixed
amount for each hour of service provided), the entity shall recognize revenue in
the amount to which the entity has a right to invoice.
605-10-25-45 A disadvantage of output methods is that they often are not directly
observable and the information required to apply them may not be available to
the entity without undue cost. Therefore, an input method may be necessary.
> > > Input Methods
605-10-25-46 Input methods recognize revenue on the basis of the entity’s
efforts or inputs to the satisfaction of a performance obligation (for example,
resources consumed, labor hours expended, costs incurred, time lapsed, or
machine hours used) relative to the total expected inputs to the satisfaction of
that performance obligation. If the entity’s efforts or inputs are expended evenly
throughout the performance period, it may be appropriate for an entity to
recognize revenue on a straight-line basis.
605-10-25-47 A shortcoming of input methods is that there may not be a direct
relationship between an entity’s inputs and the transfer of control of goods or
services to a customer because of inefficiencies in the entity’s performance or
other factors. Therefore, when using an input method, the entity shall exclude the
effects of any inputs that do not depict the transfer of control of goods or services
to the customer (for example, the costs of wasted materials, labor, or other
resources to fulfill the contract that were not reflected in the price of the contract).
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605-10-25-48 When applying an input method to a separate performance
obligation that includes goods that the customer obtains control of significantly
before receiving services related to those goods, the best depiction of the entity’s
performance may be for the entity to recognize revenue for the transferred goods
in an amount equal to the costs of those goods if both of the following conditions
are present at contract inception:
a.
b.
The cost of the transferred goods is significant relative to the total
expected costs to completely satisfy the performance obligation.
The entity procures the goods from another entity and is not significantly
involved in designing and manufacturing the goods (but the entity is
acting as a principal in accordance with paragraphs 605-10-55-17
through 55-20).
605-10-25-49 See Example 8 (paragraphs 605-10-55-90 through 55-96) for an
illustration of the guidance in the preceding paragraph on applying an input
method to measure progress if the entity has a single performance obligation that
includes goods that the customer obtains control of before services related to
those goods.
> > > Reasonable Measures of Progress
605-10-25-50 An entity shall recognize revenue for a performance obligation
satisfied over time only if the entity can reasonably measure its progress toward
complete satisfaction of the performance obligation. An entity would not be able
to reasonably measure its progress toward complete satisfaction of a
performance obligation if it lacks reliable information that would be required to
apply an appropriate method of measuring progress.
605-10-25-51 In some circumstances (for example, in the early stages of a
contract), an entity may not be able to reasonably measure the outcome of a
performance obligation, but the entity expects to recover the costs incurred in
satisfying the performance obligation. In those circumstances, the entity shall
recognize revenue only to the extent of the costs incurred until such time that it
can reasonably measure the outcome of the performance obligation or until the
performance obligation becomes onerous.
> Constraining the Cumulative Amount of Revenue Recognized
605-10-25-52 If the amount of consideration to which an entity expects to
be entitled is variable, the cumulative amount of revenue that the entity
recognizes to date shall not exceed the amount to which the entity is
reasonably assured to be entitled. An entity is reasonably assured to be
entitled to the amount of consideration allocated to satisfied performance
obligations only if both of the following criteria are met:
a.
The entity has experience with similar types of performance
obligations (or has other evidence such as access to the
experience of other entities).
285
b.
The entity’s experience (or other evidence) is predictive of the
amount of consideration to which the entity will be entitled in
exchange for satisfying those performance obligations.
605-10-25-53 Indicators that an entity’s experience (or other evidence) is not
predictive of the amount of consideration to which the entity will be entitled
include any of the following:
a.
b.
c.
d.
The amount of consideration is highly susceptible to factors outside the
entity’s influence. Those factors include any of the following:
1. Volatility in a market
2. The judgment of third parties
3. Weather conditions
4. A high risk of obsolescence of the promised good or service.
The uncertainty about the amount of consideration is not expected to be
resolved for a long period of time.
The entity has limited experience (or other evidence) with similar types
of performance obligations.
The contract has a large number and broad range of possible
consideration amounts.
605-10-25-54 An entity shall use judgment and consider all facts and
circumstances when evaluating whether the entity’s experience is predictive of
the amount of consideration to which it will be entitled. The presence of any one
of the indicators in the preceding paragraph does not necessarily mean that the
entity is not reasonably assured to be entitled to an amount of consideration.
605-10-25-55 If an entity is not reasonably assured to be entitled to the amount
of the transaction price allocated to satisfied performance obligations, the
cumulative amount of revenue recognized as of the reporting date is limited to
the amount of the transaction price to which the entity is reasonably assured to
be entitled.
605-10-25-56 Notwithstanding the requirements in paragraphs 605-10-25-52
through 25-54, if an entity licenses intellectual property (see paragraph 605-1055-37) to a customer and the customer promises to pay an additional amount of
consideration that varies on the basis of the customer’s subsequent sales of a
good or service (for example, a sales-based royalty), the entity is not reasonably
assured to be entitled to the additional amount of consideration until the
uncertainty is resolved (that is, when the customer’s subsequent sales occur).
605-10-25-57 See Examples 12–14 (paragraphs 605-10-55-108 through 55-126)
for illustrations of the guidance in paragraphs 605-10-25-52 through 25-56 on
constraining the cumulative amount of revenue when the promised amount of
consideration is variable.
286
> Onerous Performance Obligations
605-10-25-58 For a performance obligation that an entity satisfies over time
(see paragraphs 605-10-25-31 through 25-32) and that the entity expects at
contract inception to satisfy over a period of time greater than one year, an
entity shall recognize a liability and a corresponding expense if the
performance obligation is onerous.
605-10-25-59 A performance obligation is onerous if the lowest cost of settling
the performance obligation exceeds the amount of the transaction price allocated
to that performance obligation. The lowest cost of settling a performance
obligation is the lower of the following amounts:
a.
b.
The costs that relate directly to satisfying the performance obligation by
transferring the promised goods or services (those costs are described
in paragraph 340-40-25-2)
The amount that the entity would pay to exit the performance obligation
if the entity is permitted to do so other than by transferring the promised
goods or services.
605-10-25-60 An entity initially shall measure the liability for an onerous
performance obligation at the amount by which the lowest cost of settling the
remaining performance obligation exceeds the amount of the transaction price
allocated to that remaining performance obligation. At each reporting date, the
entity shall update the measurement of the liability for an onerous performance
obligation for changes in circumstances. The entity shall recognize changes in
the measurement of that liability as an expense or as a reduction of an expense.
When the entity satisfies an onerous performance obligation, the entity shall
derecognize the related liability.
605-10-25-61 Before an entity recognizes a liability for an onerous performance
obligation, the entity shall apply the guidance in paragraphs 340-40-35-3 through
35-6 to test for impairment of an asset recognized from the costs incurred to
obtain or fulfill a contract with a customer.
605-10-25-62 A not-for-profit entity shall not recognize a liability for an onerous
performance obligation if the purpose of the contract is to provide a social or
charitable benefit.
61. Add Section 605-10-30, with a link to transition paragraph 605-10-65-1, as
follows:
[For ease of readability, the new Section is not underlined.]
Initial Measurement
General
287
605-10-30-1 When (or as) a {add glossary link}performance obligation{add
glossary link} is satisfied, an entity shall recognize as {add glossary
link}revenue{add glossary link} the amount of the {add glossary
link}transaction price{add glossary link} allocated to that performance
obligation. If the amount of consideration to which an entity expects to be
entitled is variable, the cumulative amount of revenue that an entity
recognizes for satisfied performance obligations shall not exceed the
amount to which the entity is reasonably assured to be entitled.
> Determining the Transaction Price
605-10-30-2 An entity shall consider the terms of the contract and its customary
business practices to determine the transaction price. The transaction price is the
amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts
collected on behalf of third parties (for example, sales taxes). The transaction
price does not include the effects of the customer’s credit risk in accordance with
paragraphs 605-10-30-22 through 30-23.
605-10-30-3 For the purpose of determining the transaction price, an entity shall
assume that the goods or services will be transferred to a customer as promised
in accordance with the existing contract and that the contract will not be
cancelled, renewed, or modified.
605-10-30-4 When determining the transaction price, an entity shall consider the
effects of all of the following:
a.
b.
c.
d.
Variable consideration
The time value of money
Noncash consideration
Consideration payable to a customer.
> > Variable Consideration
605-10-30-5 The promised amount of consideration in a contract can vary
because of discounts, rebates, refunds, credits, incentives, performance
bonuses, penalties, contingencies, price concessions, or other similar items.
605-10-30-6 If the promised amount of consideration in a contract is variable, an
entity shall estimate the total amount to which the entity will be entitled in
exchange for transferring the promised goods or services to a customer. An
entity shall update the estimated transaction price at each reporting date to
represent faithfully the circumstances present at the reporting date and the
changes in circumstances during the reporting period. An entity shall account for
changes in the transaction price in accordance with paragraphs 605-10-30-33
through 30-36.
288
605-10-30-7 To estimate the transaction price, an entity shall use either of the
following methods, depending on which method the entity expects to better
predict the amount of consideration to which it will be entitled:
a.
b.
The expected value—The expected value is the sum of probability
weighted amounts in a range of possible consideration amounts. An
expected value may be an appropriate estimate of the transaction price
if an entity has a large number of contracts with similar characteristics.
The most likely amount—The most likely amount is the single most
likely amount in a range of possible consideration amounts (that is, the
single most likely outcome of the contract). The most likely amount may
be an appropriate estimate of the transaction price if the contract has
only two possible outcomes (for example, an entity either achieves a
performance bonus or does not).
605-10-30-8 When estimating the transaction price, an entity shall apply one
method consistently throughout the contract. In addition, an entity shall consider
all the information (historical, current, and forecasted) that is reasonably available
to the entity and shall identify a reasonable number of possible consideration
amounts. The information that the entity uses to determine the transaction price
typically would be similar to the information that management of the entity uses
during the bid and proposal process and in establishing prices for promised
goods or services.
605-10-30-9 If an entity receives consideration from a customer and expects to
refund some or all of that consideration to the customer, the entity shall
recognize as a refund liability the amount of consideration that the entity
reasonably expects to refund to the customer. The refund liability (and
corresponding change in the transaction price) shall be updated at each reporting
period for changes in circumstances. To account for a refund liability relating to a
sale with a right of return, an entity shall apply the guidance in paragraphs 60510-55-1 through 55-8.
> > The Time Value of Money
605-10-30-10 In determining the transaction price, an entity shall adjust the
promised amount of consideration to reflect the time value of money if the
contract has a financing component that is significant to the contract. The
objective when adjusting the promised amount of consideration to reflect the time
value of money is for an entity to recognize revenue at an amount that reflects
what the cash selling price would have been if the customer had paid cash for
the promised goods or services at the point that they are transferred to the
customer. If the promised amount of consideration differs from the cash selling
price of the promised goods or services, then the contract also has a financing
component (that is, interest either to or from the customer) that may be
significant to the contract.
289
605-10-30-11 In assessing whether a financing component is significant to a
contract, an entity shall consider various factors, including any of the following:
a.
b.
c.
The expected length of time between when the entity transfers the
promised goods or services to the customer and when the customer
pays for those goods or services
Whether the amount of consideration would differ substantially if the
customer paid in cash promptly in accordance with typical credit terms
in the industry and jurisdiction
The interest rate in the contract and prevailing interest rates in the
relevant market.
605-10-30-12 As a practical expedient, an entity need not adjust the promised
amount of consideration to reflect the time value of money if the entity expects at
contract inception that the period between payment by the customer of all or
substantially all of the promised consideration and the transfer of the promised
goods or services to the customer will be one year or less.
605-10-30-13 To adjust the promised amount of consideration to reflect the time
value of money, an entity shall use the discount rate that would be reflected in a
separate financing transaction between the entity and its customer at contract
inception. That rate would reflect the credit characteristics of the party that
receives financing in the contract as well as any collateral or security provided by
the customer or the entity, which might include assets transferred in the contract.
An entity may be able to determine that rate by identifying the rate that discounts
the nominal amount of the promised consideration to the cash selling price of the
good or service. After contract inception, an entity shall not update the discount
rate for changes in circumstances or interest rates.
605-10-30-14 An entity shall present the effects of financing separately from
revenue (as interest expense or interest income) in the statement of
comprehensive income.
605-10-30-15 See Example 9 (paragraphs 605-10-55-97 through 55-100) for an
illustration of the guidance in paragraphs 605-10-30-10 through 30-13 on
accounting for the effects of the time value of money.
> > Noncash Consideration
605-10-30-16 To determine the transaction price for contracts in which a
customer promises consideration in a form other than cash, an entity shall
measure the noncash consideration (or promise of noncash consideration) at fair
value. If the entity cannot reasonably estimate the fair value of the noncash
consideration, it shall measure the consideration indirectly by reference to the
standalone selling price of the goods or services promised to the customer (or
class of customer) in exchange for the consideration.
605-10-30-17 If a customer contributes goods or services (for example,
materials, equipment, or labor) to facilitate an entity’s fulfillment of the contract,
290
the entity shall assess whether it obtains control of those contributed goods or
services. If so, the entity shall account for the contributed goods or services as
noncash consideration received from the customer.
> > Consideration Payable to a Customer
605-10-30-18 Consideration payable to a customer includes amounts that an
entity pays, or expects to pay, to a customer (or to other parties that purchase
the entity’s goods or services from the customer) in the form of cash, credit, or
other items that the customer can apply against amounts owed to the entity. An
entity shall account for consideration payable to a customer as a reduction of the
transaction price and, therefore, of revenue unless the payment to the customer
is in exchange for a distinct good or service (as described in paragraphs 605-1025-23 through 25-24) that the customer transfers to the entity.
605-10-30-19 If the consideration payable to a customer is a payment for a
distinct good or service from the customer, then the entity shall account for the
purchase of the good or service in the same way that it accounts for other
purchases from suppliers. If the amount of consideration payable to the customer
exceeds the fair value of the distinct good or service that the entity receives from
the customer, then the entity shall account for such excess as a reduction of the
transaction price. If the entity cannot reasonably estimate the fair value of the
good or service received from the customer, the entity shall account for all of the
consideration payable to the customer as a reduction of the transaction price.
605-10-30-20 Accordingly, if consideration payable to a customer is a reduction
of the transaction price, an entity shall recognize the reduction of revenue when
(or as) the later of the following occurs:
a.
b.
The entity recognizes revenue for the transfer of the related goods or
services to the customer.
The entity pays or promises to pay the consideration (even if the
payment is conditional on a future event). That promise might be implied
by the entity’s customary business practices.
605-10-30-21 See Example 10 (paragraphs 605-10-55-101 through 55-104) for
an illustration of the guidance in the preceding paragraph on consideration
payable to the customer.
> Collectibility
605-10-30-22 Collectibility refers to a customer’s credit risk—that is, the risk that
an entity will be unable to collect from the customer the amount of consideration
to which the entity is entitled in accordance with the contract. For an
unconditional right to consideration (that is, a receivable), an entity shall account
for the receivable in accordance with Topic 310 except as specified in the
following paragraph. An entity similarly shall account for the effects of a
customer’s credit risk on a contract asset (see paragraph 605-10-45-3).
291
605-10-30-23 Upon initial recognition of the receivable, any difference between
the measurement of the receivable in accordance with Topic 310 and the
corresponding amount of revenue recognized shall be presented in profit or loss
as a separate line item adjacent to the revenue line item. If the contract does not
have a significant financing component in accordance with paragraph 605-10-3010, an entity shall present any impairment of the receivable (or change in the
measurement of the impairment) in profit or loss as a separate line item adjacent
to the revenue line item.
> Allocating the Transaction Price to Separate Performance Obligations
605-10-30-24 For a contract that has more than one separate performance
obligation, an entity shall allocate the transaction price to each separate
performance obligation in an amount that depicts the amount of
consideration to which the entity expects to be entitled in exchange for
satisfying each separate performance obligation.
605-10-30-25 To allocate an appropriate amount of consideration to each
separate performance obligation, an entity shall determine the standalone selling
price at contract inception of the good or service underlying each separate
performance obligation and allocate the transaction price on a relative
standalone selling price basis. The standalone selling price is the price at which
an entity would sell a promised good or service separately to a customer.
605-10-30-26 The best evidence of a standalone selling price is the observable
price of a good or service when the entity sells that good or service separately in
similar circumstances and to similar customers. A contractually stated price or a
list price for a good or service may be (but shall not be presumed to be) the
standalone selling price of that good or service.
605-10-30-27 An entity shall estimate a standalone selling price if it is not directly
observable. When estimating a standalone selling price, the entity shall consider
all information (including market conditions, entity-specific factors, and
information about the customer or class of customer) that is reasonably available
to the entity. In addition, the entity shall maximize the use of observable inputs
and shall apply estimation methods consistently in similar circumstances.
Suitable estimation methods include any of the following:
a.
b.
292
Adjusted market assessment approach—An entity could evaluate the
market in which it sells goods or services and estimate the price that
customers in that market would be willing to pay for those goods or
services. That approach also might include referring to prices from the
entity’s competitors for similar goods or services and adjusting those
prices as necessary to reflect the entity’s costs and margins.
Expected cost plus a margin approach—An entity could forecast its
expected costs of satisfying a performance obligation and then add an
appropriate margin for that good or service.
c.
Residual approach—If the standalone selling price of a good or service
is highly variable or uncertain, then an entity may estimate the
standalone selling price by reference to the total transaction price less
the sum of the observable standalone selling prices of other goods or
services promised in the contract. A selling price is highly variable when
an entity sells the same good or service to different customers (at or
near the same time) for a broad range of amounts. A selling price is
uncertain when an entity has not yet established a price for a good or
service and the good or service has not previously been sold.
605-10-30-28 If the sum of the standalone selling prices of the promised goods
or services in the contract exceeds the transaction price (that is, if a customer
receives a discount for purchasing a bundle of goods or services), an entity shall
allocate that discount to all separate performance obligations on a relative
standalone selling price basis except as specified in paragraphs 605-10-30-29
through 30-30.
605-10-30-29 An entity shall allocate a discount entirely to one (or some)
separate performance obligation(s) in the contract if both of the following criteria
are met:
a.
b.
The entity regularly sells each good or service (or each bundle of goods
or services) in the contract on a standalone basis.
The observable selling prices from those standalone sales provide
evidence of the performance obligation(s) to which the entire discount in
the contract belongs.
605-10-30-30 If the transaction price includes an amount of consideration that is
contingent on a future event or circumstance (for example, an entity’s
performance or a specific outcome of the entity’s performance), the entity shall
allocate that contingent amount (and subsequent changes to the amount) entirely
to a distinct good or service if both of the following criteria are met:
a.
b.
The contingent payment terms for the distinct good or service relate
specifically to the entity’s efforts to transfer that good or service (or to a
specific outcome from transferring that good or service).
Allocating the contingent amount of consideration entirely to the distinct
good or service is consistent with the allocation principle in paragraph
605-10-30-24 when considering all of the performance obligations and
payment terms in the contract.
605-10-30-31 See Example 11 (paragraphs 605-10-55-105 through 55-107) for
an illustration of the guidance in paragraph 605-10-30-29 on allocating a discount
to only one performance obligation in a contract.
605-10-30-32 See Example 12 (paragraphs 605-10-55-108 through 55-116) for
an illustration of the guidance in paragraphs 605-10-30-24 through 30-30 on
allocating the transaction price in a contract with variable consideration.
293
> Changes in the Transaction Price
605-10-30-33 After contract inception, the transaction price can change for
various reasons, including the resolution of uncertain events or other changes in
circumstances that change the amount of consideration to which an entity
expects to be entitled in exchange for the promised goods or services.
605-10-30-34 An entity shall allocate to the separate performance obligations in
the contract any subsequent changes in the transaction price on the same basis
as at contract inception. Amounts allocated to a satisfied performance obligation
shall be recognized as revenue, or as a reduction of revenue, in the period in
which the transaction price changes.
605-10-30-35 An entity shall allocate a change in the transaction price entirely to
one or more distinct goods or services only if the criteria in paragraph 605-10-3030 are met.
605-10-30-36 An entity shall not reallocate the transaction price to reflect
changes in standalone selling prices after contract inception.
62. Add Section 605-10-45, with a link to transition paragraph 605-10-65-1, as
follows:
[For ease of readability, the new Section is not underlined.]
Other Presentation Matters
General
605-10-45-1 When either party to a {add glossary link}contract{add glossary
link} has performed, an entity shall present the contract in the statement of
financial position as a {add glossary link}contract liability{add glossary
link}, a {add glossary link}contract asset{add glossary link}, or a receivable
depending on the relationship between the entity’s performance and the
{add glossary link}customer’s{add glossary link} payment.
605-10-45-2 If a customer pays consideration or an amount of consideration is
due before an entity performs by transferring a good or service, the entity shall
present the contract as a contract liability. A contract liability is an entity’s
obligation to transfer a good or service to a customer for which the entity has
received consideration from the customer.
605-10-45-3 If an entity performs by transferring a good or service to a customer
before the customer pays consideration, the entity shall present the contract as
either a contract asset or as a receivable depending on the nature of the entity’s
right to consideration for its performance. A receivable is an entity’s right to
consideration that is unconditional. A right to consideration is unconditional if
nothing other than the passage of time is required before payment of that
294
consideration is due. An entity shall account for a receivable in accordance with
Topic 310.
605-10-45-4 The guidance in this Subtopic uses the terms contract asset and
contract liability but does not prohibit an entity from using alternative descriptions
in the statement of financial position for those items. If an entity uses an
alternative description for a contract asset, the entity shall provide sufficient
information for a user of the financial statements to distinguish between
unconditional rights to consideration (that is, receivables) and conditional rights
to consideration (that is, contract assets).
605-10-45-5 See Examples 15 and 16 (paragraphs 605-10-55-127 through 55136) for illustrations of the guidance in paragraphs 605-10-45-1 through 45-3.
> Onerous Performance Obligations
605-10-45-6 An entity shall present a liability for onerous performance obligations
(in accordance with paragraph 605-10-25-58) separately from contract assets or
contract liabilities.
63. Add Section 605-10-50, with a link to transition paragraph 605-10-65-1, as
follows:
[For ease of readability, the new Section is not underlined.]
Disclosure
General
605-10-50-1 The objective of the disclosure requirements is to enable users
of financial statements to understand the nature, amount, timing, and
uncertainty of {add glossary link}revenue{add glossary link} and cash
flows arising from {add glossary link}contracts{add glossary link} with
{add glossary link}customers{add glossary link}. To achieve that objective,
an entity shall disclose qualitative and quantitative information about all of
the following:
a.
b.
c.
Its contracts with customers (see paragraphs 605-10-50-5 through
50-16)
The significant judgments, and changes in the judgments, made in
applying the guidance to those contracts (see paragraphs 605-1050-17 through 50-20)
Any assets recognized from the costs to obtain or fulfill a contract
with a customer in accordance with paragraphs 340-40-25-1 and
340-40-25-4 (see paragraphs 340-40-50-1 through 50-2).
605-10-50-2 An entity shall consider the level of detail necessary to satisfy the
disclosure objective and how much emphasis to place on each of the various
requirements. An entity shall aggregate or disaggregate disclosures so that
295
useful information is not obscured by either the inclusion of a large amount of
insignificant detail or the aggregation of items that have substantially different
characteristics.
605-10-50-3 Amounts disclosed are for each period for which a statement of
comprehensive income is presented and as of each period for which a statement
of financial position is presented, as applicable, unless otherwise stated.
605-10-50-4 An entity need not disclose information in accordance with the
guidance in this Section if it has provided the information in accordance with
another Topic.
> Contracts with Customers
605-10-50-5 An entity shall disclose information about its contracts with
customers, including all of the following:
a.
b.
c.
A disaggregation of revenue for the period (see paragraphs 605-10-50-6
through 50-8)
A reconciliation from the opening to the closing aggregate balance of
contract assets and contract liabilities (see paragraph 605-10-50-9)
Information about the entity’s performance obligations (see
paragraphs 605-10-50-11 through 50-14), including additional
information about any onerous performance obligations (see
paragraphs 605-10-50-15 through 50-16).
> > Disaggregation of Revenue
605-10-50-6 An entity shall disaggregate revenue from contracts with customers
(excluding amounts presented for customers’ credit risk) into the primary
categories that depict how the nature, amount, timing, and uncertainty of revenue
and cash flows are affected by economic factors. To meet the disclosure
objective in paragraph 605-10-50-1, an entity may need to use more than one
type of category to disaggregate revenue.
605-10-50-7 Examples of categories that might be appropriate include all of the
following:
a.
b.
c.
d.
e.
f.
296
Type of good or service (for example, major product lines)
Geography (for example, country or region)
Market or type of customer (for example, government and
nongovernment customers)
Type of contract (for example, fixed-price and time-and-materials
contracts)
Contract duration (for example, short-term and long-term contracts)
Timing of transfer of goods or services (for example, revenue from
goods or services transferred to customers at a point in time and
revenue from goods or services transferred over time)
g.
Sales channels (for example, goods sold directly to consumers and
goods sold through intermediaries).
605-10-50-8 A nonpublic entity need not apply the guidance in paragraphs 60510-50-6 through 50-7. Rather, a nonpublic entity shall disclose qualitative
information about how economic factors (such as type of customer, geographical
location of customers, and type of contract) affect the nature, amount, timing, and
uncertainty of revenue and cash flows. A nonpublic entity shall disaggregate
revenue in accordance with the timing of transfer of goods or services (for
example, revenue from goods or service transferred to customers at a point in
time and revenue from goods or services transferred over time).
> > Reconciliation of Contract Balances
605-10-50-9 An entity shall disclose in tabular format a reconciliation from the
opening to the closing aggregate balance of contract assets and contract
liabilities. The reconciliation shall disclose each of the following, if applicable:
a.
b.
c.
d.
e.
f.
The amount(s) recognized in the statement of comprehensive income
arising from either of the following:
1. Revenue from performance obligations satisfied during the
reporting period
2. Revenue from allocating changes in the transaction price to
performance obligations satisfied in previous reporting periods.
Cash received
Amounts transferred to receivables
Noncash consideration received
Effects of business combinations
Any additional line items that may be needed to understand the change
in the contract assets and contract liabilities.
605-10-50-10 See Example 17 (paragraphs 605-10-55-137 through 55-142) for
an illustration of the guidance in the preceding paragraph.
> > Performance Obligations
605-10-50-11 An entity shall disclose information about its performance
obligations in contracts with customers, including a description of all of the
following:
a.
b.
c.
When the entity typically satisfies its performance obligations (for
example, upon shipment, upon delivery, as services are rendered, or
upon completion of service)
The significant payment terms (for example, when payment typically is
due, whether the consideration amount is variable, and whether the
contract has a significant financing component)
The nature of the goods or services that the entity has promised to
transfer, highlighting any performance obligations to arrange for another
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d.
e.
party to transfer goods or services (that is, if the entity is acting as an
agent)
Obligations for returns, refunds, and other similar obligations
Types of warranties and related obligations.
605-10-50-12 For contracts with an original expected duration of more than one
year, an entity shall disclose all of the following information as of the end of the
current reporting period:
a.
b.
The aggregate amount of the transaction price allocated to remaining
performance obligations
An explanation of when the entity expects to recognize that amount as
revenue.
605-10-50-13 An entity may disclose the information in the preceding paragraph
either on a quantitative basis using the time bands that would be most
appropriate for the duration of the remaining performance obligations or by using
qualitative information.
605-10-50-14 As a practical expedient, an entity need not disclose the
information in paragraph 605-10-50-12 for a performance obligation if the entity
recognizes revenue in accordance with paragraph 605-10-25-44.
> > > Onerous Performance Obligations
605-10-50-15 An entity shall disclose the amount of the liability recognized for
onerous performance obligations along with a description of all of the following:
a.
b.
c.
The nature and amount of the remaining performance obligation(s) in
the contract that are onerous for which the liability has been recognized
Why those performance obligations are onerous
When the entity expects to satisfy those performance obligations.
605-10-50-16 An entity shall disclose in tabular format a reconciliation from the
opening to the closing balance of the liability recognized for onerous performance
obligations. The reconciliation shall include the amounts attributable to each of
the following, if applicable:
a.
b.
c.
d.
Increases in the liability from performance obligations that became
onerous during the period
Reductions of the liability from performance obligations satisfied during
the period
Changes in the measurement of the liability that occurred during the
reporting period
Any additional line items that may be needed to understand the change
in the liability recognized.
> Significant Judgments in the Application of the Guidance in This
Subtopic
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605-10-50-17 An entity shall disclose the judgments, and changes in the
judgments, made in applying the guidance in this Subtopic that significantly affect
the determination of the amount and timing of revenue from contracts with
customers. At a minimum, an entity shall explain the judgments, and changes in
the judgments, used in determining both of the following:
a.
b.
The timing of satisfaction of performance obligations (see paragraphs
605-10-50-18 through 50-19)
The transaction price and the amounts allocated to performance
obligations (see paragraph 605-10-50-20).
> > Determining the Timing of Satisfaction of Performance Obligations
605-10-50-18 For performance obligations that an entity satisfies over time, an
entity shall disclose both of the following:
a.
b.
The methods used to recognize revenue (for example, a description of
the output method or input method)
An explanation of why such methods are a faithful depiction of the
transfer of goods or services.
605-10-50-19 For performance obligations satisfied at a point in time, an entity
shall disclose the significant judgments made in evaluating when a customer
obtains control of promised goods or services.
> > Determining the Transaction Price and the Amounts Allocated to
Performance Obligations
605-10-50-20 An entity shall disclose information about the methods, inputs, and
assumptions used to:
a.
b.
c.
d.
Determine the transaction price
Estimate standalone selling prices of promised goods or services
Measure obligations for returns, refunds, and other similar obligations
Measure the amount of the liability recognized for onerous performance
obligations.
> Nonpublic Entity Disclosure
605-10-50-21 A nonpublic entity may elect not to provide any of the following
disclosures:
a.
b.
c.
d.
A reconciliation of contract balances (see paragraph 605-10-50-9)
The amount of the transaction price allocated to remaining performance
obligations and an explanation of when the entity expects to recognize
that amount as revenue (see paragraph 605-10-50-12)
A reconciliation of liability balances recognized from onerous
performance obligations (see paragraph 605-10-50-16)
An explanation of the judgments, and changes in the judgments, used in
determining the timing of satisfaction of performance obligations (see
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paragraphs 605-10-50-18 through 50-19) and in determining the
transaction price and allocating it to performance obligations (see
paragraph 605-10-50-20).
64. Add Section 605-10-55, with a link to transition paragraph 605-10-65-1, as
follows:
[For ease of readability, the new Section is not underlined.]
Implementation Guidance and Illustrations
General
> Implementation Guidance
> > Sale with a Right of Return
605-10-55-1 In some contracts, an entity transfers control of a product to a
customer and also grants the customer the right to return the product for various
reasons (such as dissatisfaction with the product) and receive any combination of
the following:
a.
b.
c.
A full or partial refund of any consideration paid
A credit that can be applied against amounts owed, or that will be owed,
to the entity
Another product in exchange.
605-10-55-2 To account for the transfer of products with a right of return (and for
some services that are provided subject to a refund), an entity should recognize
all of the following:
a.
b.
c.
Revenue for the transferred products in the amount of consideration to
which the entity is reasonably assured to be entitled (considering the
products expected to be returned)
A refund liability
An asset (and corresponding adjustment to cost of sales) for its right to
recover products from customers on settling the refund liability.
605-10-55-3 An entity’s promise to stand ready to accept a returned product
during the return period should not be accounted for as a separate performance
obligation in addition to the obligation to provide a refund.
605-10-55-4 An entity should apply the guidance in paragraphs 605-10-25-52
through 25-54 to determine the amount of consideration to which the entity is
reasonably assured to be entitled (considering the products expected to be
returned). For any amounts to which an entity is not reasonably assured to be
entitled, the entity should not recognize revenue when it transfers products to
customers but should recognize any consideration received as a refund liability.
Subsequently, the entity should update its assessment of amounts to which the
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entity is reasonably assured to be entitled in exchange for the transferred
products and should recognize corresponding adjustments to the amount of
revenue recognized.
605-10-55-5 An entity should update the measurement of the refund liability at
the end of each reporting period for changes in expectations about the amount of
refunds. An entity should recognize corresponding adjustments as revenue (or
reductions of revenue).
605-10-55-6 An asset recognized for an entity’s right to recover products from a
customer on settling a refund liability initially should be measured by reference to
the former carrying amount of the inventory less any expected costs to recover
those products (including potential decreases in the value to the entity of
returned products). Subsequently, an entity should update the measurement of
the asset to correspond with changes in the measurement of the refund liability.
An entity should present the asset separately from the refund liability.
605-10-55-7 Exchanges by customers of one product for another of the same
type, quality, condition, and price (for example, one color or size for another) are
not considered returns for the purposes of applying the guidance in this Subtopic.
605-10-55-8 Contracts in which a customer may return a defective product in
exchange for a functioning product should be evaluated in accordance with the
guidance on warranties in paragraphs 605-10-55-10 through 55-15.
605-10-55-9 See Example 18 (paragraphs 605-10-55-143 through 55-146) for an
illustration of the guidance in paragraphs 605-10-55-1 through 55-8 on
accounting for the sale of products with a right of return.
> > Warranties
605-10-55-10 It is common for an entity to provide (in accordance with the
contract, the entity’s customary business practices, or the law) a warranty in
connection with the sale of a product (whether a good or service). The nature of
a warranty can vary significantly across industries and contracts. Some
warranties provide a customer with assurance that the related product complies
with agreed-upon specifications. Other warranties provide the customer with a
service in addition to the assurance that the product complies with agreed-upon
specifications.
605-10-55-11 If a customer has the option to purchase a warranty separately (for
example, because the warranty is priced or negotiated separately), an entity
should account for the promised warranty as a separate performance obligation
because the entity promises to provide a service to the customer in addition to
the product. Therefore, the entity should allocate a portion of the transaction
price to the performance obligation for the service in accordance with
paragraphs 605-10-30-24 through 30-36.
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605-10-55-12 If a customer does not have the option to purchase a warranty
separately, the entity should account for the warranty in accordance with the
guidance on product warranties in Subtopic 460-10 unless the promised
warranty, or a part of the promised warranty, provides the customer with a
service in addition to the assurance that the product complies with agreed-upon
specifications.
605-10-55-13 In assessing whether a warranty provides a customer with a
service in addition to the assurance that the product complies with agreed-upon
specifications, an entity should consider factors such as:
a.
b.
c.
Whether the warranty is required by law—if the entity is required by law
to provide a warranty, the existence of that law indicates that the
warranty is not a performance obligation because such requirements
typically exist to protect customers from the risk of purchasing defective
products.
The length of the warranty coverage period—the longer the coverage
period, the more likely that the warranty is a performance obligation
because it is more likely to provide a service in addition to the
assurance that the product complies with agreed-upon specifications.
The nature of the tasks that the entity promises to perform—if it is
necessary for an entity to perform specified tasks to provide the
assurance that a product complies with agreed-upon specifications (for
example, a return shipping service for a defective product), then those
tasks likely do not give rise to a performance obligation.
605-10-55-14 If a warranty, or a part of a warranty, provides the customer with a
service in addition to the assurance that the product complies with agreed-upon
specifications, that promised service is a separate performance obligation.
Therefore, an entity should allocate the transaction price to the product and the
service. If an entity promises both an assurance and a service-type warranty but
cannot reasonably account for them separately, the entity should account for
both of the warranties together as a single performance obligation.
605-10-55-15 A law that requires an entity to pay compensation if its products
cause harm or damage does not give rise to a performance obligation. For
example, a manufacturer may sell products in a jurisdiction in which the law
holds the manufacturer liable for any damages (for example, to personal
property) that might be caused by a consumer using a product for its intended
purpose. Similarly, an entity’s promise to indemnify the customer for liabilities
and damages arising from claims of patent, copyright, trademark, or other
infringement by the entity’s products does not give rise to a performance
obligation. The entity should account for such obligations in accordance with the
guidance on loss contingencies in Subtopic 450-20.
605-10-55-16 See Example 19 (paragraphs 605-10-55-148 through 55-149) for
an illustration of the guidance in paragraphs 605-10-55-10 through 55-15 on
accounting for the sale of a product with a warranty.
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> > Principal versus Agent Considerations
605-10-55-17 When other parties are involved in providing goods or services to
an entity’s customer, the entity should determine whether its performance
obligation is to provide the specified goods or services itself (that is, the entity is
a principal) or to arrange for another party to provide those goods or services
(that is, the entity is an agent). That determination affects whether the entity
recognizes revenue in the gross amount of consideration to which the entity is
entitled in exchange for those goods or services (if a principal) or in the amount
of any fee or commission received in exchange for arranging for the other party
to provide its goods or services (if an agent). An entity’s fee or commission might
be the net amount of consideration that the entity retains after paying other
parties for providing their goods or services to the customer.
605-10-55-18 If an entity obtains control of the goods or services of another party
before it transfers those goods or services to the customer, the entity’s
performance obligation is to provide the goods or services itself. Therefore, the
entity is acting as a principal and should recognize revenue in the gross amount
to which it is entitled. If an entity obtains legal title of a product only momentarily
before legal title is transferred to the customer, the entity is not necessarily acting
as a principal.
605-10-55-19 Indicators that the entity’s performance obligation is to arrange for
the provision of goods or services by another party (that is, that the entity is an
agent and should recognize revenue in the net amount) include all of the
following:
a.
b.
c.
d.
e.
The other party is primarily responsible for fulfilling the contract.
The entity does not have inventory risk before or after the customer’s
order, during shipping, or on return.
The entity does not have latitude in establishing prices for the other
party’s goods or services and, therefore, the benefit that the entity can
receive from those goods or services is constrained.
The entity’s consideration is in the form of a commission.
The entity does not have customer credit risk for the amount receivable
in exchange for the other party’s goods or services.
605-10-55-20 If another party assumes an entity’s performance obligation so that
the entity is no longer obliged to provide the promised good or service to the
customer (that is, the entity is no longer acting as the principal), the entity should
not recognize revenue for that performance obligation. Instead, the entity should
evaluate whether to recognize revenue for satisfying a performance obligation to
obtain a contract for the other party (that is, whether the entity is acting as an
agent).
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> > Customer Options for Additional Goods or Services
605-10-55-21 Customer options to acquire additional goods or services for free
or at a discount come in many forms, including sales incentives, customer award
credits (or points), contract renewal options, or other discounts on future goods
or services.
605-10-55-22 If in a contract with more than one performance obligation an entity
grants a customer the option to acquire additional goods or services, that option
gives rise to a separate performance obligation in the contract only if the option
provides a material right to the customer that it would not receive without entering
into that contract (for example, a discount that is incremental to the range of
discounts typically given for those goods or services to that class of customer in
that geographical area or market). If the option provides a material right to the
customer, the customer, in effect, pays the entity in advance for future goods or
services, and the entity recognizes revenue when those future goods or services
are transferred or when the option expires.
605-10-55-23 If a customer has the option to acquire an additional good or
service at a price that would reflect the standalone selling price for that good or
service, that option does not provide the customer with a material right even if the
option can be exercised only because of entering into a previous contract. In
those cases, the entity has merely made a marketing offer that it should account
for in accordance with the guidance in this Subtopic only when the customer
exercises the option to purchase the additional goods or services.
605-10-55-24 Paragraph 605-10-30-25 requires an entity to allocate the
transaction price to separate performance obligations on a relative standalone
selling price basis. If the standalone selling price for a customer’s option to
acquire additional goods or services is not directly observable, an entity should
estimate it. That estimate should reflect the discount the customer would obtain
when exercising the option, adjusted for both of the following:
a.
b.
Any discount that the customer could receive without exercising the
option
The likelihood that the option will be exercised.
605-10-55-25 If a customer has a material right to acquire future goods or
services and those goods or services are similar to the original goods or services
in the contract and are provided in accordance with the terms of the original
contract, then an entity may, as a practical alternative to estimating the
standalone selling price of the option, allocate the transaction price to the
optional goods or services by reference to the goods or services expected to be
provided and the corresponding expected consideration. Typically, those types of
options are for contract renewals.
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605-10-55-26 See Examples 20 and 21 (paragraphs 605-10-55-150 through 55158) for illustrations of the implementation guidance in paragraphs 605-10-55-21
through 55-23 on determining whether an option provides a customer with a
material right.
605-10-55-27 See Example 22 (paragraphs 605-10-55-159 through 55-165) for
an illustration of the implementation guidance in paragraph 605-10-55-24 on
determining the amount of the transaction price to allocate to an option.
605-10-55-28 See Example 23 (paragraphs 605-10-55-166 through 55-174) for
an illustration of the implementation guidance in paragraph 605-10-55-25 on
using a practical alternative to determine the amount of the transaction price to
allocate to a contract renewal option.
> > A Customer’s Unexercised Rights (Breakage)
605-10-55-29 In accordance with paragraph 605-10-45-2, upon receipt of a
prepayment from a customer, an entity should recognize a contract liability for
its performance obligation to transfer, or to stand ready to transfer, goods or
services in the future. The entity should derecognize that contract liability (and
recognize revenue) when it transfers those goods or services and, therefore,
satisfies its performance obligation.
605-10-55-30 A customer’s nonrefundable prepayment to an entity gives the
customer a right to receive a good or service in the future (and obliges the entity
to stand ready to transfer a good or service). However, the customer may not
exercise all of its contractual rights. Those unexercised rights often are referred
to as breakage.
605-10-55-31 If an entity is reasonably assured of a breakage amount in a
contract liability, the entity should recognize the expected breakage amount as
revenue in proportion to the pattern of rights exercised by the customer. If an
entity is not reasonably assured of a breakage amount, the entity should
recognize the expected breakage amount as revenue when the likelihood of the
customer exercising its remaining rights becomes remote. To determine whether
an entity is reasonably assured of a breakage amount, the entity should consider
the guidance in paragraphs 605-10-25-52 through 25-54.
605-10-55-32 An entity should recognize a liability (and not revenue) for any
customer balances for which the entity may be required to remit the funds to a
government entity in accordance with applicable unclaimed property laws.
> > Nonrefundable Upfront Fees (and Some Related Costs)
605-10-55-33 In some contracts, an entity charges a customer a nonrefundable
upfront fee at or near contract inception. Examples include the following:
a.
b.
c.
Joining fees in health club membership contracts
Activation fees in telecommunication contracts
Setup fees in some services contracts
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d.
Initial fees in some supply contracts.
605-10-55-34 To identify performance obligations in such contracts, an entity
should assess whether the fee relates to the transfer of a promised good or
service. In many cases, even though a nonrefundable upfront fee relates to an
activity that the entity is required to undertake at or near contract inception to
fulfill the contract, that activity does not result in the transfer of a promised good
or service to the customer (see paragraph 605-10-25-20). Instead, the upfront
fee is an advance payment for future goods or services and, therefore, would be
recognized as revenue when those future goods or services are provided. That
revenue recognition period would extend beyond the initial contractual period if
the entity grants the customer the option to renew the contract and that option
provides the customer with a material right as specified in paragraph 605-1055-22.
605-10-55-35 If the nonrefundable upfront fee relates to a performance
obligation, an entity should evaluate whether to account for that performance
obligation separately in accordance with paragraphs 605-10-25-18 through
25-25.
605-10-55-36 An entity may charge a nonrefundable fee in part as compensation
for costs incurred in setting up a contract (or other administrative tasks as
specified in paragraph 605-10-25-20). If those setup activities do not satisfy a
performance obligation, the entity should disregard those activities (and related
costs) when measuring progress in accordance with paragraph 605-10-25-47.
That is because the costs of setup activities do not depict the transfer of services
to the customer. The entity should evaluate whether costs incurred in setting up a
contract have resulted in an asset that should be recognized in accordance with
paragraph 340-40-25-1.
> > Licensing and Rights to Use
605-10-55-37 Licensing refers to an entity’s granting to a customer of a right to
use, but not own, the entity’s intellectual property. Rights to use can vary by time,
geography, or form of distribution. Examples of intellectual property include all of
the following:
a.
b.
c.
d.
Software and technology
Motion pictures, music, and other forms of media and entertainment
Franchises
Patents, trademarks, and copyrights.
605-10-55-38 If an entity grants to a customer a license or other rights to use
intellectual property of the entity, those promised rights give rise to a
performance obligation that the entity satisfies at the point in time when the
customer obtains control of the rights. Control of rights to use intellectual property
cannot be transferred before the beginning of the period during which the
customer can use and benefit from the licensed intellectual property. For
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example, if a software license period begins before the customer obtains an
access code that enables the customer to use the software, an entity should not
recognize revenue before the entity provides the access code.
605-10-55-39 To determine the amount of revenue recognized for transferring a
license to a customer, the entity should apply the guidance on determining and
allocating the transaction price (including paragraph 605-10-25-56 on
constraining the amount of revenue recognized to amounts that are reasonably
assured).
605-10-55-40 If an entity has other performance obligations in the contract, the
entity should apply the criteria in paragraphs 605-10-25-18 through 25-25 to
determine whether the promised rights are a separate performance obligation or
whether the performance obligation for the rights should be combined with those
other performance obligations in the contract. For example, if an entity grants a
license that is not distinct because the customer cannot benefit from the license
without an additional service that the entity promises to provide, the entity should
account for the combined license and service as a single performance obligation
satisfied over time.
605-10-55-41 If an entity has a patent to intellectual property that it licenses to
customers, the entity may represent and guarantee to its customers that it has a
valid patent and that it will defend and maintain that patent. That promise to
maintain and defend patent rights is not a performance obligation because it
does not transfer a good or service to the customer. Defending a patent protects
the value of the entity’s intellectual property assets.
605-10-55-42 See Example 24 (paragraphs 605-10-55-175 through 55-181) for
an illustration of the implementation guidance in paragraphs 605-10-55-37
through 55-40 on licensing.
> > Repurchase Agreements
605-10-55-43 A repurchase agreement is a contract in which an entity sells an
asset and also promises or has the option (either in the same contract or in
another contract) to repurchase the asset. The repurchased asset may be any
one of the following:
a. The asset that was originally sold to the customer
b. An asset that is substantially the same as that asset
c. Another asset of which the asset that was originally sold is a
component.
605-10-55-44 Repurchase agreements generally come in three forms:
a.
b.
c.
An entity’s unconditional obligation to repurchase the asset (a forward)
An entity’s unconditional right to repurchase the asset (a call option)
An entity’s unconditional obligation to repurchase the asset at the
customer’s request (a put option).
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> > > A Forward or a Call Option
605-10-55-45 If an entity has an unconditional obligation or unconditional right to
repurchase the asset (a forward or a call option), a customer does not obtain
control of the asset because the customer is limited in its ability to direct the use
of and obtain substantially all of the remaining benefits from the asset (even
though the customer may have physical possession of the asset). Consequently,
the entity should account for the contract as either of the following:
a.
b.
A lease in accordance with Topic 840, if the entity can repurchase the
asset for an amount that is less than the original selling price of the
asset
A financing arrangement in accordance with paragraph 605-10-55-47, if
the entity can repurchase the asset for an amount that is equal to or
more than the original selling price of the asset.
605-10-55-46 When comparing the repurchase price with the selling price, an
entity should consider the effects of the time value of money.
605-10-55-47 If the repurchase agreement is a financing arrangement, an entity
should continue to recognize the asset and also recognize a financial liability for
any consideration received from a customer. The entity should recognize the
difference between the amount of consideration received from the customer and
the amount of consideration to be paid to the customer as interest and, if
applicable, holding costs (for example, insurance). If the option lapses
unexercised, the entity should derecognize the liability and recognize revenue.
> > > A Put Option
605-10-55-48 If an entity has an unconditional obligation to repurchase the asset
at the customer’s request (a put option) at a price that is lower than the original
selling price of the asset, the entity should consider at contract inception whether
a customer has a significant economic incentive to exercise that right. The
customer’s exercising of that right results in the customer effectively paying the
entity consideration for the right to use a specified asset for a period of time.
Therefore, if the customer has a significant economic incentive to exercise that
right, the entity should account for the agreement as a lease in accordance with
Topic 840.
605-10-55-49 To determine whether a customer has a significant economic
incentive to exercise its right, an entity should consider various factors, including
the relationship of the repurchase price to the expected market value of the asset
at the date of repurchase and the amount of time until the right expires. If the
repurchase price is expected to significantly exceed the market value of the
asset, the customer has an economic incentive to exercise the put option.
605-10-55-50 If a customer does not have a significant economic incentive to
exercise its right, the entity should account for the agreement similar to the sale
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of a product with a right of return as discussed in paragraphs 605-10-55-1
through 55-8.
605-10-55-51 If the repurchase price of the asset exceeds the original selling
price and is more than the expected market value of the asset, the contract is, in
effect, a financing arrangement. Therefore, an entity should:
a.
b.
Continue to recognize the asset
Recognize a liability that initially should be measured at the amount of
the original selling price of the asset.
605-10-55-52 When comparing the repurchase price with the selling price, an
entity should consider the effects of the time value of money.
605-10-55-53 If the option lapses unexercised, an entity should derecognize the
liability and recognize revenue.
> > Consignment Arrangements
605-10-55-54 When an entity delivers a product to another party (such as a
dealer or a distributor) for sale to end customers, the entity should evaluate
whether that other party has obtained control of the product at that point in time.
605-10-55-55 Inventory on consignment typically is controlled by an entity until a
specified event occurs, such as the sale of the product to a customer of the
dealer, or until a specified period expires. Until that point, the entity typically is
able to require the return of the products or transfer them to another dealer.
Moreover, the dealer typically does not have an unconditional obligation to pay
for the products, although it might be required to pay a deposit. Accordingly, in
those circumstances, the entity would not recognize revenue upon delivery of the
products to the dealer.
> > Bill-and-Hold Arrangements
605-10-55-56 A bill-and-hold arrangement is a contract under which an entity
bills a customer for a product but the entity retains physical possession of the
product until it is transferred to the customer at a point in time in the future. A
customer may request an entity to enter into such a contract because of the
customer’s lack of available space for the product or because of delays in the
customer’s production schedules.
605-10-55-57 An entity should determine when it has satisfied its performance
obligation to transfer a product by evaluating when the customer obtains control
of that product. For some contracts, control is transferred either when the product
is delivered to the customer’s site or when the product is shipped, depending on
the terms of the contract (including delivery and shipping terms). However, for
some contracts, a customer may obtain control of a product even though that
product remains in the physical possession of the entity. In such cases, the
customer has the ability to direct the use of and obtain substantially all of the
remaining benefits from the product even though it has decided not to exercise
309
its right to take physical possession of that product. Consequently, the entity
does not control the product. Instead, the entity has custodial services over the
customer’s asset.
605-10-55-58 For a customer to have obtained control of a product in a bill-andhold arrangement, all of the following criteria should be met:
a.
b.
c.
d.
The reason for the bill-and-hold arrangement must be substantive.
The product must be identified separately as belonging to the customer.
The product currently must be ready for physical transfer to the
customer.
The entity cannot have the ability to use the product or to direct it to
another customer.
605-10-55-59 If an entity recognizes revenue for the sale of a product on a billand-hold basis, the entity should consider whether it has remaining separate
performance obligations (for example, for custodial services) in accordance with
paragraphs 605-10-25-18 through 25-25 to which the entity should allocate a
portion of the transaction price in accordance with paragraphs 605-10-30-24
through 30-36.
> > Customer Acceptance
605-10-55-60 In accordance with paragraph 605-10-25-38, a customer’s
acceptance of an asset indicates that the customer has obtained control of the
asset. Customer acceptance clauses allow the customer to cancel a contract or
require an entity to take remedial action if a good or service does not meet
agreed-upon specifications. An entity should consider such clauses when
evaluating when a customer obtains control of a good or service.
605-10-55-61 If an entity can objectively determine that control of a good or
service has been transferred to the customer in accordance with the agreedupon specifications in the contract, then customer acceptance is a formality that
would not affect the entity’s determination of when the customer has obtained
control of the good or service. For example, if the customer acceptance clause is
based on meeting specified size and weight characteristics, the entity would be
able to determine whether those criteria have been met before receiving
confirmation of the customer’s acceptance. The entity’s experience with contracts
for similar goods or services may provide evidence that a good or service
provided to the customer is in accordance with the agreed-upon specifications in
the contract. If revenue is recognized before customer acceptance, the entity still
must consider whether there are any remaining performance obligations (for
example, installation of equipment) and evaluate whether to account for them
separately.
605-10-55-62 However, if an entity cannot objectively determine that the good or
service provided to a customer is in accordance with the agreed-upon
specifications in the contract, then the entity would not be able to conclude that
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the customer has obtained control until the entity receives the customer’s
acceptance. That is because the entity cannot determine that the customer has
the ability to direct the use of and obtain substantially all of the remaining benefits
from the good or service.
605-10-55-63 If an entity delivers products to a customer for trial or evaluation
purposes and a customer is not committed to pay any consideration until the trial
period lapses, control of the product is not transferred to the customer until either
the customer accepts the product or the trial period lapses.
> Illustrations
605-10-55-64 The following Examples illustrate how an entity might apply some
of the guidance in this Subtopic to particular aspects of a contract with a
customer on the basis of the limited facts presented. Additional facts most likely
would be required to fully evaluate the contract. The evaluations following each
Example are not intended to represent the only manner in which the guidance in
this Subtopic could be applied.
> > Contract Modifications
605-10-55-65 The following Examples illustrate the guidance in paragraphs 60510-25-12 through 25-16 on contract modifications.
> > > Example 1: Separate Contract for Goods
605-10-55-66 Assume that an entity promises to sell 120 products to a customer
for $12,000 ($100 per product). The products are transferred to the customer at
various points in time over a six-month period. The contract is modified after 60
products have been transferred, and the entity promises to deliver an additional
30 products for an additional $2,850 or $95 per product. The pricing for the
additional products reflects the standalone selling price of the products at the
time of the contract modification. In addition, the additional products are distinct
from the original products because the entity regularly sells the products
separately. Therefore, the contract modification for the additional 30 products is,
in effect, a new and separate contract for future products that does not affect the
accounting for the existing contract.
605-10-55-67 If the pricing for the additional products does not reflect the
standalone selling price of the additional products, the entity would allocate the
modified transaction price (less the amounts allocated to products transferred at
or before the date of the modification) to all remaining products to be transferred.
Consequently, the amount recognized as revenue for each of the remaining
products would be a blended price of $98.33 {[($100 × 60 products not yet
transferred under original contract) + ($95 × 30 products to be transferred under
the contract modification)] ÷ 90 remaining products} per product.
> > > Example 2: Modification of a Services Contract
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605-10-55-68 Assume that an entity enters into a three-year services contract.
The customer promises to pay $100,000 at the beginning of each year. The
standalone selling price of the services at contract inception is $100,000 per
year. At the end of the second year, the contract is modified, and the fee for the
third year of services is reduced to $80,000. In addition, the customer agrees to
pay an additional $200,000 to extend the contract for 3 additional years (that is, 4
years remain after the modification). The standalone selling price of the services
at the beginning of the third year is $80,000 per year. The entity’s standalone
selling price multiplied by the number of years is deemed to be an appropriate
estimate of the standalone selling price of the multiyear contract (that is, the
standalone selling price is 4 years × $80,000 per year = $320,000).
605-10-55-69 At the date of modification, the entity evaluates the remaining
services to be provided and concludes that they are distinct in accordance with
paragraphs 605-10-25-23 through 25-24. However, the amount of remaining
consideration to be paid ($280,000) does not reflect the standalone selling price
of the services to be provided ($320,000). Therefore, the entity would reallocate
the remaining consideration of $280,000 to the remaining services to be provided
and would recognize revenue of $70,000 per year ($280,000 ÷ 4 years) as the
services are provided.
> > > Example 3: Modification of an Existing Performance Obligation
605-10-55-70 Assume that an entity enters into a contract to construct a house
for a customer, which is considered to be a single performance obligation. That is
because in accordance with paragraph 605-10-25-24 the goods or services in the
bundle are highly interrelated and providing them to the customer requires the
entity also to provide a significant service of integrating the goods or services into
the combined item (that is, the house) for which the customer has contracted. In
addition, the goods or services are significantly modified and customized to fulfill
the contract. At inception, the entity expects the following.
Transaction price
$
Expected costs
Expected profit (20%)
$
1,000,000
(800,000)
200,000
605-10-55-71 By the end of the first year, the entity has satisfied 50 percent of its
performance obligation on the basis of costs incurred ($400,000) relative to total
expected costs ($800,000). Therefore, the cumulative revenue and costs
recognized for the first year are as follows.
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Revenue
$ 500,000
Costs
Gross profit
(400,000)
$ 100,000
605-10-55-72 At the beginning of the second year, the parties to the contract
agree to change the floor plan of the house. As a result, the contract revenue and
expected costs increase by $100,000 and $75,000, respectively. The entity
concludes that the remaining goods and services to be provided under the
modified contract are not distinct in accordance with paragraphs 605-10-25-23
through 25-24 because the entity provides a significant service of integrating the
highly interrelated goods and services into the combined item (the house) for
which the customer has contracted. In addition, providing the house requires the
entity to significantly modify the promised goods and services.
605-10-55-73 Consequently, the entity accounts for the contract modification as if
it were part of the original contract. The entity updates its measure of progress
and estimates that it has satisfied 45.7 percent of its performance obligation
($400,000 actual costs incurred ÷ $875,000 total expected costs). In addition, the
entity would recognize additional revenue of $2,700 (45.7% complete ×
$1,100,000 modified transaction price – $500,000 revenue recognized to date).
> > Identifying Separate Performance Obligations
605-10-55-74 The following Examples illustrate the guidance in paragraphs 60510-25-22 through 25-24 on determining whether to account for a bundle of goods
or services as one performance obligation.
> > > Example 4: Significant Customization of Software
605-10-55-75 Assume that an entity licenses customer relationship management
software to a customer. In addition, the entity promises to provide consulting
services to significantly customize the software to the customer’s information
technology environment for total consideration of $600,000.
605-10-55-76 The entity is providing a significant service of integrating the goods
and services (the license and the consulting services) into the combined item for
which the customer has contracted. In addition, the software is significantly
customized by the entity in accordance with the specifications negotiated with the
customer. Therefore, the entity would account for the license and consulting
services together as one performance obligation. Revenue for that performance
obligation would be recognized over time by selecting an appropriate measure of
progress toward complete satisfaction of the performance obligation (assuming
that the criteria in paragraph 605-10-25-31 are met for satisfaction of a
performance obligation over time).
> > > Example 5: Construction
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605-10-55-77 Assume that an entity enters into a contract to design and build a
hospital. The entity is responsible for the overall management of the project and
identifies various goods and services to be provided, including engineering, site
clearance, foundation, procurement, construction of the structure, piping and
wiring, installation of equipment, and finishing.
605-10-55-78 The entity would account for the bundle of goods and services as a
single performance obligation in accordance with paragraph 605-10-25-24
because the goods or services in the bundle are highly interrelated and providing
them to the customer requires the entity also to provide a significant service of
integrating the goods or services into the combined item (that is, the hospital) for
which the customer has contracted. In addition, the goods or services are
significantly modified and customized to fulfill the contract.
605-10-55-79 Revenue for the performance obligation would be recognized over
time by selecting an appropriate measure of progress toward complete
satisfaction of the performance obligation (assuming that the criteria in paragraph
605-10-25-31 are met for satisfaction of a performance obligation over time).
> > Satisfaction of Performance Obligations
> > > Example 6: Shipment of a Product with Risk of Loss
605-10-55-80 The following Example illustrates the guidance on identifying
separate performance obligations and determining when a performance
obligation is satisfied if the entity retains the risk of loss during shipment of a
product.
605-10-55-81 Assume that an entity enters into a contract to sell a product to a
customer. The delivery terms of the contract are free on board shipping point
(that is, legal title to the product passes to the customer when the product is
handed over to the carrier). The entity uses a third-party carrier to deliver the
product. In accordance with the entity’s past business practices, the entity will
provide the customer with a replacement product, at no additional cost, if a
product is damaged or lost while in transit. The entity has determined that its past
business practices of replacing damaged products has implicitly created a
performance obligation.
605-10-55-82 Therefore, the entity has two performance obligations—one to
provide the customer with a product and another to cover the risk of loss during
transit. The customer obtains control of the product at the point of shipment.
Although it does not have physical possession of the product at that point, it has
legal title and, therefore, can sell the product to (or exchange it with) another
party. The entity also is precluded from selling the product to another customer.
605-10-55-83 In this Example, the additional performance obligation for risk
coverage does not affect when the customer obtains control of the product.
However, it does result in the customer receiving a service from the entity while
the product is in transit. Therefore, the entity has not satisfied all of its
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performance obligations at the point of shipment and would not recognize all of
the revenue at that time. Instead, the entity would allocate a portion of the
transaction price to the performance obligation to provide risk coverage and
would recognize revenue as that performance obligation is satisfied.
> > > Example 7: Determining Whether an Asset Has an Alternative Use to
an Entity
605-10-55-84 The following Example illustrates the guidance in paragraphs 60510-25-31 through 25-32 on determining whether an asset has an alternative use
to an entity and if one of the criteria is met for satisfaction of a performance
obligation over time.
605-10-55-85 Assume that an entity is developing residential real estate and
starts marketing individual units (apartments). The entity has entered into the
minimum number of contracts that are needed to begin construction.
605-10-55-86 A customer enters into a binding sales contract for a specified unit
that is not yet ready for occupancy. The customer pays a nonrefundable deposit
at inception of the contract and also promises to make payments throughout the
contract. Those payments are intended to at least compensate the entity for
performance completed to date and are refundable only if the entity fails to
deliver the completed unit. The entity receives the final payment only on
completion of the contract (that is, when the customer obtains possession of the
unit).
605-10-55-87 To finance the payments, the customer borrows from a financial
institution that makes the payments directly to the entity on behalf of the
customer. The lender has full recourse against the customer. The customer can
sell his or her interest in the partially completed unit, which would require
approval of the lender but not the entity. The customer is able to specify minor
variations to the basic design but cannot specify or alter major structural
elements of the unit’s design. The contract precludes the entity from transferring
the specified unit to another customer.
605-10-55-88 The asset (apartment) created by the entity’s performance does
not have an alternative use to the entity because the contract has substantive
terms that preclude the entity from directing the unit to another customer. The
entity concludes that it has a right to payment for performance completed to date
because the customer is obliged to compensate the entity for its performance
rather than only a loss of profit if the contract is terminated. In addition, the entity
expects to fulfill the contract as promised. Therefore, the terms of the contract
and the surrounding facts and circumstances indicate that the entity has a
performance obligation that it satisfies over time.
605-10-55-89 To recognize revenue for that performance obligation satisfied over
time, the entity would measure its progress toward completion in accordance with
paragraphs 605-10-25-40 through 25-51.
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> > Measuring Progress toward Complete Satisfaction of a Performance
Obligation That Is Satisfied over Time
605-10-55-90 The following Example illustrates the guidance in paragraph 60510-25-48 on applying an input method to measure progress if an entity has a
single performance obligation that includes goods (for example, specialized
materials) that a customer obtains control of before services related to those
goods (for example, installation).
> > > Example 8: Uninstalled Materials
605-10-55-91 Assume that an entity enters into a contract with a customer to
construct a facility for $140 million over 2 years. The contract also requires the
entity to procure specialized equipment from a third party and integrate that
equipment into the facility. The entity expects to transfer control of the
specialized equipment approximately six months from when the project begins.
The installation and integration of the equipment continue throughout the
contract. The contract is a single performance obligation in accordance with
paragraph 605-10-25-24 because all of the promised goods or services in the
contract are highly interrelated and the entity also provides a significant service
of integrating those goods or services into the single facility for which the
customer has contracted. In addition, the entity significantly modifies the bundle
of goods and services to fulfill the contract. The entity measures progress toward
complete satisfaction of the performance obligation on the basis of costs incurred
relative to total costs expected to be incurred.
605-10-55-92 At contract inception, the entity expects the following.
Transaction price
Cost of the specialized equipment
40,000,000
Other costs
Total expected costs
80,000,000
$
140,000,000
$
120,000,000
605-10-55-93 In accordance with paragraph 605-10-25-48, the entity concludes
that the best depiction of the entity’s performance is to recognize revenue for the
specialized equipment in an amount equal to the cost of the specialized
equipment upon the transfer of control to the customer. Therefore, the entity
would exclude the cost of the specialized equipment from its measure of
progress toward complete satisfaction of the performance obligation on a cost-tocost basis and account for the contract as follows in paragraphs 605-10-55-94
through 55-96.
605-10-55-94 During the first 6 months, the entity incurs $20 million of costs
relative to the total $80 million of expected costs (excluding the $40 million cost
of the specialized equipment). Therefore, the entity estimates that the
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performance obligation is 25 percent complete ($20 million ÷ $80 million) and
recognizes revenue of $25 million [25% × ($140 million total transaction price –
$40 million revenue for the specialized equipment)].
605-10-55-95 Upon transfer of control of the specialized equipment, the entity
recognizes revenue and costs of $40 million.
605-10-55-96 Subsequently, the entity continues to recognize revenue on the
basis of costs incurred relative to total expected costs (excluding the revenue
and cost of the specialized equipment).
> > The Time Value of Money
605-10-55-97 The following Example illustrates how an entity would apply the
guidance in paragraphs 605-10-30-10 through 30-14 to account for the effects of
the time value of money.
> > > Example 9: Time Value of Money in a Multiple-Element Arrangement
605-10-55-98 An entity enters into a contract to sell Product A and Product B for
an upfront cash payment of $150,000. Product A will be delivered in two years
and Product B will be delivered in five years. The entity allocates the $150,000 to
Products A and B on a relative standalone selling price basis as follows.
Standalone
Selling Prices
Percent
Allocated
Allocated
Amounts
Product A
$
40,000
25%
$
37,500
Product B
Total
$
120,000
160,000
75%
112,500
$ 150,000
605-10-55-99 The entity uses a financing rate of 6 percent, which is the entity’s
incremental borrowing rate.
605-10-55-100 The following journal entries illustrate how an entity would
account for the effects of the time value of money.
a.
Recognize the contract liability for the $150,000 payment at contract
inception.
Cash
Contract liability
b.
$ 150,000
$ 150,000
During the 2 years from contract inception until the transfer of Product
A, recognize the interest expense on $150,000 at 6 percent for 2 years.
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Interest expense
$ 18,540
(a)
$ 18,540
Contract liability
(a) $18,540 = $150,000 contract liability × (1.062 – 1).
c.
Recognize revenue for the transfer of Product A.
Contract liability
$ 42,135
(b)
$ 42,135
Revenue
(b) $42,135 = $37,500 initial allocation to Product A + $4,635, which is
Product A’s portion (25 percent) of the $18,540 interest for the first
2 years of the contract.
d.
Recognize the interest expense for 3 years on the remaining contract
(c)
liability of $126,405.
Interest expense
$ 24,145
(d)
Contract liability
$ 24,145
(c) $126,405 = $150,000 initial contract liability + $18,540 interest for 2
years – $42,135 derecognized from the transfer of Product A.
(d) $24,145 = $126,405 contract liability balance after 2 years ×
(1.063 – 1).
e.
Recognize revenue for the transfer of Product B.
Contract liability
Revenue
$ 150,550
(e)
$ 150,550
(e) $150,550 = $126,405 contract liability balance after 2
years + $24,145 interest for 3 years.
> > Consideration Payable to a Customer
605-10-55-101 The following Example illustrates the guidance in paragraph 60510-30-20 on consideration payable to a customer.
> > > Example 10: Volume Discount Incentive
605-10-55-102 Assume that an entity enters into a contract with a customer to
sell Product A for $100 per unit. If the customer purchases more than 1,000 units
of Product A in a calendar year, the price per unit is retroactively reduced to $90
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per unit. The entity’s experience is predictive of the amount of consideration to
which the entity will be entitled.
605-10-55-103 For the first quarter ended March 31, the entity sells 90 units of
Product A to the customer, and the entity estimates that the customer’s
purchases will not exceed the 1,000 units threshold required for the volume
discount in the calendar year. Hence, the entity recognizes revenue of $9,000
(90 units × $100 per unit) for the period ended March 31. The entity is reasonably
assured to be entitled to that amount.
605-10-55-104 In June, the entity’s customer acquires another company. As a
result, the entity estimates that the customer’s purchases will exceed the 1,000
units threshold for the calendar year. For the second quarter ended June 30, the
entity sells an additional 500 units of Product A to the customer. Hence, the entity
recognizes revenue of $44,100 for the period ended June 30. That amount
equals $45,000 for the sale of 500 units (500 units × $90 per unit) less $900 (90
units × $10 price reduction) for the reduction of revenue relating to units sold for
the quarter ended March 31. The entity is reasonably assured to be entitled to
that amount.
> > Allocating the Transaction Price to Separate Performance Obligations
> > > Example 11: Allocating a Discount
605-10-55-105 The following Example illustrates the guidance in paragraph 60510-30-29 on allocating a discount to only one performance obligation in a
contract rather than to all separate performance obligations in the contract.
605-10-55-106 Assume that an entity enters into a contract with a customer to
sell Products A, B, and C for a total transaction price of $36. The entity regularly
sells Products A, B, and C on a standalone basis for the following prices.
Standalone
Selling Prices
Product A
$
9
Product B
11
Product C
Total 20
40
$
605-10-55-107 The customer receives a $4 discount ($40 sum of standalone
selling prices – $36 transaction price) for buying the bundle of 3 products.
Because Products A and B are transferred at the same time, the entity accounts
for only two separate performance obligations in accordance with paragraph 60510-25-25—one for Products A and B combined and another for Product C. The
entity regularly sells Products A and B as a bundle for $16 (that is, at a $4
discount). Because the entity regularly sells Products A and B together for $16
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and regularly sells Product C for $20, the entity has observable prices as
evidence that the $4 discount in the contract should be allocated only to Products
A and B. Therefore, the entity allocates the transaction price of $36 as follows.
Allocated
Amounts
Products A and B
$
16
Product C
Total $
20
36
> > > Example 12: Multiple Performance Obligations and Contingent
Consideration
605-10-55-108 The following Example illustrates the guidance in paragraphs
605-10-30-24 through 30-30 on allocating the transaction price in a contract with
contingent consideration and paragraphs 605-10-25-52 through 25-56 on
constraining the cumulative amount of revenue when the promised amount of
consideration is variable.
> > > > Case A
605-10-55-109 Assume that an entity enters into a contract with a customer for
two intellectual property licenses (Licenses A and B), which are two separate
performance obligations. The stated price for License A is a fixed amount of
$800, and the price for License B is 3 percent of the customer’s future sales of
products that use License B. The entity’s estimate of the transaction price is
$1,700 (which includes $900 of estimated royalties for License B). The estimated
standalone selling prices of Licenses A and B are $800 and $1,000, respectively.
605-10-55-110 Applying the criteria in paragraph 605-10-30-30, the entity would
allocate the contingent royalty payment of $900 entirely to License B because
that contingent payment relates specifically to an outcome from the performance
obligation to transfer License B (that is, the customer’s subsequent sales of
products that use License B). In addition, allocating the expected royalty amounts
of $900 entirely to License B is consistent with the allocation principle in
paragraph 605-10-30-24 and when considering the other payment terms and
performance obligations in the contract.
605-10-55-111 The entity transfers License B at inception of the contract and
transfers License A one month later. Upon transfer of License B, the entity
recognizes as revenue only the amount to which it is reasonably assured to be
entitled. Because the expected royalty amount of $900 varies entirely on the
basis of the customer’s subsequent sales of products that use License B, the
entity is not reasonably assured to receive that amount until the customer’s
subsequent sales occur (in accordance with paragraph 605-10-25-56).
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Therefore, the entity would not recognize revenue at the $900 allocated amount
until the customer sells the products that use License B.
605-10-55-112 When License A is transferred, the entity would recognize as
revenue the $800 allocated to License A.
> > > > Case B
605-10-55-113 Assume that an entity enters into a contract with a customer for
two intellectual property licenses (Licenses A and B), which are two separate
performance obligations. The stated price for License A is $300, and for License
B the price is 5 percent of the customer’s future sales of products using License
B. The entity’s estimate of the transaction price is $1,800 (which includes $1,500
of royalties for License B). The estimated standalone selling prices of Licenses A
and B are $800 and $1,000, respectively.
605-10-55-114 Applying the criteria in paragraph 605-10-30-30, the entity
concludes that even though the contingent payment relates to subsequent sales
of License B, allocating that amount entirely to License B would not be consistent
with the principle for allocating the transaction price because the contingent
payment does not reflect the amount to which the entity expects to be entitled in
exchange for License B when considering the other payment terms and
performance obligations in the contract. Hence, the entity would allocate the total
transaction price of $1,800 ($300 fixed payment + $1,500 contingent payment) to
Licenses A and B on a relative standalone selling price basis of $800 and
$1,000, respectively.
605-10-55-115 The entity transfers License A at the inception of the contract and
transfers License B one month later. Upon transfer of License A, the entity
recognizes as revenue only the amount to which it is reasonably assured to be
entitled. Because the $1,500 varies entirely on the basis of the customer’s
subsequent sales of products that use License B, the entity is not reasonably
assured to receive that amount until the customer’s subsequent sales occur (in
accordance with paragraph 605-10-25-56). Therefore, the amount of revenue
recognized for License A is limited to $300 at the time of transfer of License A to
the customer.
605-10-55-116 Any contingent payments relating to License B would be
recognized as revenue as the customer sells the products that use License B.
> > Constraining the Cumulative Amount of Revenue Recognized
> > > Example 13: Management Fees
605-10-55-117 The following Example illustrates the guidance in paragraphs
605-10-25-52 through 25-56 on constraining cumulative revenue to amounts that
are reasonably assured.
605-10-55-118 On January 1, an entity enters into a contract with a client to
provide asset management services for one year. The entity receives a quarterly
321
management fee based on a percentage of the client’s assets under
management at the end of each quarter. In addition, the entity receives a
performance-based incentive fee of 20 percent of the fund’s return in excess of
the return of an observable index at the end of the year.
605-10-55-119 Although each increment of service is distinct in accordance with
paragraphs 605-10-25-23 through 25-24, the entity accounts for the contract as a
single performance obligation to provide investment management services for
one year because the services have the same pattern of transfer to the customer
(see paragraph 605-10-25-25).
605-10-55-120 To recognize revenue for satisfying the performance obligation
over time, the entity selects an output method of measuring progress toward
complete satisfaction of the performance obligation.
605-10-55-121 The entity concludes that it is not reasonably assured to be
entitled to the incentive fee until the end of the year. Although the entity has
experience with similar contracts, that experience is not predictive of the outcome
of the current contract because the amount of consideration is highly susceptible
to volatility in the market. In addition, the incentive fee has a large number and
high variability of possible consideration amounts.
605-10-55-122 Because the entity is not yet reasonably assured to be entitled to
the incentive fee, the cumulative amount of revenue recognized during the year
is limited to the quarterly management fees. Therefore, in accordance with
paragraph 605-10-25-44, the entity directly measures the value of the services
provided to the customer to date by reference to the quarterly management fees
for which the entity has a right to invoice. In other words, the quarterly
management fee is an appropriate depiction of the amount of consideration to
which the entity expects to be entitled in exchange for the services provided each
quarter.
> > > Example 14: Trailing Commission
605-10-55-123 The following Example illustrates how an entity would apply the
guidance in paragraphs 605-10-25-52 through 25-56 to a situation in which the
entity has experience with similar types of contracts and that experience is
predictive of the amount of consideration to which the entity will be entitled. This
Example does not consider potential effects of the time value of money.
605-10-55-124 Assume that an entity sells an insurance policy on behalf of an
insurance company for a commission of $100. In addition, the entity will receive
an additional commission of $10 each year for as long as the policyholder does
not cancel its policy. After selling the policy, the entity does not have any
remaining performance obligations.
605-10-55-125 The entity has significant experience with similar types of
contracts and customers. The entity’s experience is predictive of the amount of
consideration to which the entity will be entitled because it has reliable data from
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past contracts about the likely level of policyholder terminations and has no
evidence to suggest that previous policyholder behavior will change.
605-10-55-126 The entity determines that the transaction price is $145 (because,
on average, customers renew for 4.5 years) and allocates that amount to the
performance obligation. When the entity satisfies its performance obligation by
selling the insurance policy to the customer, it recognizes revenue of $145
because it determines that it is reasonably assured to be entitled to that amount.
The entity concludes that its past experience is predictive, even though the total
amount of commission that the entity ultimately will receive depends on the
actions of a third party (that is, policyholder behavior). As circumstances change,
the entity updates its estimate of the transaction price and recognizes revenue
(or a reduction of revenue) for those changes in circumstances.
> > Presentation
605-10-55-127 The following Examples illustrate the guidance in paragraphs
605-10-45-1 through 45-3.
> > > Example 15: Contract Liability and Receivable
605-10-55-128 On January 1, an entity enters into a contract to transfer a
product to a customer on March 31. The contract requires the customer to pay
the consideration of $1,000 in advance on January 31. The customer pays the
consideration on March 1. The contract is noncancellable. The entity transfers
the product on March 31.
605-10-55-129 When the amount of consideration is due on January 31:
Receivable
$
1,000
Contract liability
$
1,000
$
1,000
605-10-55-130 On receiving the cash on March 1:
Cash
$
1,000
Receivable
605-10-55-131 On satisfying the performance obligation on March 31:
Contract liability
$
1,000
Revenue
$
1,000
605-10-55-132 If the contract were cancellable, the entity would not make the
accounting entry in paragraph 605-10-55-129 on January 1 because it would not
have an unconditional right to consideration. Instead, it would recognize the cash
and contract liability on January 31.
> > > Example 16: Contract Asset and Receivable
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605-10-55-133 On January 1, an entity enters into a contract to transfer Products
X and Y to a customer in exchange for $1,000. The contract requires delivery of
Product X first and states that payment for the delivery of Product X is contingent
on the delivery of Product Y. In other words, the consideration of $1,000 is due
only after the entity has transferred both Products X and Y to the customer.
Therefore, the entity does not have an unconditional right to consideration (a
receivable) until both Products X and Y are transferred to the customer.
605-10-55-134 The entity identifies separate performance obligations for
Products X and Y and allocates $400 to Product X and $600 to Product Y on the
basis of their standalone selling prices.
605-10-55-135 On satisfying the performance obligation to transfer Product X:
Contract asset
$
400
Revenue
$
400
605-10-55-136 On satisfying the performance obligation to transfer Product Y:
Receivable
Contract asset
$
Revenue
1,000
$
400
600
> > Reconciliation of Contract Balances
605-10-55-137 The following Example illustrates the guidance in paragraph 60510-50-9 that requires the disclosure of a reconciliation of contract assets and
contract liabilities.
> > > Example 17: Reconciliation of Contract Assets and Contract
Liabilities
605-10-55-138 Assume that an entity has two main business units—a services
business and a retail business. Customers of the services business typically pay
a portion of the promised consideration in advance of receiving the services and
the remaining amount upon completion of the services. The service contracts do
not include a significant financing component. Customers of the retail business
typically pay in cash at the time of transfer of the promised goods.
605-10-55-139 During 20X1, the entity recognized revenue of $18,500 from
contracts with customers ($1,000 of which was cash sales from the entity’s retail
business). The entity received $3,500 payments in advance.
605-10-55-140 Included in the transaction price of one of the entity’s service
contracts is a performance bonus that the entity will receive only if it meets a
specified milestone by a specified date. The entity includes that performance
bonus in the transaction price and recognizes revenue over time using an
appropriate method of measuring progress. As of December 31, 20X0, the entity
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was not reasonably assured to be entitled to the cumulative amount of
consideration that was allocated to the entity’s past performance at that date.
However, during 20X1 the entity became reasonably assured to be entitled to the
performance bonus. Consequently, the entity recognized a contract asset and
revenue of $500 for the portion of the bonus relating to the entity’s performance
in the previous reporting period.
605-10-55-141 As a result of a business combination on December 31, 20X1, the
entity’s contract assets increased by $4,000 and its contract liabilities increased
by $1,900.
605-10-55-142 The entity’s reconciliation of contract assets and contract
liabilities is as follows.
Contract assets
Contract liabilities
$
Net contracts at December 31, 20X0
(2,000)
(2,000)
Revenue from contracts with customers
Performance obligations satisfied during the
reporting period
18,000
Amounts allocated to performance obligations
satisfied in previous periods
500
18,500
(14,000)
Amounts recognized as receivables
Payments in advance
(3,500)
Cash sales
(1,000)
Effects of a business combination
Increase of contract assets
4,000
Increase of contract liabilities
Net contracts at December 31, 20X1
(1,900)
$
Contract assets
Contract liabilities
100
4,500
$
(4,400)
> > Sale with a Right of Return
605-10-55-143 The following Example illustrates the guidance in paragraphs
605-10-55-1 through 55-8 on accounting for the sale of products with a right of
return.
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> > > Example 18: Right of Return
605-10-55-144 Assume that an entity sells 100 products for $100 each. The
entity’s customary business practice is to allow a customer to return any unused
product within 30 days and receive a full refund. The cost of each product is $60.
To determine the transaction price, the entity decides that the approach that is
most predictive of the amount of consideration to which the entity will be entitled
is the most likely amount. Using the most likely amount, the entity estimates that
three products will be returned. The entity’s experience is predictive of the
amount of consideration to which the entity will be entitled.
605-10-55-145 The entity estimates that the costs of recovering the products will
be immaterial and expects that the returned products can be resold at a profit.
605-10-55-146 Upon transfer of control of the products, the entity would not
recognize revenue for the three products that it expects to be returned.
Consequently, the entity would recognize the following:
a.
b.
c.
Revenue of $9,700 ($100 × 97 products expected not to be returned)
A refund liability for $300 ($100 refund × 3 products expected to be
returned)
An asset of $180 ($60 × 3 products) for its right to recover products from
customers on settling the refund liability. Therefore, the amount
recognized in cost of sales for 97 products is $5,820 ($60 × 97).
> > Warranties
605-10-55-147 The following Example illustrates the guidance in paragraphs
605-10-55-10 through 55-15 on accounting for the sale of a product with a
warranty.
> > > Example 19: Separate Performance Obligation for Service
605-10-55-148 Assume that a manufacturer grants its customers a warranty with
the purchase of a product. The warranty provides a customer with assurance that
the product complies with agreed-upon specifications and will operate as
promised for three years from the date of purchase. The warranty also gives
customers a right of up to 20 hours of training services on how to operate the
product. The training services are included with the warranty (that is, the
customer does not have the option to accept the warranty without the training
services).
605-10-55-149 To account for the warranty, the entity must determine whether
any of the warranty should be accounted for as a separate performance
obligation. Because the warranty includes the training services that are a service
to the customer in addition to assurance that the product complies with agreedupon specifications, the entity would account for the training services as a
separate performance obligation. Therefore, the entity would allocate a portion of
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the total transaction price to that performance obligation. In addition, the entity
would account for the assurance-type warranty in accordance with the guidance
on product warranties in Subtopic 460-10.
> > Customer Options for Additional Goods or Services
> > > Example 20: Option That Provides the Customer with a Material Right
605-10-55-150 The following Example illustrates the guidance in paragraphs
605-10-55-21 through 55-23 on determining whether an option provides a
customer with a material right.
605-10-55-151 Assume that an entity enters into a contract for the sale of
Product A for $100. As part of the contract, the entity gives the customer a 40
percent discount voucher for any future purchases in the next 30 days up to
$100. The entity intends to offer a 10 percent discount on all sales during the
next 30 days as part of a seasonal promotion.
605-10-55-152 All customers will receive a 10 percent discount on purchases
during the next 30 days. Hence, the discount that provides the customer with a
material right is only the discount that is incremental to that 10 percent (that is,
the additional 30 percent discount). The entity would account for the incremental
discount as a separate performance obligation in the contract for the sale of
Product A.
605-10-55-153 To allocate a portion of the transaction price to the separate
performance obligation for the discount voucher, the entity estimates an 80
percent likelihood that a customer will redeem the voucher and that a customer
will, on average, purchase $50 of additional products. Because the entity intends
to offer a 10 percent discount to all customers as part of a seasonal promotion,
the 40 percent discount that the customer would obtain when exercising the
voucher needs to be reduced by 10 percentage points to 30 percent to reflect the
incremental value of the discount to the customer. Therefore, the entity’s
estimated standalone selling price of the discount voucher is $12 ($50 average
purchase of additional products × 30% incremental discount × 80% likelihood of
exercising the option).
605-10-55-154 If the standalone selling price of Product A is $100, the entity
allocates $10.70 {$100 × [12 ÷ (12 + 100)]} of the $100 transaction price to the
discount voucher.
> > > Example 21: Option That Does Not Provide the Customer with a
Material Right
605-10-55-155 The following Example illustrates the guidance in paragraphs
605-10-55-21 through 55-23 on determining whether an option provides a
customer with a material right.
605-10-55-156 Assume that a telecommunications entity enters into a contract
with a customer to provide up to 600 call minutes and 100 text messages each
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month for a fixed monthly fee. The contract specifies the price for any additional
call minutes or texts that the customer may opt to purchase in any month.
605-10-55-157 The entity determines that the customer’s fixed monthly payments
do not include a prepayment for future services because the prices of the
additional call minutes and texts reflect the standalone selling prices for those
services.
605-10-55-158 Consequently, even though the customer can exercise the option
for any additional call minutes and text messages only because it entered into a
contract, the option does not grant the customer a material right and, therefore, is
not a performance obligation in the contract. Therefore, the entity would
recognize revenue for additional call minutes and texts only if and when the
customer receives those additional services.
> > > Example 22: Customer Loyalty Program
605-10-55-159 The following Example illustrates the guidance in paragraph 60510-55-24 on determining the amount of the transaction price to allocate to an
option as part of a customer loyalty program.
605-10-55-160 Assume that an entity has a customer loyalty program that
rewards a customer with 1 customer loyalty point for every $10 of purchases.
Each point is redeemable for a $1 discount on any future purchases. During a
reporting period, customers purchase products for $100,000 and earn 10,000
points redeemable for future purchases. The standalone selling price of the
purchased products is $100,000. The entity expects 9,500 points to be redeemed
on the basis of its past experience that it concludes is predictive of the amount of
consideration to which it will be entitled. The entity estimates a standalone selling
price of $0.95 per point (or $9,500 total) on the basis of the likelihood of
redemption.
605-10-55-161 The points provide a material right to a customer that it would not
receive without entering into a contract. Therefore, the entity concludes that the
points are a separate performance obligation.
605-10-55-162 The entity allocates the transaction price to the product and the
points on a relative standalone selling price basis as follows.
Product
$ 91,324
Points
$
8,676
(a)
(b)
(a) $100,000 × $100,000 ÷ $109,500
(b) $100,000 × $9,500 ÷ $109,500
605-10-55-163 At the end of the first reporting period, 4,500 of the points have
been redeemed, and the entity continues to expect 9,500 points to be redeemed
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in total. The entity recognizes revenue for the loyalty points of $4,110 [(4,500
points ÷ 9,500 points) × $8,676].
605-10-55-164 During the second reporting period, an additional 4,000 points are
redeemed (cumulative points redeemed are 8,500). The entity expects that 9,700
points will be redeemed in total. The cumulative revenue that the entity
recognizes is $7,603 [(8,500 ÷ 9,700) × $8,676]. The entity has recognized
$4,110 in the first reporting period; therefore, it recognizes revenue for the loyalty
points of $3,493 ($7,603 − $4,110) in the second reporting period.
605-10-55-165 In the third reporting period, an additional 1,200 points are
redeemed (cumulative points redeemed are 9,700). The entity expects that no
additional points will be redeemed. The entity has already recognized revenue of
$7,603; therefore, it recognizes the remaining revenue for the loyalty points of
$1,073 ($8,676 − $7,603).
> > > Example 23: Maintenance Services with a Renewal Option
605-10-55-166 The following Example illustrates the guidance in paragraph 60510-55-25 on using a practical alternative to determine the amount of the
transaction price to allocate to an option for a renewal of annual maintenance
services.
605-10-55-167 Assume that an entity enters into 100 contracts to provide 1 year
of maintenance services for $1,000 per contract. At the end of the year, each
customer has the option to renew the contract for a second year by paying an
additional $1,000. Customers who renew for a second year are also granted the
option to renew for a third year under the terms of the existing contract.
605-10-55-168 The entity concludes that the renewal option provides a material
right to the customer because the entity expects to undertake progressively more
maintenance work each year if a customer renews. Part of each customer’s
payment of $1,000 in the first year is, in effect, a nonrefundable prepayment of
services to be provided in a subsequent year. Therefore, the option is a separate
performance obligation.
605-10-55-169 The renewal option is for a continuation of maintenance services,
and those services are provided in accordance with the terms of the existing
contract. Therefore, rather than determining the standalone selling prices for the
renewal options directly, the entity could allocate the transaction price by
determining the consideration that it expects to receive in exchange for all the
services that it expects to provide.
605-10-55-170 The entity expects 90 percent of customers to renew at the end of
Year 1, and 90 percent of those customers to renew at the end of Year 2.
605-10-55-171 The entity determines the amount to allocate to the option at the
end of Years 1 and 2 as follows in paragraphs 605-10-55-166 through 55-168.
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605-10-55-172 The expected amount of consideration for each contract that is
renewed twice is $2,710 [$1,000 + (90% × $1,000) + (90% × 90% × $1,000)].
The entity determines that recognizing revenue on the basis of costs incurred
relative to total expected costs would depict the transfer of services to the
customer. For a contract that is renewed twice and extended to 3 years, the
estimated costs in Years 1–3 are as follows.
Year 1
$
600
Year 2
$
750
Year 3
$ 1,000
605-10-55-173 Accordingly, the pattern of revenue recognition for each contract
is as follows.
Allocation of
Consideration
Expected
Expected Costs
Adjusted for Likelihood
of Contract Renewal
Year 1
600
($600 × 100%)
Year 2
675
($750 × 90%)
Year 3
810
($1,000 × 81%)
Total
$
$ 2,085
$
$
780
($600 ÷ $2,085 × $2,710)
877
($675 ÷ $2,085 × $2,710)
1,053
($810 ÷ $2,085 × $2,710)
2,710
605-10-55-174 Therefore, at the end of Year 1, the entity allocates to the option
$22,000 of the consideration received to date [cash of $100,000 – revenue
recognized of $78,000 ($780 × 100)]. The entity allocates $24,300 to the option
at the end of Year 2 [cumulative cash of $190,000 – cumulative revenue
recognized of $165,700 ($78,000 + $877 × 100)].
> > Licensing
605-10-55-175 The following Example illustrates the guidance in paragraphs
605-10-55-37 through 55-41 on licensing.
> > > Example 24: Franchise Rights
605-10-55-176 Assume that an entity enters into a contract with a customer and
promises to transfer to the customer a right to open a franchise store in a
specified location. The store will bear the entity’s trade name, and the customer
has the right to sell the entity’s products for five years. The customer promises to
pay an upfront, fixed fee and ongoing royalty payments of 1 percent of the
customer’s quarterly sales. The customer is obliged to purchase products from
the entity at their current standalone selling prices at the time of purchase. The
entity also will provide the customer with employee training and the equipment
necessary to be a distributor of the entity’s products. Similar training services and
equipment are sold separately.
330
605-10-55-177 To identify the performance obligations, the entity must determine
whether the promised rights, training services, and equipment are distinct.
605-10-55-178 In accordance with paragraph 605-10-25-23, the rights to the
trade name, market area, and proprietary know-how for five years are not
individually distinct because each one is not sold separately and cannot be used
with other goods or services that are readily available to the customer. However,
on a combined basis, those rights are distinct because they can be used together
with other services that are readily available to the customer. Therefore, those
combined rights give rise to a separate performance obligation. The entity
satisfies the performance obligation to grant those rights at the point in time when
the customer obtains control of the rights (that is, commencement of operations
by the customer).
605-10-55-179 The training services and equipment are distinct because similar
services and equipment are sold separately. The entity satisfies those
performance obligations when it transfers the services and equipment to the
customer.
605-10-55-180 The entity’s promise to stand ready to provide products to the
customer in the future would not be accounted for as a separate performance
obligation in the contract because it does not provide the customer with a
material right (as described in paragraph 605-10-55-23).
605-10-55-181 In accordance with paragraph 605-10-25-56, the entity cannot
recognize revenue for the royalty payments because the entity is not reasonably
assured to be entitled to those sales-based royalty amounts. Therefore, the entity
recognizes revenue for the royalties when (or as) the uncertainty is resolved.
65. Supersede Section 605-10-60, with a link to transition paragraph 605-1065-1.
66.
Add paragraph 605-10-65-1 and its related heading, as follows:
> Transition Related to Accounting Standards Update No. 201X-XX,
Revenue Recognition (Topic 605): Revenue from Contracts with Customers
605-10-65-1 The following represents the transition and effective date
information related to Accounting Standards Update No. 201X-XX, Revenue
Recognition (Topic 605): Revenue from Contracts with Customers:
a.
{add glossary link to first definition}Public entities{add glossary
link to first definition} shall apply the pending content that links to this
paragraph for annual reporting periods beginning on or after [date to be
inserted after exposure]. The effective date for {add glossary link to
first definition}nonpublic entities{add glossary link to first
definition} will be a minimum of one year after the effective date for
public entities. Earlier application is not permitted.
331
b.
c.
d.
An entity shall apply the pending content that links to this paragraph
retrospectively by applying the requirements on accounting changes in
paragraphs 250-10-45-5 through 45-10, subject to the expedients
specified in paragraph 605-10-65-1(c). In the period of adoption, an
entity shall provide the disclosures required in paragraphs 250-10-50-1
through 50-3.
An entity may use one or more of the following practical expedients
when applying the pending content that links to this paragraph. For the
purposes of the expedients, the date of initial application is the start of
the reporting period in which an entity first applies the pending content
that links to this paragraph.
1. For contracts completed before the date of initial application, an
entity need not restate contracts that begin and end within the
same annual reporting period.
2. For contracts completed before the date of initial application and
that have variable consideration, an entity may use the transaction
price at the date the contract was completed rather than estimating
variable consideration amounts in the comparative reporting
periods.
3. An entity need not evaluate whether a performance obligation is
onerous before the date of initial application unless an onerous
contract liability was recognized previously for that contract in
accordance with the requirements that were effective before the
date of initial application. If an entity recognizes an onerous
contract liability at the date of initial application, the entity shall
recognize a corresponding adjustment to the opening balance of
retained earnings for that period.
4. For all periods presented before the date of initial application, an
entity need not disclose the amount of the transaction price
allocated to remaining performance obligations and an explanation
of when the entity expects to recognize that amount as revenue (as
specified in paragraph 605-10-50-12).
For any of the practical expedients in paragraph 605-10-65-1(c) that an
entity uses, the entity shall apply that expedient consistently to all
reporting periods presented. In addition, the entity shall disclose the
following information:
1. The expedients that were used
2. To the extent reasonably possible, a qualitative assessment of the
estimated effect of applying each of those expedients.
Amendments to Subtopic 605-15
67.
Supersede Subtopic 605-15, with a link to transition paragraph 605-1065-1.
332
Amendments to Subtopic 605-20
68.
Supersede Subtopic 605-20, with a link to transition paragraph 605-10-651. [Paragraph 605-20-25-12 amended and moved to paragraph 942-825-15-3]
Amendments to Subtopic 605-25
69.
Supersede Subtopic 605-25, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 605-28
70.
Supersede Subtopic 605-28, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 605-30
71.
Supersede Subtopic 605-30, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 605-35
72.
Supersede Subtopic 605-35, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 605-40
73.
Amend paragraph 605-40-05-1, add paragraph 605-40-05-2A, and
supersede paragraph 605-40-05-3, with a link to transition paragraph 605-10-651, as follows:
Revenue Recognition—Gains and Losses
Overview and Background
605-40-05-1 This Subtopic clarifies the accounting for involuntary conversions of
nonmonetary assets (such as property or equipment) to monetary assets (such
as insurance proceeds). Examples of such conversions are total or partial
destruction or theft of insured nonmonetary assets and the condemnation of
property in eminent domain proceedings.The guidance in this Subtopic is
presented in the following two Subsections:
333
a.
b.
The General Subsections address the accounting for the derecognition
of nonfinancial assets within the scope of Topics 350 and 360 if the
derecognition of those assets is not an output of an entity’s ordinary
activities.
The Involuntary Conversion Subsections clarify the accounting for
involuntary conversions of nonmonetary assets (such as property or
equipment) to monetary assets (such as insurance proceeds).
Examples of such conversions are total or partial destruction or theft of
insured nonmonetary assets and the condemnation of property in
eminent domain proceedings.
605-40-05-2 The terms nonmonetary and monetary as used in this Subtopic
have the same meaning as those terms have in Topic 845.
605-40-05-2A As used in this Subtopic, the term cost refers to the cost of a
nonmonetary asset or to its carrying amount, if different. [Content moved from
paragraph 605-40-25-1]
605-40-05-3 Paragraph superseded by Accounting Standards Update 201XXX.Although this Subtopic provides specific guidance for gains and losses
resulting from involuntary conversions, the majority of other guidance for gains
and losses is included in the Derecognition Section of the relevant asset or
liability Topic.
74.
Amend paragraph 605-40-15-1, supersede paragraph 605-40-15-2, and
add paragraphs 605-40-15-3 through 15-11 and their related headings, with a
link to transition paragraph 605-10-65-1, as follows:
Scope and Scope Exceptions
General
> Entities
605-40-15-1 The guidance in this Subtopicthe General Subsections applies to all
entities.
> Transactions
605-40-15-2 Paragraph superseded by Accounting Standards Update 201XXX.The guidance in this Subtopic applies to the following events and
transactions:
a.
334
Those in which nonmonetary assets are involuntarily converted (for
example, as a result of total or partial destruction, theft, seizure, or
condemnation) to monetary assets that are then reinvested in other
nonmonetary assets. [Content amended and moved to paragraph
605-40-15-11]
605-40-15-3 The guidance in the General Subsections applies to the following
events and transactions:
a.
b.
The derecognition of nonfinancial assets within the scope of Topics 350
and 360 when the derecognition of those assets are not an output of an
entity’s ordinary activities. An entity shall account for an exchange of a
group of assets that constitutes a business or nonprofit activity
(except for a sale of in substance real estate, which is subject to the
General Subsections of this Subtopic, and a conveyance of oil and
mineral rights, which is subject to Subtopic 932-360) in accordance with
Subtopic 810-10.
The transfer of a financial asset that is in substance real estate.
605-40-15-4 Determining whether a transaction is in substance the sale of real
estate requires judgment. However, in making that determination, one shall
consider the nature of the entire real estate component being sold (that is, the
land plus the property improvements and integral equipment), and not the land
only, in relation to the entire transaction. Further, that determination shall not
consider whether the operations in which the assets are involved are traditional
or nontraditional real estate activities. For example, if a ski resort is sold and the
lodge and ski lifts are considered to be affixed to the land (that is, they cannot be
removed and used separately without incurring significant cost), then it would
appear that the sale is in substance the sale of real estate and that the entire
sale transaction would be subject to the provisions of this Subtopic. Transactions
involving the sale of underlying land (or the sale of the property improvements or
integral equipment subject to a lease of the underlying land) shall not be
bifurcated into a real estate component (the sale of the underlying land) and a
non-real-estate component (the sale of the lodge and lifts) for purposes of
determining profit recognition on the transaction. [Content amended as shown
and moved from paragraph 360-20-15-2]
605-40-15-5 The determination of whether equipment is integral equipment shall
be based on the significance of the cost to remove the equipment from its
existing location (which would include the cost of repairing damage done to the
existing location as a result of the removal), combined with the decrease in the
value of the equipment as a result of that removal. [Content moved from
paragraph 360-20-15-4]
605-40-15-6 At a minimum, the decrease in the value of the equipment as a
result of its removal is the estimated cost to ship and reinstall the equipment at a
new site. If there are multiple potential users of the leased equipment, the
estimate of the fair value of the equipment as well as the costs to ship and install
the equipment shall assume that the equipment will be sold to the potential user
that would result in the greatest net cash proceeds to the seller (current lessor).
[Content moved from paragraph 360-20-15-5]
335
605-40-15-7 The nature of the equipment, and the likely use of the equipment by
other potential users, shall be considered in determining whether any additional
diminution in fair value exists beyond that associated with costs to ship and
install the equipment. [Content moved from paragraph 360-20-15-6]
605-40-15-8 When the combined total of both the cost to remove plus the
decrease in value (for leasing transactions, the information used to estimate
those costs and the decrease in value shall be as of lease inception) exceeds 10
percent of the fair value of the equipment (installed) (for leasing transactions, at
lease inception), the equipment is integral equipment. [Content moved from
paragraph 360-20-15-7]
605-40-15-9 The phrase cannot be removed and used separately without
incurring significant cost contains both of the following distinct concepts:
a.
b.
The ability to remove the equipment without incurring significant cost
The ability of a different entity to use the equipment at another location
without significant diminution in utility or value. [Content moved from
paragraph 360-20-15-8]
Involuntary Conversion
> Entities
605-40-15-10 The guidance in the Involuntary Conversion Subsections applies to
all entities.
> Transactions
605-40-15-11 The guidance in this Subtopicthe Involuntary Conversion
Subsections applies to the following events and transactions:
a.
Those in which nonmonetary assets are involuntarily converted (for
example, as a result of total or partial destruction, theft, seizure, or
condemnation) to monetary assets that are then reinvested in other
nonmonetary assets. [Content amended as shown and moved from
paragraph 605-40-15-2]
75.
Supersede paragraph 605-40-25-1 and add paragraph 605-40-25-1A, with
a link to transition paragraph 605-10-65-1, as follows:
Recognition
605-40-25-1 Paragraph superseded by Accounting Standards Update 201XXX.As used in this Subtopic, the term cost refers to the cost of a nonmonetary
asset or to its carrying amount, if different. [Content moved to paragraph 60540-05-2A]
336
605-40-25-1A An entity shall apply the guidance on the transfer of control in
paragraphs 605-10-25-27 through 25-29 and 605-10-25-33 for the derecognition
of assets that are within the scope of the General Subsections of this Subtopic.
76.
Add a new Subsection heading preceding paragraph 605-40-25-2, with a
link to transition paragraph 605-10-65-1, as follows:
Involuntary Conversion
605-40-25-2 An involuntary conversion of a nonmonetary asset to monetary
assets and the subsequent reinvestment of the monetary assets is not equivalent
to an exchange transaction between an entity and another entity. The conversion
of a nonmonetary asset to monetary assets is a monetary transaction, whether
the conversion is voluntary or involuntary, and such a conversion differs from
exchange transactions that involve only nonmonetary assets. To the extent the
cost of a nonmonetary asset differs from the amount of monetary assets
received, the transaction results in the realization of a gain or loss that shall be
recognized.
605-40-25-3 Involuntary conversions of nonmonetary assets to monetary assets
are monetary transactions for which gain or loss shall be recognized even though
an entity reinvests or is obligated to reinvest the monetary assets in replacement
nonmonetary assets. However, the requirement of this Subtopic with respect to
gain recognition does not apply to an involuntary conversion of a last-in, first-out
(LIFO) inventory for which replacement is intended but not made by year-end
and the taxpayer does not recognize gain for income tax reporting purposes.
Paragraph 270-10-45-6(b) provides an exception for the liquidation of a LIFO
inventory at an interim date if replacement is expected by year-end. Accordingly,
that exception applies to an involuntary conversion of a LIFO inventory if
replacement is expected by year-end.
605-40-25-4 In some cases, a nonmonetary asset may be destroyed or damaged
in one accounting period, and the amount of monetary assets to be received is
not determinable until a subsequent accounting period. In those cases, gain or
loss shall be recognized in accordance with Topic 450.
77.
Amend the Subsection heading preceding paragraph 605-40-30-1, with a
link to transition paragraph 605-10-65-1, as follows:
Initial Measurement
Involuntary ConversionGeneral
605-40-30-1 The cost of subsequently acquired nonmonetary assets shall be
measured by the consideration paid and not be affected by a previous
transaction.
337
78.
Add Section 605-40-40, with a link to transition paragraph 605-10-65-1, as
follows:
Derecognition
General
605-40-40-1 An entity shall apply the guidance on measurement in paragraphs
605-10-30-2 through 30-14 and 605-10-30-18 through 30-20 for the
derecognition of assets that are within the scope of this Subtopic. An entity shall
measure noncash consideration in accordance with the guidance in Subtopic
845-10.
79.
Amend the Subsection heading preceding paragraph 605-40-45-1, with a
link to transition paragraph 605-10-65-1, as follows:
Other Presentation Matters
Involuntary ConversionGeneral
605-40-45-1 Gain or loss resulting from an involuntary conversion of a
nonmonetary asset to monetary assets shall be classified in accordance with the
provisions of Subtopic 225-20.
80.
Amend the Subsection heading preceding paragraph 605-40-60-1, with a
link to transition paragraph 605-10-65-1, as follows:
Relationships
Involuntary ConversionGeneral
> Income Taxes
605-40-60-1 For guidance on temporary differences resulting from involuntary
conversions, see paragraph 740-10-55-66.
Amendments to Subtopic 605-45
81.
Supersede Subtopic 605-45, with a link to transition paragraph 605-1065-1.
338
Amendments to Subtopic 605-50
82.
Supersede Subtopic 605-50, with a link to transition paragraph 605-10-651. [Paragraph 605-50-25-12 amended and moved to paragraph 705-20-25-3]
Amendments to Subtopic 705-10
83.
Amend paragraphs 705-10-05-1 through 05-2 and add paragraph 705-1005-1A, with a link to transition paragraph 605-10-65-1, as follows:
Cost of Sales and Services—Overall
Overview and Background
705-10-05-1 The Cost of Sales and Services Topic includes the following
Subtopics: only provides links to guidance on accounting for the cost of sales and
services in other applicable Subtopics as the asset liability model used in the
Codification generally results in the inclusion of that guidance in other Topics. For
example, as assets are sold or remeasured (or liabilities incurred), the guidance
related to the transactions is included in applicable Derecognition and
Subsequent Measurement Sections of Topic 330 and Topic 360 rather than in
this Topic. [Content amended and moved to paragraph 705-10-05-1A]
a.
b.
Overall
Accounting for Consideration Received from a Vendor.
705-10-05-1A The Overall Subtopic only provides links to guidance on
accounting for the cost of sales and services in other applicable Subtopics
asbecause the asset liability model used in the Codification generally results in
the inclusion of that guidance in other Topics. For example, asbecause assets
are sold or remeasured (or liabilities are incurred), the guidance related to the
transactions is included in the applicable Derecognition and Subsequent
Measurement Sections of Topics 330 and 360 rather than in this Topic. [Content
amended as shown and moved from paragraph 705-10-05-1]
705-10-05-2 Included in Section 705-10-25 are links to certain other Subtopics
containing guidance applicable to the recognition of cost of sales and services.
Included in Section 705-10-45 are links to certain other Subtopics containing
guidance applicable to the presentation of cost of sales and services.
84.
Amend paragraph 705-10-25-4 and supersede paragraphs 705-10-25-6
and 705-10-25-8 through 25-12 and their related headings, with a link to
transition paragraph 605-10-65-1, as follows:
339
Recognition
705-10-25-4 For a discussion of the criteriaaccounting for the recognition of {add
glossary link}revenue{add glossary link} and the related cost of sales when
the right of return exists, see the implementation guidance beginning in
paragraph 605-15-25-1.paragraphs 605-10-55-1 through 55-8.
> Property, Plant, and Equipment
> > Real Estate Sales
705-10-25-6 Paragraph superseded by Accounting Standards Update 201XXX.See Subtopic 360-20 for discussion of the conditions resulting in the full or
partial recognition of profit and their relationship to the applicable cost of sales to
be recognized.
> Extended Warranty and Product Maintenance Contracts
705-10-25-8 Paragraph superseded by Accounting Standards Update 201XXX.See paragraphs 605-20-25-1 through 25-6 for a discussion of the costs of
providing services under separately priced extended warranty and product
maintenance contracts.
> Consideration Given to a Customer or Reseller
705-10-25-9 Paragraph superseded by Accounting Standards Update 201X-XX.
See Subtopic 605-50 for a discussion of consideration given by a vendor to a
customer, including both a reseller of the vendor’s products and an entity that
purchases the vendor’s products from a reseller.
705-10-25-10 Paragraph superseded by Accounting Standards Update 201XXX.See paragraphs 605-50-25-10 through 25-12 and 605-50-45-12 through 4515 for a discussion of the accounting for cash consideration given to a reseller of
a vendor’s products.
705-10-25-11 Paragraph superseded by Accounting Standards Update 201XXX.See paragraphs 605-50-45-16 through 45-22 for a discussion of the
applicability to resellers of sales incentives offered to customers by
manufacturers.
705-10-25-12 Paragraph superseded by Accounting Standards Update 201XXX.See paragraphs 605-50-25-13 through 25-18 for a discussion of the
accounting for consideration given by a service provider to a manufacturer or
reseller of equipment necessary for an end-customer to receive service from the
service provider.
85.
Supersede Section 705-10-45, with a link to transition paragraph 605-1065-1.
340
Addition of Subtopic 705-20
86.
Add Subtopic 705-20, with a link to transition paragraph 605-10-65-1, as
follows:
Cost of Sales and Services—Accounting for Consideration
Received from a Vendor
Overview and Background
General
705-20-05-1 This Subtopic provides guidance on accounting for consideration
received from a vendor.
Recognition
General
705-20-25-1 Consideration from a vendor includes amounts that an entity
receives, or expects to receive, from a vendor (or from other parties that sell the
goods or services to the vendor) in the form of cash, credit, or other items that
the entity can apply against amounts owed to the vendor. The entity shall
account for consideration from a vendor as a reduction of the purchase price of
the goods or services acquired from the vendor unless the consideration from the
vendor is in exchange for a distinct good or service (as described in paragraphs
605-10-25-23 through 25-24) that the entity transfers to the vendor.
705-20-25-2 If the consideration from a vendor is in exchange for a distinct good
or service that an entity transfers to the vendor, then the entity shall account for
the sale of the good or service in the same way that it accounts for other sales to
customers (in accordance with Subtopic 605-10). If the amount of consideration
from the vendor exceeds the standalone selling price of the distinct good or
service that the entity transfers to the vendor, then the entity shall account for
such excess as a reduction of the purchase price of any goods or services
acquired from the vendor. If the standalone selling price is not directly
observable, the entity shall estimate it in accordance with paragraph 605-10-3027.
705-20-25-3 Changes in the estimated amount of cash rebates or refunds and
retroactive changes by a vendor to a previous offer (an increase or a decrease in
the rebate amount that is applied retroactively) are changes in estimate that shall
be recognized using a cumulative catch-up adjustment. That is, the customer
341
entity would adjust the cumulative balance of its rebate recognized to the revised
cumulative estimate immediately. Entities shall consider whether any portion of
the cumulative effect adjustment affects other accounts (inventory, for example),
in which case only a portion of that adjustment would be reflected in the income
statement. [Content amended as shown and moved from paragraph 605-5025-12]
Amendments to Subtopic 720-15
87.
Amend paragraph 720-15-15-4, with a link to transition paragraph 605-1065-1, as follows:
Other Expenses—Start-Up Costs
Scope and Scope Exceptions
720-15-15-4 Certain costs that may be incurred in conjunction with start-up
activities are outside the scope of this Subtopic. Such costs should be accounted
for in accordance with other existing authoritative accounting literature. The
guidance in this Subtopic does not apply to the following transactions and
activities:
a.
b.
c.
d.
e.
f.
g.
h.
i.
342
Ongoing customer acquisition costs, such as policy acquisition costs
(see Subtopic 944-30)
Loan origination costs (see Subtopic 310-20)
Activities related to routine, ongoing efforts to refine, enrich, or
otherwise improve upon the qualities of an existing product, service,
process, or facility
Activities related to mergers or acquisitions
Business process reengineering and information technology
transformation costs addressed in Subtopic 720-45
Costs of acquiring or constructing long-lived assets and getting them
ready for their intended uses (however, the costs of using long-lived
assets that are allocated to start-up activities [for example, depreciation
of computers] are within the scope of this Subtopic)
Costs of acquiring or producing inventory
Costs of acquiring intangible assets (however, the costs of using
intangible assets that are allocated to start-up activities [for example,
amortization of a purchased patent] are within the scope of this
Subtopic)
Costs related to internally developed assets (for example, internal-use
computer software costs) (however, the costs of using those assets that
are allocated to start-up activities are within the scope of this Subtopic)
j.
Research and development costs that are within the scope of Section
730-10-15
k. Regulatory costs that are within the scope of Section 980-10-15
l. Costs of fundraising incurred by NFPs
m. Costs of raising capital
n. Costs of advertising
o. Costs incurred in connection with existing contracts as stated in
paragraph 605-35-25-41(d).Learning or start-up costs incurred in
connection with existing contracts with customers and in anticipation
of follow-on or future contracts for the same goods or services (see
Subtopic 340-40)
p. Costs incurred in connection with acquiring a contract with a customer
(see Subtopic 340-40).
88.
Amend paragraph 720-15-55-7, with a link to transition paragraph 605-1065-1, as follows:
Implementation Guidance and Illustrations
> Illustrations
> > Example 2: Costs Incurred to Construct New Stores—One in New
Territory
720-15-55-7 The following costs that might be incurred in conjunction with startup activities are outside the scope of this Subtopic:
a.
b.
c.
d.
e.
f.
g.
Store advertising costs
Coupon giveaways (see Subtopic 605-50 paragraphs 605-10-30-18
through 30-20 for guidance on coupon incentives)
Costs of uniforms
Costs of furniture and cash registers
Costs to obtain licenses, if any
Security, property taxes, insurance, and utilities costs related to
construction activities
Deferred financing costs (see Subtopic 835-30).
Amendments to Subtopic 720-25
89.
Amend paragraph 720-25-15-2, with a link to transition paragraph 605-1065-1, as follows:
Other Expenses—Contributions Made
Scope and Scope Exceptions
343
> Transactions
720-25-15-2 The guidance in this Subtopic applies to contributions of cash and
other assets, including promises to give. For contributions received, see
paragraph 605-10-15-3.paragraph 958-605-15-4.
Amendments to Subtopic 720-35
90.
Amend paragraph 720-35-05-2, with a link to transition paragraph 605-1065-1, as follows:
Other Expenses—Advertising Costs
Overview and Background
720-35-05-2 This Subtopic does not provideprovides guidance for all advertising
transactions (except as noted in paragraph 720-35-15-3), including directresponse advertising (see Subtopic 340-20) whose primary purpose is to elicit
sales to customers who can be shown to have responded specifically to the
advertising and that results in probable future benefits. If future economic
benefits do result from advertising, they generally would be in the form of
revenue. New technology, sources of information, and measurement techniques
have given some entities the ability to better estimate the future economic
benefits that could result from certain kinds of advertising.
91.
Amend paragraphs 720-35-15-2 through 15-3, with a link to transition
paragraph 605-10-65-1, as follows:
Scope and Scope Exceptions
> Transactions
720-35-15-2 The guidance in this Subtopic applies to all advertising transactions
and activities, including direct-response advertising, with specific exceptions
noted below.
720-35-15-3 The guidance in this Subtopic does not apply to the following
transactions and activities:
a.
b.
c.
344
Direct-response advertising costs of an insurance entity (for guidance,
see Subtopic 340-20).944-30).
Advertising costs in interim periods (for guidance, see paragraph 27010-45-7).
Costs of advertising conducted for others under contractual
arrangements.
d.
e.
f.
g.
Indirect costs that are specifically reimbursable under the terms of a
contract.
Fundraising by NFPs (however, this Subtopic does apply to advertising
activities of NFPs).
Customer acquisition activities, other than advertising.
The costs of premiums, contest prizes, gifts, and similar promotions, as
well as discounts or rebates, including those resulting from the
redemption of coupons. (Other costs of coupons and similar items, such
as costs of newspaper advertising space, are considered advertising
costs.)
92.
Amend paragraph 720-35-25-5, with a link to transition paragraph 605-1065-1, as follows:
Recognition
> Communicating Advertising
720-35-25-5 Costs of communicating advertising are not incurred until the item or
service has been received and shall not be reported as expenses before the item
or service has been received.received, except as discussed in paragraph 34020-25-2. For example:
a.
b.
The costs of television airtime shall not be reported as advertising
expense before the airtime is used. Once it is used, the costs shall be
expensed.expensed, unless the airtime was used for direct-response
advertising activities that meet the criteria for capitalization under
paragraph 340-20-25-4.
The costs of magazine, directory, or other print media advertising space
shall not be reported as advertising expense before the space is used.
Once it is used, the costs shall be expensed.expensed, unless the
space was used for direct-response advertising activities that meet the
criteria for capitalization under paragraph 340-20-25-4.
93.
Amend paragraph 720-35-35-1, with a link to transition paragraph 605-1065-1, as follows:
Subsequent Measurement
720-35-35-1 As indicated in paragraph 340-20-35-6, depreciationDepreciation or
amortization of a tangible asset may be a cost of advertising if the tangible asset
is used for advertising.
345
Amendments to Subtopic 730-10
94.
Amend paragraph 730-10-60-5, with a link to transition paragraph 605-1065-1, as follows:
Research and Development—Overall
Relationships
730-10-60-5 For guidance related to a funded software-development
arrangement, see paragraphs 985-605-25-86 through 25-87.730-20-15-1A and
985-20-25-12.
Amendments to Subtopic 730-20
95.
Add paragraph 730-20-15-1A and amend paragraph 730-20-15-4, with a
link to transition paragraph 605-10-65-1, as follows:
Research and Development—Research and Development
Arrangements
Scope and Scope Exceptions
> Overall Guidance
> > > Funded Software—Developments Arrangements
730-20-15-1A This Subtopic also applies to Software-developmentsoftwaredevelopment arrangements that are fully or partially funded by a party other than
the vendor that is developing the software and technological feasibility of the
computer software product in accordance with the provisions of Subtopic 985-20
has not been established before entering into the arrangement. These
arrangements typically provide the funding party with some or all of the following
benefits:
a.
b.
c.
346
Royalties payable to the funding party based solely on future sales of
the product by the software vendor (that is, reverse royalties)
Discounts on future purchases by the funding party of products
produced under the arrangement
A nonexclusive sublicense to the funding party, at no additional charge,
for the use of any product developed (a prepaid or paid-up nonexclusive
sublicense). [Content amended as shown and moved from
paragraph 985-605-25-86]
> Transactions
730-20-15-4 The guidance in this Subtopic does not apply to the following
transactions and activities:
a.
b.
Government-sponsored research and developmentdevelopment.
Funded software-development arrangements in which the technological
feasibility of the computer software product in accordance with the
provisions of Subtopic 985-20 has been established before the
arrangement has been entered into (see paragraph 985-20-25-12).
Amendments to Subtopic 805-20
96.
Amend paragraph 805-20-35-7, with a link to transition paragraph 605-1065-1, as follows:
Business Combinations—Identifiable Assets and Liabilities,
and Any Noncontrolling Interest
Subsequent Measurement
805-20-35-7 Topic 944 and Subtopic 605-20 provide provides guidance on the
subsequent accounting for an insurance or reinsurance contract acquired in a
business combination.
Amendments to Subtopic 808-10
97.
Amend paragraphs 808-10-45-1 through 45-2, with a link to transition
paragraph 605-10-65-1, as follows:
Collaborative Arrangements—Overall
Other Presentation Matters
808-10-45-1 Participants in a collaborative arrangement shall report costs
incurred and revenue generated from transactions with third parties (that is,
parties that do not participate in the arrangement) in each entity’s respective
income statement pursuant to the implementation guidance in Subtopic 60545paragraphs 605-10-55-17 through 55-20. An entity shall not apply the equity
347
method of accounting under Subtopics 323-10 and 323-30 to activities of
collaborative arrangements.
808-10-45-2 For costs incurred and revenue generated from third parties, the
participant in a collaborative arrangement that is deemed to be the principal
participant for a given transaction under Subtopic 605-45paragraphs 605-10-5517 through 55-20 shall record that transaction on a gross basis in its financial
statements.
98.
Amend paragraphs 808-10-55-9 and 808-10-55-16 through 55-18, with a
link to transition paragraph 605-10-65-1, as follows:
Implementation Guidance and Illustrations
> Example 2: Equal Participation in Results of Research, Development, and
Commercialization Arrangement, Participants Perform Some of the Same
Activities
808-10-55-9 Biotech records research and development expense ($10 million)
for its research and development activities. Biotech will characterize the portion
of the net receivable from Pharma related to commercialization activities ($16.25
million) as revenue, based on the fact that licensing intellectual property is part of
Biotech’s ongoing major or central operations. Biotech also considers performing
research and development services to be part of its ongoing major or central
operations. Biotech analyzes its specific facts and circumstances under Subtopic
605-50 paragraphs 605-10-30-18 through 30-20 and determines that the portion
of the net receivable that relates to a reimbursement of Pharma’s research and
development costs ($2.5 million) should be characterized as a reduction of
revenue. Biotech will not present sales, cost of sales, or marketing expenses
related to the sales transactions with third parties because it is not the principal
on those transactions. Biotech presents the following information in its financial
statements
with
respect
to
this
collaborative
arrangement
(in
thousands):thousands).
Revenues from collaborative arrangement
Cost of goods sold
Selling, general and administrative expense
Research and development expense
Net profit
$ 13,750
10,000
$ 3,750
808-10-55-16 Assume that Studio A and Studio B have the same estimates of
ultimate revenue and ultimate participation costs. Both studios estimate that
Studio A will owe Studio B net ultimate participation costs of $45 million. Based
on the individual-film-forecast-computation method in accordance with Subtopic
348
926-605,926-20, Studio A’s current period participation cost expense (and Studio
B’s current period participation income) is $7 million in Year 1 following the film’s
initial release.
808-10-55-17 Based on an evaluation of the facts and circumstances, during (or
at the completion of) production, Studio A records a receivable from Studio B for
production costs and a corresponding reduction of its capitalized film costs.
Studio A has determined that, considering the implementation guidance in
Subtopic 605-45 paragraphs 605-10-55-17 through 55-20, it is the principal for
the revenue generated in the United States. Accordingly, it characterizes all of
the gross revenue generated in the United States as revenue in its income
statement and likewise records all of the associated distribution costs for
distribution in the United States. Studio A concludes that other authoritative
accounting literature does not apply, either directly or by analogy, regarding the
income statement classification of net participation costs owed to Studio B.
Studio A’s accounting policy with respect to participation costs due from and to
its production partners is to record net amounts due from production partners as
additional revenue and net amounts due to production partners as a cost of
sales. Accordingly, Studio A characterizes its Year 1 participation cost expense
of $7 million as cost of sales.
808-10-55-18 During production, Studio B records amounts payable to Studio A
for production costs and a corresponding amount as capitalized film costs. Studio
B has determined that, after considering the implementation guidance in
Subtopic 605-45 paragraphs 605-10-55-17 through 55-20, it is the principal for
the revenue generated in Europe and Asia. Accordingly, it characterizes all of the
gross revenue generated in Europe and Asia as revenue in its income statement
and likewise records all of the associated distribution costs for distribution in
Europe and Asia. Studio B concludes that other authoritative accounting
literature does not apply, either directly or by analogy, regarding the income
statement classification of net ultimate participation costs due from Studio A.
Studio B’s accounting policy for profit sharing amounts due from and to its
production partners is to record those amounts on a net basis in cost of sales. It
views those amounts either as additional costs for production and distribution or
as a reimbursement of such costs. Accordingly, Studio B characterizes its Year 1
participation cost income of $7 million as a reduction of cost of sales.
Amendments to Subtopic 810-10
99.
Amend paragraph 810-10-40-3A, with a link to transition paragraph 60510-65-1, as follows:
349
Consolidation—Overall
Derecognition
> Deconsolidation of a Subsidiary or Derecognition of a Group of Assets
810-10-40-3A The deconsolidation and derecognition guidance in this Section
applies to the following:
a.
b.
c.
A subsidiary that is a nonprofit activity or a business, except for either
of the following:
1. A sale of in substance real estate (for guidance on a sale of in
substance real estate, see Subtopic 360-20 or 976-605)605-40)
2. A conveyance of oil and gas mineral rights (for guidance on
conveyances of oil and gas mineral rights and related transactions,
see Subtopic 932-360).
A group of assets that is a nonprofit activity or a business, except for
either of the following:
1. A sale of in substance real estate (for guidance on a sale of in
substance real estate, see Subtopic 360-20 or 976-605)605-40)
2. A conveyance of oil and gas mineral rights (for guidance on
conveyances of oil and gas mineral rights and related transactions,
see Subtopic 932-360).
A subsidiary that is not a nonprofit activity or a business if the substance
of the transaction is not addressed directly by guidance in other Topics
that include, but are not limited to, all of the following:
1. Topic 605 on revenue recognition
2. Topic 845 on exchanges of nonmonetary assets
3. Topic 860 on transferring and servicing financial assets
4. Topic 932 on conveyances of mineral rights and related
transactionstransactions.
5. Subparagraph superseded by Accounting Standards Update 201XXX.Topic 360 or 976 on sales of in substance real estate.
100. Amend paragraph 810-10-45-21A, with a link to transition paragraph 60510-65-1, as follows:
Other Presentation Matters
> Changes in a Parent’s Ownership Interest in a Subsidiary
810-10-45-21A The guidance in paragraphs 810-10-45-22 through 45-24 applies
to the following:
a.
350
Transactions that result in an increase in ownership of a subsidiary
b.
Transactions that result in a decrease in ownership of either of the
following while the parent retains a controlling financial interest in the
subsidiary:
1. A subsidiary that is a business or a nonprofit activity, except for
either of the following:
i. A sale of in substance real estate (for guidance on a sale of in
substance real estate, see Subtopic 360-20 or 976-605605-40)
ii. A conveyance of oil and gas mineral rights (for guidance on
conveyances of oil and gas mineral rights and related
transactions, see Subtopic 932-360).
2. A subsidiary that is not a business or a nonprofit activity if the
substance of the transaction is not addressed directly by guidance
in other Topics that include, but are not limited to, all of the
following:
i. Topic 605 on revenue recognition
ii. Topic 845 on exchanges of nonmonetary assets
iii. Topic 860 on transferring and servicing financial assets
iv. Topic 932 on conveyances of mineral rights and related
transactionstransactions.
v. Subparagraph superseded by Accounting Standards Update
201X-XX.Topic 360 or 976 on sales of in substance real
estate.
Amendments to Subtopic 815-10
101. Amend paragraph 815-10-55-62 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Derivatives and Hedging—Overall
Implementation Guidance and Illustrations
> Implementation Guidance
> > Other Presentation Matters
> > > Income Statement Presentation of Realized Gains Andand Losses
815-10-55-62 Determining whether realized gains and losses on physically
settled derivative instruments not held for trading purposes should be reported
in the income statement on a gross or net basis is a matter of judgment that
depends on the relevant facts and circumstances. Consideration of the facts and
circumstances should be made in the context of the various activities of the entity
351
rather than based solely on the terms of the individual contracts. In evaluating the
facts and circumstances for purposes of determining whether an arrangement
should be reported on a gross or net basis, all of the following may be
considered:
a.
b.
c.
The economic substance of the transaction
The guidance set forth in Topic 845 relative to nonmonetary exchanges
The gross versus net reporting indicators provided in Subtopic 60545paragraphs 605-10-55-17 through 55-20.
Amendments to Subtopic 820-10
102. Amend paragraphs 820-10-15-2 through 15-3, with a link to transition
paragraph 605-10-65-1, as follows:
Fair Value Measurement—Overall
Scope and Scope Exceptions
> Other Considerations
> > Topics and Subtopics Not within Scope
820-10-15-2 The Fair Value Measurement Topic does not apply as follows:
a.
b.
c.
To accounting principles that address share-based payment
transactions (see Topic 718 and Subtopic 505-50)
To Sections, Subtopics, or Topics that require or permit measurements
that are similar to fair value but that are not intended to measure fair
value, including both of the following:
1. Sections, Subtopics, or Topics that permit measurements that are
determined on the basis of, or otherwise use, vendor-specific
objective evidence of fair value standalone selling price
2. Topic 330.
To accounting principles that address fair value measurements for
purposes of lease classification or measurement in accordance with
Topic 840. This scope exception does not apply to assets acquired and
liabilities assumed in a business combination or an acquisition by a
not-for-profit entity that are required to be measured at fair value in
accordance with Topic 805, regardless of whether those assets and
liabilities are related to leases.
> Practicability Exceptions to This Topic
820-10-15-3 The Fair Value Measurement Topic does not eliminate the
practicability exceptions to fair value measurements within the scope of this
352
Topic. Those practicability exceptions to fair value measurements in specified
circumstances include, among others, those stated in the following:
a.
b.
c.
d.
e.
f.
The use of a transaction price (an entry price) to measure fair value (an
exit price) at initial recognition, including the following:
1. Guarantees in accordance with Topic 460
2. Subparagraph superseded by Accounting Standards Update No.
2009-16.
An exemption to the requirement to measure fair value if it is not
practicable to do so, including the following:
1. Financial instruments in accordance with Subtopic 825-10
2. Subparagraph superseded by Accounting Standards Update No.
2009-16.
An exemption to the requirement to measure fair value if fair value is not
reasonably determinable, such as all of the following:
1. Nonmonetary assets in accordance with Topic 845 and Subtopic
605-10Sections 605-20-25 and 605-20-50
2. Asset retirement obligations in accordance with Subtopic 410-20
and Sections 440-10-50 and 440-10-55
3. Restructuring obligations in accordance with Topic 420
4. Participation rights in accordance with Subtopics 715-30 and 71560.
An exemption to the requirement to measure fair value if fair value
cannot be measured with sufficient reliability (such as contributions in
accordance with Topic 958 and Subtopic 720-25).
The use of particular measurement methods referred to in paragraph
805-20-30-10 that allow measurements other than fair value for
specified assets acquired and liabilities assumed in a business
combination.
An exemption to the requirement to measure fair value if fair value
cannot be reasonably estimated, such as the following:
1. Goods or services received from a customer in accordance with
Subtopic 605-10.
Amendments to Subtopic 835-30
103. Amend paragraph 835-30-15-3, with a link to transition paragraph 605-1065-1, as follows:
353
Interest—Imputation of Interest
Scope and Scope Exceptions
835-30-15-3 With the exception of guidance in paragraphs 835-30-45-1A through
45-3 addressing the presentation of discount and premium in the financial
statements, which is applicable in all circumstances, and the guidance in
paragraphs 835-30-55-2 through 55-3 regarding the application of the interest
method, the guidance in this Subtopic does not apply to the following:
a.
b.
c.
d.
e.
f.
g.
h.
Receivables and payablesPayables arising from transactions with
customers or suppliers in the normal course of business that are due in
customary trade terms not exceeding approximately one year
Amounts that do not require repayment in the future, but rather will be
applied to the purchase price of the property, goods, or service involved;
for example, deposits or progress payments on construction contracts,
advance payments for acquisition of resources and raw materials,
advances to encourage exploration in the extractive industries (see
paragraph 932-835-25-2).932-835-25-2)
Amounts intended to provide security for one party to an agreement (for
example, security deposits, retainages on contracts)
The customary cash lending activities and demand or savings deposit
activities of financial institutions whose primary business is lending
money
Transactions where interest rates are affected by the tax attributes or
legal restrictions prescribed by a governmental agency (for example,
industrial revenue bonds, tax exempt obligations, government
guaranteed obligations, income tax settlements)
Transactions between parent and subsidiary entities and between
subsidiaries of a common parent
The application of the present value measurement (valuation) technique
to estimates of contractual or other obligations assumed in connection
with sales of property, goods, or service, for example, a warranty for
product performance.performance
Other payments received pursuant to a contract with a customer in
accordance with Subtopic 605-10 (see paragraphs 605-10-30-10
through 30-14).
Amendments to Subtopic 840-10
104. Amend paragraph 840-10-55-14, with a link to transition paragraph 60510-65-1, as follows:
354
Leases—Overall
Implementation Guidance and Illustrations
840-10-55-14 A sales incentive program in which a manufacturer contractually
guarantees that the purchaser will receive a minimum resale amount at the time
the equipment is disposed of should be evaluated in accordance with paragraphs
605-10-55-43 through 55-53. If that evaluation results in a lease,A manufacturer
is precluded from recognizing a sale of equipment if the manufacturer guarantees
the resale value of the equipment to the purchaser. Rather, the manufacturer
should account for the transaction as a lease, using the principles of lease
accounting in this Subtopic.
Amendments to Subtopic 845-10
105. Amend paragraph 845-10-05-11, with a link to transition paragraph 60510-65-1, as follows:
Nonmonetary Transactions—Overall
Overview and Background
Exchanges Involving Monetary Consideration
845-10-05-11 The Exchanges Involving Monetary Consideration Subsections
provide guidance on all of the following:
a.
b.
c.
The level of monetary consideration in a nonmonetary exchange that
causes the transaction to be considered monetary in its entirety and,
therefore, outside the scope of this Subtopic
Whether full or partial gain recognition is appropriate in a monetary
exchange (required to be accounted for at fair value), if an entity
transfers a nonfinancial asset (or assets) to another entity in exchange
for a noncontrolling ownership interest in the other entityentity.
Subparagraph superseded by Accounting Standards Update 201XXX.Whether Subtopic 976-605 and Section 360-20-40 applies to
exchanges of similar real estate when significant boot causes the
exchange to be considered monetary.
106. Amend paragraphs 845-10-15-4, 845-10-15-8, 845-10-15-14, and 845-1015-20 and supersede paragraphs 845-10-15-15 through 15-17 and their related
headings, with a link to transition paragraph 605-10-65-1, as follows:
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Scope and Scope Exceptions
General
845-10-15-4 The guidance in the Nonmonetary Transactions Topic does not
apply to the following transactions:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
A business combination accounted for by an entity according to the
provisions of Topic 805 or a combination accounted for by a not-forprofit entity according to the provisions of Subtopic 958-805
A transfer of nonmonetary assets solely between entities or persons
under common control, such as between a parent and its subsidiaries
or between two subsidiaries of the same parent, or between a corporate
joint venture and its owners
Acquisition of nonmonetary assets or services on issuance of the capital
stock of an entity under Subtopics 718-10 and 505-50
Stock issued or received in stock dividends and stock splits that are
accounted for in accordance with Subtopic 505-20
A transfer of assets to an entity in exchange for an equity interest in that
entity (except for the specific exchange of a nonfinancial asset for a
noncontrolling ownership interest, see paragraph 845-10-15-18)
A pooling of assets in a joint undertaking intended to find, develop, or
produce oil or gas from a particular property or group of properties, as
described in paragraph 932-360-40-7
The exchange of a part of an operating interest owned for a part of an
operating interest owned by another party that is subject to paragraph
932-360-55-6
The transfer of a financial asset within the scope of Section 860-10-15
Involuntary conversions specified in paragraph 605-40-15-11605-40-152.
The receipt of noncash consideration in a contract with a customer
that is in the scope of Subtopic 605-10.
Purchases and Sales of Inventory with the Same Counterparty
845-10-15-8 The guidance in the Purchases and Sales of Inventory with the
Same Counterparty Subsections does not apply to inventory purchase and sales
arrangements that are accounted for as derivatives in accordance with Topic
815.the following transactions:
a.
356
Subparagraph superseded by Accounting Standards Update 201XXX.Inventory purchase and sales arrangements that meet either of the
following criteria:
1. They are accounted for as derivatives under Topic 815.
2.
They involve exchanges of software or exchanges of real estate.
Exchanges Involving Monetary Consideration
845-10-15-14 The guidance in these Subsections does not apply to transfers
between a joint venture and its owners.the following transactions and activities:
a.
b.
Subparagraph superseded by Accounting Standards Update 201XXX.Transfers between a joint venture and its owners
Subparagraph superseded by Accounting Standards Update 201XXX.Transfers of real estate (for guidance with respect to transfers of real
estate in exchanges involving monetary consideration see Subtopics
360-20 and 976-605 and the Exchanges Involving Monetary
Considerations Subsection of Section 845-10-30).
> > Exchanges of Real Estate Involving Monetary Consideration
845-10-15-15 Paragraph superseded by Accounting Standards Update 201XXX.Paragraph 360-20-15-10(c) indicates that the accounting for exchanges of
real estate is covered by this Topic and not by that Subtopic 360-20. However,
under paragraph 845-10-25-6, an exchange of nonmonetary assets that would
otherwise be based on recorded amounts under paragraph 845-10-30-3 but that
involves boot shall be considered a monetary (rather than nonmonetary)
transaction if the boot is at least 25 percent of the fair value of the exchange. As
a result, the guidance is different for exchanges of real estate held for sale in the
ordinary course of business for real estate to be sold in the same line of
business when the boot is at least 25 percent of the fair value of the exchange
(referred to as exchanges of similar real estate).
845-10-15-16 Paragraph superseded by Accounting Standards Update 201XXX.For the receiver of boot, the monetary portion shall be accounted for under
Subtopics 360-20 and 976-605 as the equivalent of a sale of an interest in the
underlying real estate, and the nonmonetary portion shall be accounted for in
accordance with this Subtopic.
845-10-15-17 Paragraph superseded by Accounting Standards Update 201XXX.For the payer of boot, the monetary portion shall be accounted for as an
acquisition of real estate, and the nonmonetary portion shall be accounted for
pursuant to this Subtopic.
Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership
Interest
845-10-15-20 The guidance in these Subsections does not apply to the following
types of transfers:
a.
Transfers between a joint venture and its owners
357
b.
c.
d.
e.
f.
Capital contributions of real estate in return for an unconsolidated real
estate investment (for guidance, see Section 970-323)
Subparagraph superseded by Accounting Standards Update 201XXX.Transfers of real estate in exchange for nonmonetary assets other
than real estate (for guidance on the recognition of profit from the
exchange, see Subtopic 976-605 and Section 360-20-40)
Subparagraph superseded by Accounting Standards Update No. 201008
A deconsolidation of a subsidiary that is a business or nonprofit
activity that is within the scope of Subtopic 810-10 (see paragraph 81010-40-3A)
A derecognition of a group of assets that constitutes a business or
nonprofit activity that is within the scope of Subtopic 810-10 (see
paragraph 810-10-40-3A).
107. Supersede paragraphs 845-10-25-7 through 25-8, with a link to transition
paragraph 605-10-65-1, as follows:
Recognition
Exchanges Involving Monetary Consideration
845-10-25-7 Paragraph superseded by Accounting Standards Update 201XXX.A transaction involving an exchange of similar real estate that is considered a
monetary transaction because boot is at least 25 percent of the fair value of the
exchange shall be allocated between two components: a monetary portion and a
nonmonetary portion.
845-10-25-8 Paragraph superseded by Accounting Standards Update 201XXX.See Section 360-20-15 for guidance on when an asset is considered real
estate.
108. Amend paragraphs 845-10-30-15 and 845-10-30-25 and supersede
paragraphs 845-10-30-17 through 30-18 and 845-10-30-23 and its related
heading, with a link to transition paragraph 605-10-65-1, as follows:
Initial Measurement
Purchases and Sales of Inventory with the Same Counterparty
845-10-30-15 A nonmonetary exchange whereby an entity transfers finished
goods inventory in exchange for the receipt of raw materials or work-in-process
inventory within the same line of business is not an exchange transaction to
facilitate sales to customers for the entity transferring the finished goods, as
described in paragraph 845-10-30-3(b), and, therefore, shall be accounted for by
358
the entity in accordance with Subtopic 605-10, if the counterparty is a customer.
If the counterparty is not considered to be a customer, the exchange transaction
shall be recognized by thatthe entity at fair value if both of the following
conditions are met:
a.
b.
Fair value is determinable within reasonable limits.
The transaction has commercial substance (see paragraph 845-1030-4).
Barter Credit Transactions
845-10-30-17 Paragraph superseded by Accounting Standards Update 201XXX.In reporting the exchange of a nonmonetary asset for barter credits, it shall
be presumed that the fair value of the nonmonetary asset exchanged is more
clearly evident than the fair value of the barter credits received and that the
barter credits shall be reported at the fair value of the nonmonetary asset
exchanged.
845-10-30-18 Paragraph superseded by Accounting Standards Update 201XXX.However, that presumption might be overcome if an entity can convert the
barter credits into cash in the near term, as evidenced by a historical practice of
converting barter credits into cash shortly after receipt, or if independent quoted
market prices exist for items to be received upon exchange of the barter credits.
It also shall be presumed that the fair value of the nonmonetary asset does not
exceed its carrying amount unless there is persuasive evidence supporting a
higher value.
Exchanges Involving Monetary Consideration
> Exchanges of Real Estate Involving Monetary Consideration
845-10-30-23 Paragraph superseded by Accounting Standards Update 201XXX.Paragraph 845-10-25-7 addresses allocation of certain transactions between
two components: a monetary portion and a nonmonetary portion. The allocation
between the monetary and nonmonetary portions of the transaction shall be
based on their relative fair values at the time of the transaction.
Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership
Interest
845-10-30-25 The following transactions shall be accounted for as a
deconsolidation in accordance with paragraphs 810-10-40-3A through 40-5,
except if the transaction is the sale of in substance real estate (for guidance on a
sale of in substance real estate, see Subtopic 360-20 or 976-605605-40) or is a
conveyance of oil and gas mineral rights (for guidance on conveyances of oil and
gas mineral rights, see Subtopic 932-360):
359
a.
b.
An entity transfers a subsidiary that is a business or nonprofit activity
to a second entity in exchange for a noncontrolling interest in that
second entity
An entity transfers a group of assets that constitute a business or
nonprofit activity to a second entity in exchange for a noncontrolling
interest in that second entity.
109. Supersede paragraph 845-10-50-2, with a link to transition paragraph 60510-65-1, as follows:
Disclosure
845-10-50-2 Paragraph superseded by Accounting Standards Update 201XXX.In accordance with paragraph 845-10-50-1, entities shall disclose, in each
period’s financial statements, the amount of gross operating revenue recognized
as a result of nonmonetary transactions. See Subtopic 505-50.
110. Supersede paragraphs 845-10-55-29 through 55-37 and their related
heading, with a link to transition paragraph 605-10-65-1, as follows:
Implementation Guidance and Illustrations
Exchanges Involving Monetary Consideration
> > Example 2: Exchanges of Real Estate Involving Monetary Consideration
845-10-55-29 Paragraph superseded by Accounting Standards Update 201XXX.This Example illustrates the guidance in Section 360-20-40.
845-10-55-30 Paragraph superseded by Accounting Standards Update 201XXX.Entity A transfers real estate with a fair value of $2,000,000 (Entity A’s net
book value of $1,500,000) to Entity B and receives $400,000 cash, a $400,000
note from Entity B payable to Entity A, and real estate with a fair value of
$1,200,000 (Entity B’s net book value of $800,000). The specifics of the
transaction are as follows:
a.
b.
c.
d.
360
The initial investment requirement for full accrual profit recognition
under paragraph 360-20-40-18 is 20 percent.
The terms of the note from Entity B to Entity A would satisfy the
continuing investment provisions necessary for application of the full
accrual method. The interest rate on the note from Entity B is a market
rate, and the note is considered fully collectible.
The values of the real estate transferred by both parties are readily
determinable and clearly realizable at the exchange date.
Neither party has any continuing involvement with the real estate
transferred to the other.
845-10-55-31 Paragraph superseded by Accounting Standards Update 201XXX.The computation of allocation by both Entity A and Entity B is as follows:
a.
The monetary portion of the transaction is as follows.
Total monetary consideration divided
By total fair value of exchange
$800,000 ÷ $2,000,000 = 40%
For this example, the monetary portion of the transaction is the exchange of
$400,000 cash and a $400,000 note for real estate with a fair value of $800,000
($2,000,000 x 40%).
b.
The nonmonetary portion of the transaction is as follows.
Fair value of real estate exchanged divided
$1.200,000 ÷ $2,000,000 = 60%
by total fair value of exchange
For this Example, the nonmonetary portion of the transaction is the exchange of
real estate with a fair value of $1,200,000 for similar real estate with a fair value
of $1,200,000 ($2,000,000 x 60%).
845-10-55-32 Paragraph superseded by Accounting Standards Update 201XXX.The accounting by Entity A (the receiver of monetary consideration) is as
follows.
845-10-55-33 Paragraph superseded by Accounting Standards Update 201XXX.The nonmonetary portion of the transaction does not qualify for gain
recognition because the exchange involves similar real estate. The accounting
basis of the new property equals $900,000 ($1,500,000 total net book value of
the real estate exchanged less the $600,000 pro rata portion of net book value
sold).
845-10-55-34 Paragraph superseded by Accounting Standards Update 201XXX.The monetary portion of the transaction qualifies for full accrual profit
recognition because the cash down payment of $400,000 and the $400,000 note
meet the criteria in paragraphs 360-20-40-10 through 40-12 for a buyer’s initial
and continuing investment when applied to the monetary portion of the
transaction. Accordingly, a gain of $200,000 ($800,000 total monetary
consideration less $600,000 [$1,500,000 total net book value x 40%] pro rata
portion of net book value) would be recorded at the date of sale.
845-10-55-35 Paragraph superseded by Accounting Standards Update 201XXX.The accounting by Entity B (the payer of monetary consideration) is as
follows.
845-10-55-36 Paragraph superseded by Accounting Standards Update 201XXX.The nonmonetary portion of the transaction does not qualify for gain
recognition because the exchange involves similar real estate. The accounting
basis of the new property equals $1,600,000 ($800,000 net book value of the real
estate exchanged plus $800,000 total monetary consideration paid).
361
845-10-55-37 Paragraph superseded by Accounting Standards Update 201XXX.The monetary portion of the transaction represents an acquisition of real
estate for the monetary consideration paid of $800,000.
111. Amend paragraph 845-10-60-2 and supersede 845-10-60-3 and its related
heading, with a link to transition paragraph 605-10-65-1, as follows:
Relationships
Barter Transactions
> Revenue Recognition
845-10-60-2 For guidance on accounting for advertising barter transactions, see
Subtopic 605-20605-10.
Exchanges Involving Monetary Consideration
> Property, Plant, and Equipment
845-10-60-3 Paragraph superseded by Accounting Standards Update 201XXX.For guidance on the accounting for the monetary portion of boot received,
see Subtopic 360-20-40.
Amendments to Subtopic 850-10
112. Amend paragraph 850-10-60-8, with a link to transition paragraph 605-1065-1, as follows:
Related Party Disclosures—Overall
Relationships
> Franchisors
850-10-60-8 For guidance on franchisors disclosing certain information about
franchisor-owned outlets, see paragraphs 952-605-45-1 and 952-605-50-3.
paragraph 952-10-50-1.
Amendments to Subtopic 855-10
113. Supersede paragraph 855-10-60-4 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
362
Subsequent Events—Overall
Relationships
> Software
855-10-60-4 Paragraph superseded by Accounting Standards Update 201XXX.For guidance on the effect on the timing of revenue recognition when vendorspecific objective evidence of fair value is established by management after the
balance sheet date but before the financial statements are issued or are
available to be issued (as discussed in Section 855-10-25), see paragraphs 985605-55-93 through 55-95.
Amendments to Subtopic 860-10
114. Amend paragraph 860-10-55-3, with a link to transition paragraph 605-1065-1, as follows:
Transfers and Servicing—Overall
Implementation Guidance and Illustrations
> Implementation Guidance
> > Scope
> > > Examples of Transactions and Activities That Are Included in the
Scope
860-10-55-3 The guidance in this Topic applies to the following transactions and
activities, among others:
a.
b.
c.
d
All loan participations
Transfers of equity method investments, unless the transfer is of an
investment that is in substance a sale of real estate, as defined in
Subtopic 360-20605-40
Transfers of cost-method investments
With respect to the guidance in paragraph 860-10-40-5 only, transfers of
financial assets in desecuritization transactions.
363
Amendments to Subtopic 905-310
115. Supersede paragraphs 905-310-25-1 through 25-2 and their related
heading and amend paragraph 905-310-25-3, with a link to transition paragraph
605-10-65-1, as follows:
Agriculture—Receivables
Recognition
Cooperatives—Patrons
> Products Delivered to Pooling Cooperatives
905-310-25-1 Paragraph superseded by Accounting Standards Update 201XXX.Paragraphs 905-605-25-7 through 25-8 address recognition of unbilled
receivables on products delivered to pooling cooperatives.
905-310-25-2 Paragraph superseded by Accounting Standards Update 201XXX.For other accounting guidance for patrons delivering products to pooling
cooperatives, see also paragraphs 905-330-40-1 and 905-605-25-5 through
25-8.
> Patronage Refunds
905-310-25-3 Patrons shall recognize patronage refunds on either of the
following occasions:
a.
b.
When the related patronage occurs if all of the following are probable:
1. A patronage refund applicable to the period will be declared.
2. One or more future events confirming the receipt of a patronage
refund are expected to occur.
3. The amount of the refund can be reasonably estimated.
4. The accrual can be consistently made from year to year.
On notification by the distributing {add glossary link}cooperative{add
glossary link}.
The accrual shall be based on the latest available reliable information.
116. Supersede paragraph 905-310-35-1 and its related heading and amend
paragraph 905-310-35-2, with a link to transition paragraph 605-10-65-1, as
follows:
364
Subsequent Measurement
Cooperatives—Patrons
> Deliveries to Marketing Cooperatives
905-310-35-1 Paragraph superseded by Accounting Standards Update 201XXX.If there are indications that the expected net proceeds will be less than cost,
the patron’s unbilled receivable shall be recorded at estimated net realizable
value. Variances from the amount recorded as an unbilled receivable shall be
recognized when reasonably determinable.
> Advances
905-310-35-2 Advances are financing devices and shall be treated as reductions
in the {add glossary link}patron’s{add glossary link} unbilled receivable and
shall not be used as amounts for recording sales.
Amendments to Subtopic 905-330
117. Supersede paragraph 905-330-30-3 and amend paragraph 905-330-30-4,
with a link to transition paragraph 605-10-65-1, as follows:
Agriculture—Inventory
Initial Measurement
Cooperatives
905-330-30-3 Paragraph superseded by Accounting Standards Update 201XXX.Section 905-605-25 addresses bases for recording transfers of products
between cooperatives and their patrons.
905-330-30-4 However, cooperativesCooperatives operating on a pooling basis
may receive products from their patrons without paying a fixed price to the
patrons. A cooperative may assign amounts to products based on the basis of
current prices paid by other buyers or on amounts established by the
cooperative’s board of directors, or it may assign no amount.
118. Supersede Section 905-330-40, with a link to transition paragraph 605-1065-1.
365
Amendments to Subtopic 905-605
119. Amend paragraph 905-605-05-1 and supersede paragraph 905-605-05-4
and its related Subsection heading, with a link to transition paragraph 605-1065-1, as follows:
Agriculture—Revenue Recognition
Overview and Background
General
905-605-05-1 This Subtopic addresses revenue recognition for entities in the
agricultural industry. The guidance for accounting by different entities is
presented in the following twothree Subsections:
a.
b.
c.
General
CooperativesCooperatives.
Subparagraph superseded by Accounting Standards Update 201XXX.Cooperatives—Patrons.
Cooperatives—Patrons
905-605-05-4 Paragraph superseded by Accounting Standards Update 201XXX.The Cooperative—Patrons Subsections address revenue recognition for
patrons of agricultural cooperatives.
120. Supersede paragraph 905-605-15-3 and its related headings, with a link to
transition paragraph 605-10-65-1, as follows:
Scope and Scope Exceptions
Cooperatives—Patrons
> Overall Guidance
905-605-15-3 Paragraph superseded by Accounting Standards Update 201XXX.The Cooperatives—Patrons Subsections follow the same Scope and Scope
Exceptions as outlined in the Overall Subtopic, see the Cooperatives—Patrons
Subsection of Section 905-10-15.
121. Supersede paragraphs 905-605-25-5 and 906-605-25-7 through 25-9 and
their related Subsection heading, with a link to transition paragraph 605-10-65-1,
as follows:
366
Recognition
Cooperatives—Patrons
905-605-25-5 Paragraph superseded by Accounting Standards Update 201XXX.This guidance addresses transactions between patrons and marketing
cooperatives; specifically, the timing and method of recording the sale of
products delivered.
905-605-25-6 [Not used]
905-605-25-7 Paragraph superseded by Accounting Standards Update 201XXX.If control over the future economic benefits relating to the product has
passed, which ordinarily is evidenced by the transfer of title, and if a price is
available by reference to contemporaneous transactions in the market, or if the
cooperative establishes an assigned amount, a delivery to the cooperative shall
be recorded as a sale by the patron at that amount on the date of delivery. If
there is a reasonable indication that the proceeds from the cooperative will be
less than the market price or the assigned amount, the lower amount shall be
used.
905-605-25-8 Paragraph superseded by Accounting Standards Update 201XXX.If control over the future economic benefits relating to the product has
passed, which ordinarily is evidenced by the transfer of title, and there are neither
prices determined by other market buyers nor amounts assigned by the
cooperative, or if such amounts are erratic, unstable, or volatile, the patron shall
record the delivery to the cooperative as a sale at the recorded amount of the
inventory and shall record an unbilled receivable. If there is a reasonable
indication that the proceeds from the cooperative will be less than the receivable,
the lower amount shall be used.
905-605-25-9 Paragraph superseded by Accounting Standards Update 201XXX.See also paragraph 905-310-25-3.
122. Supersede paragraph 905-605-45-2 and its related Subsection heading,
with a link to transition paragraph 605-10-65-1, as follows:
Other Presentation Matters
Cooperatives—Patrons
905-605-45-2 Paragraph superseded by Accounting Standards Update 201XXX.A cooperative patron shall record the allocation of patronage refunds in
either of the followings ways:
367
a.
b.
The classification of the allocations to patrons in their financial
statements shall follow the recording of the costs or proceeds.
The allocations shall be presented separately.
Amendments to Subtopic 908-10
123. Amend paragraph 908-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
Airlines—Overall
Overview and Background
908-10-05-1 The Airlines Topic includes the following Subtopics relating
specifically to entities in the airline industry:
a.
b.
c.
d.
e.
f.
g.
h.
i.
Overall
Segment Reporting
Inventory
Intangibles—Takeoff and Landing Slots
Property, Plant, and Equipment
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Compensation—General
Other Expenses
Nonmonetary Transactions.
Each Subtopic provides background on the guidance provided.
Amendments to Subtopic 908-360
124. Amend paragraph 908-360-55-1, with a link to transition paragraph 60510-65-1, as follows:
Airlines—Property, Plant, and Equipment
Implementation Guidance and Illustrations
> Implementation Guidance
> > Purchase Incentives
368
908-360-55-1 Paragraph 605-50-45-2 states, in part, that cash consideration
(including a sales incentive) given by a vendor to a customer is presumed to be a
reduction of the selling prices of the vendor’s products or services. Accordingly,
the creditCredit received as a purchase incentive from an aircraft manufacturer to
induce a purchase of that manufacturer’s aircraft shallshould be accounted for in
accordance with paragraphs 705-20-25-1 through 25-3applied as a reduction of
the purchase price for the aircraft that is owned or under a capital lease, or, in the
case of an aircraft under an operating lease, amortized over the life of the related
aircraft.
Amendments to Subtopic 908-605
125. Supersede Subtopic 908-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 908-720
126. Amend paragraph 908-720-25-1, with a link to transition paragraph 60510-65-1, as follows:
Airlines—Other Expenses
Recognition
> Developmental Costs
908-720-25-1 Because of the current deregulated environment and the
uncertainty regarding the recoverability of route developmental costs, such
costs, other than advertising costs, related to the preparation of operations of
new routes shall not be capitalized. (For guidance on accounting for advertising
costs, see Subtopics 340-20 andSubtopic 720-35.) Route expansion or alteration
has become a recurring activity among the airlines, and any related cost shall be
considered a normal and recurring cost of conducting business.
Amendments to Subtopic 910-10
127. Amend paragraph 910-10-05-2, with a link to transition paragraph 605-1065-1, as follows:
Contractors—Construction—Overall
Overview and Background
369
910-10-05-2 This Topic includes the following Subtopics:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Overall
Contract Costs
Notes to Financial Statements
Receivables
Inventory
Other Assets and Deferred Costs
Property, Plant, and Equipment
Liabilities
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Consolidation.
128. Amend paragraph 910-10-15-4, with a link to transition paragraph 605-1065-1, as follows:
Scope and Scope Exceptions
910-10-15-4 Other characteristics common to contractors and significant to
accountants and users of financial statements include the following:
a.
b.
c.
d.
e.
f.
A contractor normally obtains the contracts that generate revenue or
sales by bidding or negotiating for specific projects.
A contractor bids for or negotiates the initial contract price based on an
estimate of the cost to complete the project and the desired profit
margin, although the initial price may be changed or renegotiated.
A contractor may be exposed to significant risks in the performance of a
contract, particularly a fixed-price contract.
Customers (usually referred to as owners) frequently require a
contractor to post a performance and a payment bond as protection
against the contractor’s failure to meet performance and payment
requirements.
The costs and revenues of a contractor are typically accumulated and
accounted for by individual contracts or contract commitments
extending beyond one accounting period, which complicates the
management, accounting, and auditing processes.
The nature of a contractor’s risk exposure varies with the type of
contract. The several types of contracts used in the construction
industry are described in Subtopic 605-35. The four basic types of
contracts used based on their pricing arrangements are fixed-price or
lump-sum contracts, unit-price contracts, cost-type contracts, and timeand-materials contracts.
129. Amend paragraph 910-10-60-1, with a link to transition paragraph 605-1065-1, as follows:
370
Relationships
> Revenue Recognition
910-10-60-1 For guidance on accounting for {add glossary link}revenue{add
glossary link} recognition of constructionconstruction-type {add glossary
link}contracts{add glossary link}, see Subtopic 605-35605-10.
Amendments to Subtopic 910-20
130. Supersede paragraph 910-20-25-5 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Contractors—Construction—Contract Costs
Recognition
> General and Administrative Costs
910-20-25-5 Paragraph superseded by Accounting Standards Update 201XXX.General and administrative costs may be accounted for by entities within the
scope of this Subtopic as contract costs under the completed-contract method of
accounting (see paragraph 605-35-25-37(c)).
Amendments to Subtopic 910-605
131. Supersede Subtopic 910-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 912-10
132. Amend paragraph 912-10-05-2, with a link to transition paragraph 605-1065-1, as follows:
Contractors—Federal Government—Overall
Overview and Background
912-10-05-2 This Topic includes the following Subtopics:
a.
b.
Overall
Contract Costs
371
Subparagraph superseded by Accounting Standards Update 201XXX.Balance Sheet
d. Income Statement
e. Subparagraph superseded by Accounting Standards Update 201XXX.Notes to Financial Statements
f. Changing Prices
g. Risks and Uncertainties
h. Receivables
i. Inventory
j. Liabilities
k. Contingencies
l. Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
m. Cost of Sales and Services
n. Compensation—Retirement Benefits
o. Research and Development
p. Interest.
c.
133. Amend paragraph 912-10-15-3, with a link to transition paragraph 605-1065-1, as follows:
Scope and Scope Exceptions
> Transactions
912-10-15-3 The guidance in this Topic applies to all of the following transactions
and activities:
a.
b.
c.
Cost-plus-fixed-fee contracts
Subparagraph superseded by Accounting Standards Update 201XXX.Certain aspects of those government contracts and subcontracts
that are subject to renegotiation. This guidance is applicable also to
price redetermination estimated to result in retroactive price reduction.
Fixed-price war and defense supply contracts terminated, in whole or in
part, for the convenience of the government.
Amendments to Subtopic 912-20
134. Supersede paragraph 912-20-45-1 and its related heading and amend
paragraph 912-20-45-4, with a link to transition paragraph 605-10-65-1, as
follows:
Contractors—Federal Government—Contract Costs
Other Presentation Matters
372
> Balance Sheet
912-20-45-1 Paragraph superseded by Accounting Standards Update 201XXX.For guidance on offsetting and presentation of billed and unbilled costs,
current assets and liabilities, and contract-related assets and liabilities, see
Section 912-210-45.
> Income Statement
912-20-45-4 For guidance on presentation of renegotiation refunds and
terminated contracts, see Section 912-225-45.
Amendments to Subtopic 912-210
135. Supersede Subtopic 912-210, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 912-225
136. Amend paragraph 912-225-05-1, with a link to transition paragraph 60510-65-1, as follows:
Contractors—Federal Government—Income Statement
Overview and Background
912-225-05-1 This Subtopic provides guidance on presentation in the income
statement for amounts relating to contracts subject to renegotiation and
terminated contracts.
137. Supersede paragraphs 912-225-45-1 through 45-2 and their related
heading and paragraph 912-225-45-4, with a link to transition paragraph 605-1065-1, as follows:
Other Presentation Matters
> Contracts Subject to Renegotiation
912-225-45-1 Paragraph superseded by Accounting Standards Update 201XXX.Renegotiation refunds are commonly referred to as involving a refund of
excessive profits, however, renegotiation involves an adjustment of the original
contract or selling price. Because a provision for renegotiation refund indicates
that the collection, or retention, of the selling price is not reasonably assured, the
373
provision should preferably be treated in the income statement as a deduction
from sales.
912-225-45-2 Paragraph superseded by Accounting Standards Update 201XXX.If a renegotiation refund applicable to a particular year is materially different
from the provision made in the financial statements originally issued for such
year, the difference between the renegotiation refund and the provision shall be
shown as a separate item in the current income statement.
> Terminated Contracts
912-225-45-4 Paragraph superseded by Accounting Standards Update 201X-XX.
Sales related to terminated contracts shall be separately presented in the income
statement.
Amendments to Subtopic 912-235
138. Supersede Subtopic 912-235, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 912-275
139. Amend paragraph 912-275-05-1, with a link to transition paragraph 60510-65-1, as follows:
Contractors—Federal Government—Risks and Uncertainties
Overview and Background
912-275-05-1 This Subtopic provides guidance to government contractors related
to incremental disclosures about risks and uncertainties associated with
contracts subject to renegotiation and contracts terminated for the convenience
of the government.
140. Supersede paragraph 912-275-50-1 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Disclosure
> Contracts Subject to Renegotiation
912-275-50-1 Paragraph superseded by Accounting Standards Update 201XXX.Renegotiation uncertainties, their significance, the basis used in determining
the amount of the provision (such as the prior years’ experience of the contractor
374
or of similar contractors if their experience is available and is used), and
renegotiation discussions relating to the current year shall be disclosed. Such
disclosure may be helpful in informing shareholders or other interested persons
as to the entity’s status under the renegotiation law. If conditions change, the
results of a prior-year determination or settlement are not, in most circumstances,
indicative of the amount probably refundable for the current year.
Amendments to Subtopic 912-310
141. Supersede paragraphs 912-310-25-6 and 912-310-25-8 through 25-9 and
their related headings, with a link to transition paragraph 605-10-65-1, as follows:
Contractors—Federal Government—Receivables
Recognition
> Unbilled Amounts
912-310-25-6 Paragraph superseded by Accounting Standards Update 201XXX.Receivables from the U.S. government may include billed and unbilled
amounts. Unbilled amounts arise if sales or revenues cannot be billed yet under
terms of the contract or if unit prices for items shipped have not been determined.
However, unbilled amounts are appropriately recorded as receivables.
> Progress Payments
912-310-25-8 Paragraph superseded by Accounting Standards Update 201XXX.Amounts representing progress payments billed but not yet received by the
contractor are not shown in the balance sheet because it would be improper to
show uncollected progress payments as an offset to the accumulated cost of
contracts in progress.
> Advance Payments
912-310-25-9 Paragraph superseded by Accounting Standards Update 201XXX.Although advance payments differ from progress payments in that they are
not related to progress of work on a contract, they are reported in a manner
similar to progress payments. Paragraph 912-405-45-6 provides guidance on
classifying advance payments received in excess of unbilled receivables and
accumulated costs of contracts in progress as a liability.
142. Supersede paragraphs 912-310-45-9 through 45-10 and their related
headings, with a link to transition paragraph 605-10-65-1, as follows:
375
Other Presentation Matters
> Balance Sheet
> > Unbilled Amounts
912-310-45-9 Paragraph superseded by Accounting Standards Update 201XXX.Unbilled amounts (net of unliquidated progress payments) shall be stated
separately if the amounts constitute a significant portion of the U.S. government
contract receivables.
> > Advance Payments
912-310-45-10 Paragraph superseded by Accounting Standards Update 201XXX.Paragraph 912-405-45-6 provides guidance on classifying advance payments
received in excess of unbilled receivables and accumulated costs of contracts in
progress as a liability.
Amendments to Subtopic 912-405
143. Amend paragraph 912-405-05-1, with a link to transition paragraph 60510-65-1, as follows:
Contractors—Federal Government—Liabilities
Overview and Background
912-405-05-1 This Subtopic provides guidance to government contractors on
accounting for liabilities associated with contracts subject renegotiations, claims
of subcontractors on cost-plus-fixed-fee contracts,contracts and progress
payments,payments.and advance payments.
144. Supersede paragraphs 912-405-25-1 through 25-2 and their related
heading, with a link to transition paragraph 605-10-65-1, as follows:
Recognition
> Contracts Subject to Renegotiations
912-405-25-1 Paragraph superseded by Accounting Standards Update 201XXX.In keeping with the established accounting principle that provision shall be
made in financial statements for all liabilities, including reasonable estimates for
liabilities not accurately determinable, provision shall be made for probable
376
renegotiation refunds wherever the amount of such refunds can be reasonably
estimated. See Topic 450.
912-405-25-2 Paragraph superseded by Accounting Standards Update 201XXX.If experience of the entity or of comparable entities with renegotiation
determinations is available and would make a reasonable estimate practicable,
provision in the income account for an estimated refund shall be made.
145. Supersede paragraphs 912-405-45-1 through 45-2 and 912-405-45-6 and
their related headings, with a link to transition paragraph 605-10-65-1, as follows:
Other Presentation Matters
> Balance Sheet
> > Contracts Subject to Renegotiation
912-405-45-1 Paragraph superseded by Accounting Standards Update 201XXX.If government contracts and subcontracts subject to renegotiation constitute a
substantial part of the business done, the uncertainties resulting from the
possibilities of renegotiation are usually such that separate presentation shall be
given in the financial statements.
912-405-45-2 Paragraph superseded by Accounting Standards Update 201XXX.Provisions for renegotiation refunds shall be classified as current liabilities.
> > Advance Payments
912-405-45-6 Paragraph superseded by Accounting Standards Update 201XXX.Advance payments received in excess of unbilled receivables and
accumulated costs of contracts in progress shall be classified as a liability with
captions such as advance payments on U.S. government contracts or amounts
received in excess of costs incurred under U.S. government contracts.
146. Supersede paragraph 912-405-50-1 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Disclosure
> Contracts Subject to Renegotiation
912-405-50-1 Paragraph superseded by Accounting Standards Update 201XXX.If a reasonable estimate cannot be made, for example, the effect of a new or
amended renegotiation act cannot be predicted within reasonable limits, or if an
entity is facing renegotiation for the first time and no reliable precedent is
377
available, disclosure of these circumstances and the consequent uncertainties is
required.
Amendments to Subtopic 912-450
147. Supersede paragraph 912-450-25-1 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Contractors—Federal Government—Contingencies
Recognition
> Convenience Terminations
912-450-25-1 Paragraph superseded by Accounting Standards Update 201XXX.For a discussion of contract termination for the convenience of the
government, see paragraph 912-605-25-20.
Amendments to Subtopic 912-605
148. Supersede Subtopic 912-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 912-705
149. Supersede paragraph 912-705-25-1 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Contractors—Federal Government—Cost of Sales and
Services
Recognition
> Convenience Terminations
912-705-25-1 Paragraph superseded by Accounting Standards Update 201XXX.Paragraph 912-605-25-34 provides guidance on accounting for both sales
and cost of sales elements of a convenience termination.
378
Amendments to Subtopic 912-730
150. Amend paragraphs 912-730-15-2 through 15-3, with a link to transition
paragraph 605-10-65-1, as follows:
Contractors—Federal Government—Research and
Development
Scope and Scope Exceptions
> Instruments
912-730-15-2 This Subtopic applies only to contractual arrangements meeting all
of the following conditions:
a.
b.
c.
d.
e.
f.
The activities performed in connection with the contractual arrangement
qualify as research and development (see Subtopic 730-10).
The contractor retains a right to the data and results of the research and
development activities.
The contractual arrangement obligates the contractor to perform only on
a best-efforts basis to achieve the agreed-on objectives of the research
and development activity, rather than to deliver a product or service
meeting defined performance or other (such as design) specifications.
At the inception of the contract, the contractor and the customer enter
into the arrangement with the expectation that costs will be incurred in
excess of amounts to be funded. This condition will be met if contractual
or other documentation specifically evidences acknowledgment of this
expectation by both the contractor and the customer. Implicit in this
condition is the existence of significant uncertainty at the date the
contractor enters into the arrangement regarding the likelihood of
successfully securing follow-on contracts related to the research and
development activity.
The research and development arrangement is not combined with other
contracts or segmented in accordance with paragraphs 605-35-25-5
through 25-14.paragraph 605-10-25-11.
The federal government is the sole or principal expected ultimate
customer (including foreign military sales) for the research and
development activity or products directly resulting from the research and
development activity subject to the arrangements.
912-730-15-3 Contractual arrangements meeting all of the conditions in the
production-type
{add
glossary
preceding
paragraph
differ
from
link}contracts{add glossary link} with customers addressed in Subtopic 60535605-10. Such activities are research and development as discussed in
paragraph 730-10-15-4(c).
379
Amendments to Subtopic 915-10
151. Amend paragraph 915-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
Development Stage Entities—Overall
Overview and Background
915-10-05-1 The Development Stage Entities Topic specifies the guidelines for
identifying an entity in the development stage, addresses the applicability of
generally accepted accounting principles (GAAP) to development stage entities,
and provides guidance on financial reporting requirements for development stage
entities, including additional information required to be presented in the basic
financial statements of development stage entities. This Topic contains the
following Subtopics:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
Overall
Presentation of Financial Statements
Balance Sheet
Statement of Shareholder Equity
Income Statement
Statement of Cash Flows
Notes to Financial Statements
Other Assets and Deferred Costs
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Consolidation.
Amendments to Subtopic 915-605
152. Supersede Subtopic 915-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 920-10
153. Amend paragraph 920-10-05-2, with a link to transition paragraph 605-1065-1, as follows:
380
Entertainment—Broadcasters—Overall
Overview and Background
920-10-05-2 The Entertainment—Broadcasters Topic includes several Subtopics:
a.
b.
c.
d.
e.
f.
g.
Overall
Subparagraph superseded by Accounting Standards Update 201XXX.Receivables
Intangibles—Goodwill and Other
Liabilities
CommitmentsCommitments.
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Subparagraph superseded by Accounting Standards Update 201XXX.Nonmonetary Transactions.
154. Amend paragraph 920-10-15-3, with a link to transition paragraph 605-1065-1, as follows:
Scope and Scope Exceptions
> Transactions
920-10-15-3 The guidance in the Entertainment—Broadcasters Topic applies to
all transactions and activities including the following:
a.
Barter transactions and networkNetwork affiliation agreements.
Amendments to Subtopic 920-310
155. Supersede Subtopic 920-310, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 920-405
156. Supersede paragraph 920-405-25-2 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
381
Entertainment—Broadcasters—Liabilities
Recognition
> Barter Transactions
920-405-25-2 Paragraph superseded by Accounting Standards Update 201XXX.See Section 920-845-25 for guidance on recording a liability resulting from a
barter transaction.
Amendments to Subtopic 920-605
157. Supersede Subtopic 920-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 920-845
158. Supersede Subtopic 920-845, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 922-10
159. Amend paragraph 922-10-05-2, with a link to transition paragraph 605-1065-1, as follows:
Entertainment—Cable Television—Overall
Overview and Background
922-10-05-2 This Topic includes the following Subtopics:
a.
b.
c.
d.
e.
f.
g.
382
Overall
Intangibles—Goodwill and Other
Property, Plant, and Equipment
Subparagraph superseded by Accounting Standards Update 201XXX.Deferred Revenue
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Other Expenses
Interest.
Amendments to Subtopic 922-350
160. Amend paragraph 922-350-25-3, with a link to transition paragraph 60510-65-1, as follows:
Entertainment—Cable Television—Intangibles—Goodwill and
Other
Recognition
> Franchise Application Costs
922-350-25-3 CostsSome costs of successful franchise applications shall be
capitalized.recognized as an asset, if those costs meet the criteria in paragraphs
340-40-25-4 through 25-7.
161. Amend paragraph 922-350-35-4 with a link to transition paragraph 605-1065-1, as follows:
Subsequent Measurement
> Franchise Application Costs
922-350-35-4 Costs of successful franchise applications capitalized under
paragraph 922-350-25-3paragraphs 340-40-25-4 through 25-7 shall be amortized
in accordance with paragraphs 340-40-35-1 through 35-2.the provisions of Topic
350.
162. Amend paragraph 922-350-40-1 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Derecognition
> Unsuccessful Franchise Applications and Abandoned Franchises
922-350-40-1 As indicated in paragraph 922-720-25-4, costs of unsuccessful
franchise applications and abandoned franchises shall be charged to expense.
Amendments to Subtopic 922-360
163. Amend paragraph 922-360-25-1, with a link to transition paragraph 60510-65-1, as follows:
383
Entertainment—Cable Television—Property, Plant, and
Equipment
Recognition
> Prematurity Period—Certain Capitalizable Costs
922-360-25-1 Before revenue is earnedrecognized from the first subscriber,
management shall establish the beginning and end of the {add glossary
link}prematurity period{add glossary link}, subject to a presumption that the
{remove glossary link}prematurity period{remove glossary link} usually will
not exceed two years. The prematurity period frequently will be shorter than two
years; a longer period may be reasonably justified only in major urban markets.
After the prematurity period is established by management, it shall not be
changed except as a result of highly unusual circumstances. [Content amended
as shown and moved from paragraph 922-605-25-1] A portion of a cable
television system that is in the {remove glossary link}prematurity
period{remove glossary link} and can be clearly distinguished from the
remainder of the system shall be accounted for separately.
Amendments to Subtopic 922-430
164. Supersede Subtopic 922-430, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 922-605
165. Supersede Subtopic 922-605, with a link to transition paragraph 605-1065-1. [Paragraph 922-605-25-1 amended and moved to paragraph 922-36025-1]
Amendments to Subtopic 922-720
166. Amend paragraph 922-720-25-4 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Entertainment—Cable Television—Other Expenses
Recognition
> Unsuccessful Franchise Applications and Abandoned Franchises
384
922-720-25-4 Costs of unsuccessful franchise applications and abandoned
franchises shall be charged to expense. Refer toSee paragraph 922-350-25-3 for
guidance on the accounting for the costs of successful franchise applications.
Amendments to Subtopic 924-10
167. Amend paragraph 924-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
Entertainment—Casinos—Overall
Overview and Background
924-10-05-1
Subtopics:
a.
b.
c.
d.
e.
f.
The
Entertainment—Casinos
Topic
includes
the
following
Overall
Segment Reporting
Liabilities
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Other Expenses
Income Taxes.
Amendments to Subtopic 924-405
168. Amend paragraph 924-405-05-1, with a link to transition paragraph 60510-65-1, as follows:
Entertainment—Casinos—Liabilities
Overview and Background
924-405-05-1 This Subtopic addresses the following:
a.
b.
The accounting for gaming chips held in inventory by casino entities
and for gaming chips distributed to casino customerscustomers.
The accounting for jackpot liabilities.
169. Add paragraph 924-405-25-2 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
385
Recognition
> Jackpot LiabilitiesBase Jackpots
924-405-25-2 An entity shall accrue a liability and charge a jackpot (or a portion
thereof as applicable) to revenue at the time the entity has the obligation to pay
the jackpot (or a portion thereof as applicable), regardless of the manner of
payment. See paragraphs 924-605-55-1 through 55-2924-405-55-1 through 55-2
for implementation guidance. [Content amended as shown and moved from
paragraph 924-605-25-2]
170. Add Section 924-405-55, with a link to transition paragraph 605-10-65-1,
as follows:
Implementation Guidance and Illustrations
General
> Implementation Guidance
924-405-55-1 The implementation guidance in this paragraph and the following
paragraph addresses the application of paragraph 924-605-25-2924-405-25-2.
Some slot machines or other games may contain base jackpots. Depending on
the applicable gaming regulations, an entity may be able to avoid the payment of
a base jackpot, for example, by removing the machine from play. In accordance
with the guidance in paragraph 924-605-25-2924-405-25-2, no liability associated
with the base jackpot is recognized in such cases until the entity has the
obligation to pay the base jackpot. That is the case even if the entity has no
intention of removing the machine from play and expects the base jackpot to
ultimately be won. [Content amended as shown and moved from paragraph
924-605-55-1]
924-405-55-2 This implementation guidance addresses the application of
paragraph 924-605-25-2924-405-25-2.Some slot machines or other gaming
machines include progressive jackpots. Entities in many gaming jurisdictions
cannot avoid payment of the portion of the progressive jackpot that is incremental
to the base jackpot because the gaming regulators consider the incremental
portion of the jackpot to be funded by customers and required to be paid out
(whether as a jackpot or through other means, such as a raffle). Paragraph 924605-25-2924-405-25-2 requires that, in such cases, the incremental portion of the
jackpot be accrued as a liability at the time of funding (play) by its customers.
[Content amended as shown and moved from paragraph 924-605-55-2]
386
Amendments to Subtopic 924-605
171. Supersede Subtopic 924-605, with a link to transition paragraph 605-1065-1. [Paragraphs 924-605-25-2 and 924-605-55-1 through 55-2 amended
and moved to paragraphs 924-405-25-2 and 924-405-55-1 through 55-2]
Amendments to Subtopic 926-10
172. Amend paragraph 926-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
Entertainment—Films—Overall
Overview and Background
926-10-05-1 The Entertainment—{remove glossary link}Films{remove
glossary link} Topic provides accounting and reporting guidance for entities in
the {add glossary link}film{add glossary link} production and distribution
industry for revenue, film costs, participation costs, and manufacturing costs.
173. Amend paragraph 926-10-15-3, with a link to transition paragraph 605-1065-1, as follows:
Scope and Scope Exceptions
> Transactions
926-10-15-3 The guidance in this Topic does not apply to the following
transactions and activities:
a.
b.
c.
d.
e.
f.
Accounting for the creation and distribution of recorded music products.
For guidance on this subject, see Topic 928.
Financial reporting by cable television entities. For guidance on this
subject, see Topic 922.
Financial reporting by broadcasters. For guidance on this subject, see
Topic 920.
Accounting for the costs of computer software to be sold, leased, or
otherwise marketed. For guidance on this subject, see Topic 985.
Subparagraph superseded by Accounting Standards Update 201XXX.Software revenue recognition. For guidance on this subject, see
Subtopic 985-605.
Accounting for the film and software costs associated with developing
entertainment and educational software products. For guidance on this
subject, see Subtopic 720-35.
387
Amendments to Subtopic 926-20
174. Amend paragraph 926-20-25-6, with a link to transition paragraph 605-1065-1, as follows:
Entertainment—Films—Other Assets—Film Costs
Recognition
> Episodic Television Series
926-20-25-6 For an episodic television series, ultimate {remove glossary
link}revenue{remove glossary link} (see discussion of ultimate revenue in
paragraphs 926-20-35-4 through 35-8) can include estimates from the initial
market and secondary markets. Until an entity can establish estimates of
secondary market revenue in accordance with paragraph 926-20-35-5(b),
capitalized costs for each episode produced shall not exceed an amount equal to
the amount of revenue contracted for that episode. An entity shall expense as
incurred film costs in excess of this limitation on an episode-by-episode basis,
and an entity shall not restore such amounts as film cost assets in subsequent
periods. For more information, see Example 3 (paragraph 926-20-55-9).
175. Amend paragraphs 926-20-35-6 and 926-20-35-14, with a link to transition
paragraph 605-10-65-1, as follows:
Subsequent Measurement
926-20-35-6 An entity shall not discount ultimate revenue to its present value
except as required by paragraph 926-605-25-31.
926-20-35-14 As discussed in paragraph 926-605-25-16, aA discounted cash
flows model is often used to estimate fair value. If applicable, future cash flows
based on the terms of any existing contractual arrangements, including cash
flows over existing license periods without consideration of the limitations set
forth in paragraphs 926-20-35-5 and 926-20-35-11, shall be included.
176. Amend paragraph 926-20-55-2, with a link to transition paragraph 605-1065-1, as follows:
Implementation Guidance and Illustrations
> Illustrations
> > Example 1: Film Cost Amortization
388
926-20-55-2 This Example has the following assumptions:
a.
b.
c.
d.
Film cost: $50,000
Estimated ultimate {remove glossary link}revenue{remove glossary
link}: $100,000
Actual revenue earned in Year 1: $60,000
Estimated ultimate participation costs: $10,000.
Amendments to Subtopic 926-405
177. Amend paragraph 926-405-55-2, with a link to transition paragraph 60510-65-1, as follows:
Entertainment—Films—Liabilities
Implementation Guidance and Illustrations
> Illustrations
> > Example 1: Participation Liabilities
926-405-55-2 In accordance with paragraph 926-405-35-1, a participation liability
that exceeds the unpaid amount expected to be ultimately payable shall be offset
against the remaining carrying value of the corresponding film. This scenario can
result from changes in ultimate {remove glossary link}revenue{remove
glossary link} and cost estimates that result in reduced expectations of ultimate
participation costs.
Amendments to Subtopic 926-430
178. Supersede Subtopic 926-430, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 926-605
179. Supersede Subtopic 926-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 926-845
180. Supersede Subtopic 926-845, with a link to transition paragraph 605-1065-1.
389
Amendments to Subtopic 928-430
181. Supersede Subtopic 928-430, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 928-605
182. Supersede Subtopic 928-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 932-10
183. Amend paragraph 932-10-05-3, with a link to transition paragraph 605-1065-1, as follows:
Extractive Activities—Oil and Gas—Overall
Overview and Background
932-10-05-3 This Topic provides guidance specific to oil- and gas-producing
activities. It contains several Subtopics that interact with other Topics in the
Codification. Guidance in these Subtopics rather than the more general guidance
in the other Topics shall be applied to the specific issues addressed. These
Subtopics are:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
Overall
Income Statement
Notes to Financial Statements
Interim Reporting
Segment Reporting
Investments—Equity Method and Joint Ventures
Inventory
Intangibles—Goodwill and Other
Property, Plant, and Equipment
Debt
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
l. Other Expenses
m. Income Taxes
n. Consolidation
o. Derivatives and Hedging
p. Interest.
390
Amendments to Subtopic 932-605
184. Supersede Subtopic 932-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 932-835
185. Amend paragraph 932-835-25-2, with a link to transition paragraph 60510-65-1, as follows:
Extractive Activities—Oil and Gas—Interest
Recognition
> Advances Satisfied by Delivery of Future Production
932-835-25-2 In certain transactions, pipeline entities make advances to
encourage exploration. These advances are satisfied by delivery of future
production, but there is also a definite obligation to repay if the future production
is insufficient to discharge the obligation by a definite date. The advance is
covered by the exclusion in paragraph 835-30-15-3(b) even though there may be
an obligation to repay should the future production prove insufficient to discharge
the obligation. However, if the advance is from a contract with a customer in
accordance with Subtopic 605-10, the guidance in that Subtopic shall be applied.
Amendments to Subtopic 940-10
186. Amend paragraph 940-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
Financial Services—Brokers and Dealers—Overall
Overview and Background
940-10-05-1 The Financial Services—Brokers and Dealers Topic includes the
following Subtopics relating specifically to brokers and dealers in securities
(broker-dealers):
a.
b.
c.
d.
Overall
Broker-Dealer Activities
Receivables
Investments—Debt and Equity Securities
391
e.
f.
g.
h.
i.
j.
Investments—All Other
Other Assets and Deferred Costs
Liabilities
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Consolidation
Fair Value Measurements and Disclosures.
Amendments to Subtopic 940-20
187. Amend paragraph 940-20-15-4, with a link to transition paragraph 605-1065-1, as follows:
Financial Services—Broker and Dealers—Broker-Dealer
Activities
Scope and Scope Exceptions
Underwriting
> Overall Guidance
940-20-15-4 The Underwriting Subsections follow the same Scope and Scope
Exceptions as outlined in the Overall Subtopic, see Section 940-10-15. Subtopic
940-605 provides incremental guidance on revenue recognition for underwriting
activities.
Amendments to Subtopic 940-605
188. Supersede Subtopic 940-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 942-10
189. Amend paragraph 942-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
Financial Services—Depository and Lending—Overall
Overview and Background
392
942-10-05-1 The Financial Services—Depository and Lending Topic provides
industry-specific accounting and reporting guidance for depository and lending
financial institutions. This Topic includes the following Subtopics:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
Overall
Balance Sheet
Income Statement
Statement of Cash Flows
Notes to Financial Statements
Financial Instruments
Cash and Cash Equivalents
Receivables
Investments—Debt and Equity Securities
Investments—Other
Property, Plant, and Equipment
Liabilities
Debt
Equity
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Other Expenses
Income Taxes
Business Combinations
Consolidation.
Amendments to Subtopic 942-605
190. Supersede Subtopic 942-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 942-825
191. Add paragraph 942-825-15-3, with a link to transition paragraph 605-1065-1, as follows:
Financial Services—Depository and Lending—Financial
Instruments
Scope and Scope Exceptions
942-825-15-3 Paragraph 815-10-15-58 excludes from its scope financial
guarantee contracts that provide for payments to be made only to reimburse the
guaranteed party for a loss incurred because the debtor fails to pay when
393
payment is due, which is an identifiable insurable event. However, if the
guarantee payment is based on changes in an underlying, such as a decrease in
the creditworthiness of the borrower, the guarantee would meet the definition of a
derivative and shall therefore be accounted for pursuant toin accordance with
Subtopic 815-10. [Content amended as shown and moved from paragraph
605-20-25-12]
192. Amend paragraph 942-825-50-2, with a link to transition paragraph 60510-65-1, as follows:
Disclosure
942-825-50-2 Examples of activities and financial instruments with off-balancesheet credit risk include obligations for loans sold with recourse (with or without a
floating-interest-rate provision), fixed-rate and variable-rate loan commitments,
financial guarantees, note issuance facilities at floating rates, and letters of credit.
A guarantor is required to disclose and account for a financial guarantee under
paragraphs 605-20-25-8 through 25-12.Subtopic 605-10. See paragraph 825-1055-3 regarding disclosures about fair value of financial instruments.
Amendments to Subtopic 944-30
193. Amend paragraph 944-30-25-1A and add paragraphs 944-30-25-1C
through 25-1I and their related headings, with a link to transition paragraph 60510-65-1, as follows:
Financial Services—Insurance—Acquisition Costs
Recognition
944-30-25-1A An insurance entity shall capitalize only the following as
acquisition costs related directly to the successful acquisition of new or renewal
insurance contracts:
a.
b.
394
Incremental direct costs of contract acquisition
The portion of the employee’s total compensation (excluding any
compensation that is capitalized as incremental direct costs of contract
acquisition) and payroll-related fringe benefits related directly to time spent
performing any of the following acquisition activities for a contract that
actually has been acquired:
1. Underwriting
2. Policy issuance and processing
3. Medical and inspection
4. Sales force contract selling.
c.
d.
Other costs related directly to the insurer’s acquisition activities in (b) that
would not have been incurred by the insurance entity had the acquisition
contract transaction(s) not occurred.
Advertising costs that meet the capitalization criteria in paragraph 340-2025-4.The costs of direct-response advertising shall be capitalized if both of
the following conditions are met:
1. a. The primary purpose of the advertising is to elicit sales to customers
who could be shown to have responded specifically to the
advertising. Paragraph 340-20-25-6944-30-25-1D discusses the
conditions that must exist in order to conclude that the advertising’s
purpose is to elicit sales to customers who could be shown to have
responded specifically to the advertising.
2. b. The direct-response advertising results in probable future benefits.
Paragraph 340-20-25-9944-30-25-1G discusses the conditions that
must exist in order to conclude that direct-response advertising
results in probable future benefits. [Content amended as shown
and moved from paragraph 340-20-25-4]
> > Primary Purpose to Elicit Sales to Customers Responding to the
Advertising
944-30-25-1C As noted abovein the preceding paragraph, the first condition for
capitalizing direct responsedirect-response advertising is that the primary
purpose of the advertising is to elicit sales to customers who could be shown to
have responded specifically to the advertising. [Content amended as shown
and moved from paragraph 340-20-25-5]
944-30-25-1D In order to conclude that advertising elicits sales to customers who
could be shown to have responded specifically to the advertising, there must be
a means of documenting that response, including a record that can identify the
name of the customer and the advertising that elicited the direct response.
Examples of such documentation include the following:
a.
b.
c.
Files indicating the customer names and the related direct-response
advertisement
A coded order form, coupon, or response card, included with an
advertisement, indicating the customer name
A log of customers who have made phone calls to a number appearing
in an advertisement, linking those calls to the advertisement. [Content
moved from paragraph 340-20-25-6]
> > Probable Future Benefits of Direct-Response Advertising
944-30-25-1E As noted above, the second condition for capitalizing direct
responsedirect-response advertising is that the direct-response advertising
results in probable future benefits. [Content amended as shown and moved
from paragraph 340-20-25-7]
395
944-30-25-1F The probable future benefits of direct-response advertising
activities are probable future revenues arising from that advertising in excess of
future costs to be incurred in realizing those revenues. [Content moved from
paragraph 340-20-25-8]
944-30-25-1G Demonstrating that direct-response advertising will result in future
benefits requires persuasive evidence that its effects will be similar to the effects
of responses to past direct-response advertising activities of the entity that
resulted in future benefits. Such evidence shall include verifiable historical
patterns of results for the entity. Attributes to consider in determining whether the
responses will be similar include the following:
a.
b.
c.
d.
The demographics of the audience
The method of advertising
The product
The economic conditions. [Content moved from paragraph 340-2025-9]
944-30-25-1H Industry statistics would not be considered objective evidence that
direct-response advertising will result in future benefits in the absence of the
specific entity’s operating history. If the entity does not have an operating history
for a particular product or service but does have operating histories for other new
products or services, statistics for the other products or services may be used if it
can be demonstrated that the statistics for the other products or services are
likely to be highly correlated to the statistics of the particular product or service
being evaluated. For example, test market results for a new product or service
may be used to support the view that the results of advertising for current new
products or services are likely to be highly correlated with the results of
advertising for new products or services previously sold by the entity. In the
absence of the expectation of a high degree of correlation, a success rate based
on historical ratios of successful products or services to total products or services
introduced to the marketplace would not be a sufficient basis for reporting a
portion of the costs of current-period advertising as resulting in assets. [Content
moved from paragraph 340-20-25-10]
> Direct-Response Advertising thatThat Does Not Result in Probable Future
Benefits
944-30-25-1I Direct-response advertising costs that are not capitalized because it
cannot be demonstrated that the direct-response advertising will result in future
benefits shall not be retroactively capitalized in subsequent periods if historical
evidence in those subsequent periods indicates that the advertising did in fact
result in future benefits. [Content amended as shown and moved from
paragraph 340-20-25-11]
396
Amendments to Subtopic 944-80
194. Amend paragraph 944-80-35-4, with a link to transition paragraph 605-1065-1, as follows:
Financial Services—Insurance—Separate Accounts
Subsequent Measurement
944-80-35-4 If the asset transferred is real estate, no gain may be recognized if
recognition is inconsistent with Subtopic 360-20605-40.
Amendments to Subtopic 946-605
195. Amend paragraph 946-605-05-1 and supersede paragraphs 946-605-05-5
through 05-11 and their related heading, with a link to transition paragraph 60510-65-1, as follows:
Financial Services—Investment Companies—Revenue
Recognition
Overview and Background
946-605-05-1 This Subtopic addresses an investment adviser’s offering costs
when both 12b-1 fees and contingent-deferred sales fees are not received. all of
the following matters involving revenue recognition by investment advisers:
a.
b.
c.
Subparagraph superseded by Accounting Standards Update 201XXX.Investment adviser’s offering costs when both 12b-1 fees and
contingent-deferred sales fees are not received
Subparagraph superseded by Accounting Standards Update 201XXX.Distributor transfer of rights to certain future distribution fees
Subparagraph superseded by Accounting Standards Update 201XXX.Distribution fees and costs for mutual funds with no front-end sales
fee.
> Distributor Transfer of Rights to Certain Future Distribution Fees
946-605-05-5 Paragraph superseded by Accounting Standards Update 201XXX.B shares typically have an asset-based fee (a 12b-1 fee) charged to the fund
over a period of years (that is, the 12b-1 plan period) and a contingent-deferred
sales fee.
397
946-605-05-6 Paragraph superseded by Accounting Standards Update 201XXX.The distributor pays a sales commission to a sales representative (usually a
broker-dealer) when a B share is sold. The distributor charges the mutual fund a
12b-1 fee in accordance with the fund’s distribution plan (that is, the 12b-1 plan).
The distributor is entitled to receive the 12b-1 fee over the 12b-1 plan period
(typically six to eight years).
946-605-05-7 Paragraph superseded by Accounting Standards Update 201XXX.If the mutual fund investor redeems its investment in the fund before the
expiration of the 12b-1 plan period, the contingent-deferred sales fee is charged
to the investor. The contingent-deferred sales fee declines over time until it
reaches zero (typically after six to eight years) and corresponds to the potential
shortfall in 12b-1 fees that might result from the investor redeeming its
investment in the fund.
946-605-05-8 Paragraph superseded by Accounting Standards Update 201XXX.The 12b-1 fees are calculated periodically as a percentage of the net assets
during the 12b-1 plan period. The contingent-deferred sales fee is calculated as a
percentage of the lesser of current net assets or the original cost of shares being
redeemed. Thus, 12b-1 fees and contingent-deferred sales fee vary with the net
asset value of the fund.
946-605-05-9 Paragraph superseded by Accounting Standards Update 201XXX.Additionally, under Rule 12b-1, the fund’s independent board is obligated to
regularly evaluate the benefits of the 12b-1 plan to the fund. If the fund’s
independent board concludes that the 12b-1 plan is no longer beneficial for the
fund, the fund’s independent board has a fiduciary responsibility to terminate the
plan. However, if the 12b-1 plan is continued but the distributor is replaced, the
replaced distributor continues to receive the 12b-1 fees and contingent-deferred
sales fees for the shares it sold before the distributor was replaced.
946-605-05-10 Paragraph superseded by Accounting Standards Update 201XXX.The distributor is generally a subsidiary of the fund sponsor and primarily
exists to separate the distribution function from the management (investment
advisory) and other administrative (record keeping and transaction services)
functions.
946-605-05-11 Paragraph superseded by Accounting Standards Update 201XXX.Some distributors have received lump-sum cash payments from third parties
for the rights to 12b-1 fees and contingent-deferred sales fees for shares
previously sold. These transactions may include certain provisions and
indemnities that protect the third party in the event that the 12b-1 plan is
terminated by the fund’s independent board.
196. Amend paragraphs 946-605-25-1 through 25-3 and their related heading
and supersede paragraphs 946-605-25-4 through 25-8 and their related
headings, with a link to transition paragraph 605-10-65-1, as follows:
398
Recognition
> Investment Advisor’s Offering Costs when BothWhen both 12b-1 Fees
and Contingent-Deferred Sales Fees Are Not Received
946-605-25-1 Paragraph 946-605-25-8 providesSee paragraphs 340-40-25-4
through 25-7 on the incremental costs of obtaining a contract for guidance on
accounting by investment advisers who are reimbursed, for offering costs paid,
through both 12b-1 fees and contingent-deferred sales fees. Accordingly, the
accounting by those investment advisers for fees and offering costs are outside
the scope of the guidance in paragraphs 946-605-25-2 through 25-3.
946-605-25-2 Benefits expected from the expenditures paid by an investment
adviser in connection with the distribution of shares of a fund in circumstances in
which the investment adviser does not receive both 12b-1 fees and contingentdeferred sales fees do not meet the definition of an asset of the investment
adviser as provided in FASB Concepts Statement No. 6, Elements of Financial
StatementsElements of Financial Statements. Accordingly, such offering costs
paid by the investment adviser shall be expensed as incurred. Initial offering
costs paid by an investment adviser that does not receive both 12b-1 fees and
contingent-deferred sales fees are start-up costs of the investment adviser, which
should be accounted for in accordance with Subtopic 470-20.
946-605-25-3 The guidance in the preceding paragraph applies also to
distribution plans of open-end investment companies permitted under Rule 12b1. Some closed-end interval funds incur distribution-related fees (similar to 12b-1
fees) and impose early withdrawal charges (similar to contingent-deferred sales
fees) pursuant to exemptive orders issued under the Investment Company Act of
1940. In addition, certain offshore funds not subject to regulation under the
Investment Company Act of 1940 also may incur fees and impose charges that
are substantially the same as 12b-1 fees and contingent-deferred sales fees,
respectively. Offering costs paid by an investment adviser for distribution of those
funds shall be expensed as incurred unless those costs are eligible for
capitalization in accordance with paragraphs 340-40-25-4 through 25-7.In such
instances, it would be appropriate to account for offering costs incurred for
distribution of those funds in a manner similar to the accounting for distribution
fees specified in paragraph 946-605-25-8.
> Distributor Transfer of Rights to Certain Future Distribution Fees
946-605-25-4 Paragraph superseded by Accounting Standards Update 201XXX.Revenue recognition is appropriate when cash is received from a third party
for the rights to 12b-1 fees and contingent-deferred sales fees if the distributor
has neither continuing involvement with the transferred rights nor recourse. The
distributor has neither continuing involvement nor recourse if neither the
distributor nor any member of the consolidated group that includes the distributor
does any of the following:
399
a.
b.
c.
Retains any disproportionate risks or rewards in the cash flows of the
transferred rights
Guarantees or assures in any way the purchaser’s rate of return or
return on investment related to the transferred rights
Restricts the ability of the consolidated group or the mutual fund
independent board to remove, replace, or subcontract any of the service
providers of the fund.
946-605-25-5 Paragraph superseded by Accounting Standards Update 201XXX.Deferred costs for the shares sold to which the transferred rights pertain
should be expensed concurrent with the recognition of revenue consistent with
the guidance in paragraph 946-605-25-8.
946-605-25-6 Paragraph superseded by Accounting Standards Update 201XXX.This guidance does not address the accounting for the rights to 12b-1 fees
and contingent-deferred sales fees by a mutual fund, an investor in a mutual
fund, or a third party investor that obtains the rights to 12b-1 fees and contingentdeferred sales fees. For guidance to be applied by mutual funds, see Subtopic
946-20.
946-605-25-7 Paragraph superseded by Accounting Standards Update 201XXX.This guidance shall not be analogized to other transactions.
> Distribution Fees and Costs for Mutual Funds with No Front-End Sales
Fee
946-605-25-8 Paragraph superseded by Accounting Standards Update 201XXX.Distributors of mutual funds that do not have a front-end sales fee receive
fees that are designed to compensate them for the distribution of fund shares.
The fees are sometimes received over a specified future period. The cost
deferral method shall be used, that is, the fees shall be recognized when
received, the deferred incremental direct costs shall be amortized, and the
indirect costs shall be expensed when incurred.
197. Supersede Section 946-605-50, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 948-10
198. Amend paragraph 948-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
Financial Services—Mortgages Banking—Overall
Overview and Background
400
General
948-10-05-1 The Financial Services—Mortgage Banking Topic establishes
accounting and reporting standards for mortgage banking entities and entities
that engage in certain mortgage banking activities. This Topic includes the
following Subtopics:
a.
b.
c.
d.
e.
Overall
Receivables
Other Assets and Deferred Costs
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Other Expenses.
Amendments to Subtopic 948-605
199. Supersede Subtopic 948-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 952-10
200. Supersede paragraph 952-10-05-1 and amend paragraph 952-10-05-2,
with a link to transition paragraph 605-10-65-1, as follows:
Franchisors—Overall
Overview and Background
952-10-05-1 Paragraph superseded by Accounting Standards Update 201XXX.The Franchisors Topic establishes accounting and reporting standards for
franchisors. It addresses franchise fee revenue from individual and area
franchise sales and when all material services or conditions relating to the sale
have been substantially performed or satisfied by the franchisor. This Topic also
establishes accounting standards for continuing franchise fees, continuing
product sales, agency sales, repossessed franchises, franchising costs,
commingled revenue, and relationships between a franchisor and a franchisee.
952-10-05-2 The Franchisors Topic includes the following Subtopics:
a.
b.
c.
Overall
Subparagraph superseded by Accounting Standards Update 201XXX.Other Assets and Deferred Costs
Commitments
401
d.
e.
f.
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Subparagraph superseded by Accounting Standards Update 201XXX.Other Expenses
Consolidations.
201. Add Section 952-10-50, with a link to transition paragraph 605-10-65-1, as
follows:
Disclosure
General
952-10-50-1 If there are significant changes in franchisor-owned outlets or
franchised outlets during the period, the number of the following shall be
disclosed:
a.
b.
c.
d.
Franchises sold
Franchises purchased during the period
Franchised outlets in operation
Franchisor-owned outlets in operation.
paragraph 952-605-50-3]
[Content
moved
from
Amendments to Subtopic 952-340
202. Supersede Subtopic 952-340, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 952-605
203. Supersede Subtopic 952-605, with a link to transition paragraph 605-1065-1. [Paragraph 952-605-50-3 moved to paragraph 952-10-50-1]
Amendments to Subtopic 952-720
204. Supersede Subtopic 952-720, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 954-10
205. Amend paragraph 954-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
402
Health Care Entities—Overall
Overview and Background
954-10-05-1 The Health Care Entities Topic includes the following Subtopics
relating specifically to entities in the health care industry:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
tt.
u.
v.
w.
Overall
Presentation of Financial Statements
Balance Sheet
Income Statement
Segment Reporting
Cash and Cash Equivalents
Receivables
Investments—Debt and Equity Securities
Investments—Other
Other Assets and Deferred Costs
Property, Plant, and Equipment
Liabilities
Subparagraph superseded by Accounting Standards Update 201XXX.Deferred Revenue
Commitments
Contingencies
Guarantees
Debt
Revenue Recognition
Other Expenses
Income Taxes
Business Combinations (Mergers and Acquisitions)
Consolidation
Derivatives and Hedging
Financial Instruments.
Amendments to Subtopic 954-310
206. Supersede Section 954-310-30, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 954-340
207. Amend paragraphs 954-340-25-1 through 25-2, with a link to transition
paragraph 605-10-65-1, as follows:
403
Health Care Entities—Other Assets and Deferred Costs
Recognition
> Continuing Care Retirement Community—Costs of Acquiring Initial
Continuing-Care Contracts
954-340-25-1 CostsSome costs of acquiring initial continuing-care contracts that
are within the scope of Topic 970 shall be capitalized if those costs are eligible
for capitalization in accordance with paragraphs 340-40-25-4 through 25-7.that
Topic. The costs of acquiring initial continuing-care contracts have all of the
following characteristics:
a.
b.
c.
Subparagraph superseded by Accounting Standards Update 201XXX.The costs are incurred to originate a contract.
Subparagraph superseded by Accounting Standards Update 201XXX.The costs result from and are essential to the acquisition of the initial
contract.
Subparagraph superseded by Accounting Standards Update 201XXX.The costs are incurred through the date of substantial occupancy
but no later than one year from the date of completion of construction.
954-340-25-2 The costs of acquiring initial continuing-care contracts may include
the following:
a.
b.
c.
The costs of processing the contract, such as evaluating the prospective
resident’s financial condition; evaluating and recording guarantees,
collateral, and other security arrangements; negotiating contract terms;
preparing and processing contract documents; and closing the
transactiontransaction.
Subparagraph superseded by Accounting Standards Update 201XXX.The costs from activities in connection with soliciting potential initial
residents (such as model units and their furnishings, sales brochures,
semi-permanent signs, tours, grand openings, and sales salaries)
Subparagraph superseded by Accounting Standards Update 201XXX.The portion of an employee’s compensation and benefits that relates
to the initial contract acquisitions.
208. Amend paragraph 954-340-35-1, with a link to transition paragraph 60510-65-1, as follows:
Subsequent Measurement
> Continuing Care Retirement Community—Costs of Acquiring Initial
Continuing-Care Contracts
404
954-340-35-1 Capitalized costs shall be amortized to expenses in accordance
with paragraphs 340-40-35-1 through 35-2.on a straight-line basis over the
average expected remaining lives of the residents under the contract or the
contract term, if shorter.
Amendments to Subtopic 954-405
209. Amend paragraph 954-405-25-3, with a link to transition paragraph 60510-65-1, as follows:
Health Care Entities—Liabilities
Recognition
> Continuing Care Retirement Community—Advance Fees
954-405-25-3 See Subtopic 954-430605-10 for guidance on advance fees
received by a continuing care retirement community.
Amendments to Subtopic 954-430
210. Supersede Subtopic 954-430, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 954-440
211. Supersede Sections 954-440-25, 954-440-35, and 954-440-55, with a link
to transition paragraph 605-10-65-1.
Amendments to Subtopic 954-450
212. Supersede paragraphs 954-450-30-3 through 30-4 and their related
heading, with a link to transition paragraph 605-10-65-1.
Health Care Entities—Contingencies
Initial Measurement
> Prepaid Health Care Services
954-450-30-3 Paragraph superseded by Accounting Standards Update 201XXX.The estimated future health care costs and maintenance costs to be
405
considered in determining whether a loss has been incurred shall include fixed
and variable, direct and allocable indirect costs.
954-450-30-4 Paragraph superseded by Accounting Standards Update 201XXX.Losses under prepaid health care services contracts shall be recognized
when it is probable that expected future health care costs and maintenance costs
under a group of existing contracts will exceed anticipated future premiums and
stop-loss insurance recoveries on those contracts. Contracts shall be grouped in
a manner consistent with the provider’s method of establishing premium rates,
for example, by community rating practices, geographical area, or statutory
requirements, to determine whether a loss has been incurred.
Amendments to Subtopic 954-605
213. Amend paragraph 954-605-05-12, with a link to transition paragraph 60510-65-1, as follows:
Health Care Entities—Revenue Recognition
Overview and Background
> > Refundable Advance Fees
954-605-05-12 Payment of an advance fee generally is required before a
resident acquires a right to reside in an apartment or residential unit for life. A
portion of advance fees may be refundable by rescission within a legally set time
period or if a certain future event occurs, such as the death or withdrawal of a
resident or termination of the contract. Some refunds are paid only if a residential
unit is reoccupied. See also Subtopic 954-430605-10 for further guidance on
advance fees.
214. Amend paragraph 954-605-25-1 and supersede paragraphs 954-605-25-2
through 25-8 and their related heading and paragraph 954-605-25-11, with a link
to transition paragraph 605-10-65-1, as follows:
Recognition
954-605-25-1 This Section provides recognition guidance for the following:
a.
b.
c.
d.
406
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue from health care services, including capitation payments
made periodically during the year
Rate setting methods
Charity care
Related fundraising entities.
> Revenue from Health Care Services
954-605-25-2 Paragraph superseded by Accounting Standards Update 201XXX.Revenue usually is recorded when coverage is provided to an enrollee or the
service is provided to a patient or resident. An enrollee is an individual who is a
subscriber or an eligible dependent of a subscriber in a prepaid health care
plan.
954-605-25-3 Paragraph superseded by Accounting Standards Update 201XXX.In general, gross service revenue is recorded in the accounting records on an
accrual basis at the provider’s established rates, regardless of whether the health
care entity expects to collect that amount.
954-605-25-4 Paragraph superseded by Accounting Standards Update 201XXX.The provision for contractual adjustments (that is, the difference between
established rates and expected third-party payor payments) and discounts (that
is, the difference between established rates and the amount billable) are
recognized on an accrual basis. These amounts are deducted from gross service
revenue to determine net service revenue.
954-605-25-5 Paragraph superseded by Accounting Standards Update 201XXX.Paragraph 954-310-05-2 states that amounts realizable from third-party
payors for health care services are usually less than the provider’s full
established rates for those services.
954-605-25-6 Paragraph superseded by Accounting Standards Update 201XXX.Estimates of contractual adjustments, other adjustments, and the allowance
for uncollectibles shall be reported in the period during which the services are
provided even though the actual amounts may become known at a later date.
This later date may be any one of the following:
a.
b.
c.
d.
When the person is discharged
Subsequent to discharge or completion of service
When the third party is billed
When payment or partial payment is received.
954-605-25-7 Paragraph superseded by Accounting Standards Update 201XXX.Revenue from capitation fees is earned as a result of agreeing to provide
services to qualified beneficiaries and not as a result of actually providing the
care. If the provider’s accounting system records patient charges and establishes
patient receivables as services are rendered, appropriate valuation allowances or
adjustments shall be recorded so only the amount of contract revenue is
recorded.
954-605-25-8 Paragraph superseded by Accounting Standards Update 201XXX.In addition to the capitation payments, the amount of contract revenue may
be affected by factors such as reinsurance recoveries, deductibles, coinsurance,
407
and risk pool adjustments. Risk pool adjustments may be based on factors such
as utilization or cost targets.
954-605-25-11 Paragraph superseded by Accounting Standards Update 201XXX.Although it is not necessary for the entity to make this determination on
admission or registration of an individual, at some point the entity must determine
that the individual meets the established criteria for charity care.
215. Supersede paragraphs 954-605-45-4 through 45-5, with a link to transition
paragraph 605-10-65-1, as follows:
Other Presentation Matters
954-605-45-4 Paragraph superseded by Accounting Standards Update 201XXX.Some health care entities may perform services for patients for which the
ultimate collection of all or a portion of the amounts billed or billable cannot be
determined at the time services are rendered. For example, some health care
entities have a policy of providing services to patients and recording patient
service revenue regardless of their ability to pay and, in some cases (for
example, hospital emergency departments), are required by law to treat
emergency conditions regardless of a patient’s ability to pay. As a result, those
health care entities might record revenue along with a relatively high bad-debt
provision in the period of service. A health care entity that recognizes significant
amounts of patient service revenue at the time the services are rendered even
though it does not assess the patient’s ability to pay shall present all of the
following as separate line items on the face of the statement of operations:
a.
b.
c.
Patient service revenue (net of contractual allowances and discounts)
The provision for bad debts (the amount related to patient service
revenue and included as a deduction from patient service revenue)
The resulting net patient service revenue less the provision for bad
debts.
See paragraphs 954-605-55-1 through 55-2 for an Example of this presentation.
954-605-45-5 Paragraph superseded by Accounting Standards Update 201XXX.Bad debts that shall continue to be presented as an operating expense in the
statement of operations are the following:
a.
b.
Bad debts related to receivables from revenue other than patient service
revenue
Bad debts related to receivables from patient service revenue if the
entity only recognizes revenue to the extent it expects to collect that
amount.
216. Supersede paragraph 954-605-50-4 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
408
Disclosure
> Sources of Revenue
954-605-50-4 Paragraph superseded by Accounting Standards Update 201XXX.A health care entity that recognizes significant amounts of patient service
revenue at the time the services are rendered even though it does not assess the
patient’s ability to pay (see paragraph 954-605-25-3) shall disclose both of the
following by major payor source of revenue for interim and annual periods:
a.
b.
Its policy for assessing collectibility in determining the timing and
amount of patient service revenue (net of contractual allowances and
discounts) to be recognized
Its patient service revenue (net of contractual allowances and discounts)
before the provision for bad debts.
Major payor sources of revenue shall be identified by the entity and be consistent
with how the entity manages its business (for example, how it assesses credit
risk). See paragraphs 954-605-55-3 through 55-4 for an Example of this
disclosure.
217. Supersede Section 954-605-55, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 954-720
218. Amend paragraphs 954-720-25-6 through 25-7, with a link to transition
paragraph 605-10-65-1, as follows:
Health Care Entities—Other Expenses
Recognition
> Prepaid Health Care Services—Contract Acquisition Costs
954-720-25-6 See paragraphs 340-40-25-4 through 25-7 on the incremental
costs of obtaining a contract for guidance on accountingAlthough there is
theoretical support for deferring certain acquisition costs, acquisition costs of
providers of prepaid health care services—other than costs of advertising—
shall be expensed as incurred. Advertising costs shall be accounted for in
conformity with the guidance in Subtopic 720-35.
> Continuing Care Retirement Community—Cost of Acquiring Initial
Continuing-Care Contracts
409
954-720-25-7 The costs of acquiring continuing-care contracts that are not
eligible for capitalization in accordance with paragraphs 340-40-25-4 through 257after a continuing care retirement community is substantially occupied or one
year following completion shall be expensed when incurred. However, costs of
acquiring initial continuing-care contracts that are within the scope of Topic 970
shall be expensed in accordance with that Topic. See Subtopic 954-340 for
additional information about the costs of acquiring initial continuing-care
contracts.
Amendments to Subtopic 958-605
219. Amend paragraph 958-605-05-2, with a link to transition paragraph 60510-65-1, as follows:
Not-for-Profit Entities—Revenue Recognition
Overview and Background
958-605-05-2 The General Subsections provide guidance on the recognition of
exchange transactions, primarily membership dues, and presentation of
exchange transactions in a statement of activities. They also provide
implementation guidance for distinguishing contribution transactions from
exchange transactions.
220. Amend paragraph 958-605-25-1, with a link to transition paragraph 60510-65-1, as follows:
Recognition
958-605-25-1 Revenue from exchange transactions follow generally accepted
accounting principles (GAAP); for example, revenue derived from membership
dues in exchange transactions shall be recognized over the period to which the
dues relate. Nonrefundable initiation and life membership fees received in
exchange transactions shall be recognized as revenues in the period in which the
fees become receivable if future fees are expected to cover the costs of future
services to be provided to members. If nonrefundable initiation and life
membership fees, rather than future fees, are expected to cover those costs,
nonrefundable initiation and life member fees received in exchange transactions
shall be recognized as revenue over the average duration of membership, the life
expectancy of members, or other appropriate time periods.Exchange
transactions shall be accounted for in accordance with Subtopic 605-10.
221. Supersede paragraph 958-605-45-2, with a link to transition paragraph
605-10-65-1, as follows:
410
Other Presentation Matters
958-605-45-2 Paragraph superseded by Accounting Standards Update 201XXX.If the not-for-profit entity (NFP) regularly provides discounts (such as
financial aid for students that is not reported as an expense, reduced fees for
services, or free services) to certain recipients of its goods or services, revenues
shall be reported net of those discounts (see also paragraphs 958-720-25-7 and
958-720-45-23). Net revenue may be reported as a single line item in a
statement of activities, or the gross revenue is permitted to be reported less the
related discount, provided that the discount is displayed immediately beneath the
revenue.
Amendments to Subtopic 958-720
222. Supersede paragraph 958-720-25-8, with a link to transition paragraph
605-10-65-1, as follows:
Not-for-Profit Entities—Other Expenses
Recognition
958-720-25-8 Paragraph superseded by Accounting Standards Update 201XXX.If reductions in amounts charged for goods or services provided by an NFP
are given other than in exchange for services provided to the NFP, those
amounts shall be reported as follows:
a.
b.
As expenses to the extent that the NFP incurs incremental expense in
providing such goods or services
As discounts if the NFP incurs no incremental expense in providing
such goods or services (see paragraph 958-605-45-2).
Amendments to Subtopic 970-10
223. Amend paragraphs 970-10-05-1 through 05-2, with a link to transition
paragraph 605-10-65-1, as follows:
Real Estate—General—Overall
Overview and Background
411
970-10-05-1 The Codification contains several Topics for Real Estatereal estate
due to the differing accounting treatment for various real estate subindustries.
The Topics include:
a.
b.
c.
d.
e.
Real Estate—General
Real Estate—Common Interest Realty Associations
Real Estate—Real Estate Investment Trusts
Real Estate—Retail Land
Real Estate—Time-Sharing Activities.
Additionally, Subtopic 360-20 provides guidance for general real estate
transactions other than retail land.
970-10-05-2 The Real Estate—General Topic provides general real estate
industry guidance, and includes the following Subtopics:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
Overall
Statement of Cash Flows
Subparagraph superseded by Accounting Standards Update 201XXX.Investments—Debt and Equity Securities
Investments—Equity Method and Joint Ventures
Other Assets and Deferred Costs
Property, Plant, and Equipment
Debt
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Other Expenses
Consolidation
Interest.
224. Amend paragraph 970-10-15-9 and supersede paragraph 970-10-15-10,
with a link to transition paragraph 605-10-65-1, as follows:
Scope and Scope Exceptions
970-10-15-9 Paragraphs 970-340-25-16 through 25-1725-19, 970-340-35-2, and
970-340-40-2, and 970-605-25-1 through 25-2 do not apply to real estate rental
activity in which the predominant rental period is less than one month.
970-10-15-10 Paragraph superseded by Accounting Standards Update 201XXX.Paragraphs 970-340-25-13 through 25-15 and 970-340-40-1 do not apply to
real estate time-sharing transactions. Topic 978 provides guidance on the
accounting for those transactions.
412
Amendments to Subtopic 970-323
225. Amend paragraphs 970-323-30-3 through 30-4 and 970-323-30-6, with a
link to transition paragraph 605-10-65-1, as follows:
Real Estate—General—Investments—Equity Method and
Joint Ventures
Initial Measurement
> > Contribution of Real Estate
970-323-30-3 An investor that contributes real estate to the capital of a real
estate venture generally should record its investment in the venture at the
investor’s cost (less related depreciation and valuation allowances) of the real
estate contributed, regardless of whether the other investors contribute cash,
property, or services. An investor shall not recognize profit on a transaction that
in economic substance is a contribution to the capital of an entity, because a
contribution to the capital of an entity is not the culmination of the earnings
process. Some transactions, structured in the form of capital contributions, may
in economic substance be sales. The recommendations in paragraph 360-20-4049 on accounting forThose in substance sales of real estate shall be accounted
for in accordance with Subtopic 605-40to a venture by an investor apply to those
transactions. An example of such a transactionan in substance sale of real estate
is one in which investor A contributes to a venture real estate with a fair value of
$2,000 and investor B contributes cash in the amount of $1,000 which is
immediately withdrawn by investor A, and, following such contributions and
withdrawals, each investor has a 50 percent interest in the venture (the only
asset of which is the real estate). Assuming investor A is not committed to
reinvest the $1,000 in the venture, the substance of this transaction is a sale by
investor A of a one-half interest in the real estate in exchange for cash.
970-323-30-4 Unless the investor that contributes real estate to the venture
withdraws cash (or other hard assets) and has no commitment to reinvest, such
a transaction is not the culmination of an earnings processan in substance sale
of real estate.
> > Contribution of Services or Intangibles
970-323-30-6 The accounting considerations that apply to real property
contributed to a partnership or joint venture also apply to contributions of services
or intangibles. The investor’s cost of such services or intangibles to be allocated
to the cost of the investment shall be determined by the investor in the same
manner as for an investment in a wholly owned real estate project. The
provisions of this Section do not apply to real estate syndication activities in
413
which the syndicators receive or retain partnership interests. Such activities are
accounted for in accordance with the guidance in Subtopic 605-10. discussed in
Subtopic 970-605.
226. Amend paragraph 970-323-40-1, with a link to transition paragraph 60510-65-1, as follows:
Derecognition
> Sale of an Investment in a Real Estate Venture
970-323-40-1 A sale of an investment in a real estate venture (including the
sale of stock in a corporate real estate venture) is the equivalent of a sale of an
interest in the underlying real estate and shall be evaluated under the guidelines
set forth in Subtopic 360-20605-40.
Amendments to Subtopic 970-340
227. Amend paragraphs 970-340-25-13 and 970-340-25-15, supersede
paragraph 970-340-25-14, and add paragraphs 970-340-25-18 through 25-19
and their related heading, with a link to transition paragraph 605-10-65-1, as
follows:
Real Estate—General—Other Assets and Deferred Costs
Recognition
Real Estate Project Costs
> Costs Incurred to Sell and Rent Real Estate Projects, Including Initial
Rental Operations
> > Costs Incurred to Sell Real Estate Projects
970-340-25-13 Costs incurred to sell real estate projects shall be evaluated
for capitalizationcapitalized in accordance with paragraphs 340-40-25-4 through
25-7.if they meet both of the following conditions:
a.
b.
414
Subparagraph superseded by Accounting Standards Update 201XXX.They are reasonably expected to be recovered from the sale of the
project or from incidental operations
Subparagraph superseded by Accounting Standards Update 201XXX.They are incurred for either of the following:
1. Tangible assets that are used directly throughout the selling period
to aid in the sale of the project
2.
Services that have been performed to obtain regulatory approval of
sales.
970-340-25-14 Paragraph superseded by Accounting Standards Update 201XXX.Examples of costs incurred to sell real estate projects that ordinarily meet the
criteria for capitalization are costs of model units and their furnishings, sales
facilities, legal fees for preparation of prospectuses, and semipermanent signs.
970-340-25-15 Other costs incurred to sell real estate projects shall be
capitalized as prepaid costs if they are directly associated with and their recovery
is reasonably expected from sales that are being accounted for under a method
of accounting other than full accrual. Topic 976 discusses the circumstances
under which the appropriate accounting methods are to be applied, including the
full accrual method. Costs that do not meet the criteria for capitalization shall be
expensed as incurred.
> Initial Rental Operations
970-340-25-18 When a real estate project is substantially completed and held
available for occupancy:
a.
b.
c.
Rental revenues and operating costs shall be recognized in income and
expense as they accruecharged to expense when incurred.
All carrying costs (such as real estate taxes) shall be charged to
expense when incurred, depreciation on the cost of the project shall be
provided.
Costs to rent the project shall be amortized in accordance with
paragraphs 970-340-35-2 and 970-340-40-2. [Content amended as
shown and moved from paragraph 970-605-25-1]
970-340-25-19 A real estate project shall be considered substantially completed
and held available for occupancy upon completion of tenant improvements by the
developer but no later than one year from cessation of major construction activity
(as distinguished from activities such as routine maintenance and cleanup).
[Content moved from paragraph 970-605-25-2]
228. Amend paragraphs 970-340-35-1 through 35-2, with a link to transition
paragraph 605-10-65-1, as follows:
Subsequent Measurement
Real Estate Project Costs
> Determining Amounts to Be Capitalized or Expensed
> > Revision of Estimates
415
970-340-35-1 Estimates and cost allocations shall be reviewed at the end of
each financial reporting period until a project is substantially completed and
available for sale. Costs shall be revised and reallocated as necessary for
material changes on the basis of current estimates. Paragraph 976-605-35-1
discusses revisions of estimates relating to retail land sales accounted for by the
percentage-of-completion method. Changes in estimates shall be reported in
accordance with paragraphs 250-10-45-17 through 45-20 and 250-10-50-4.
> > Costs Incurred to Rent Real Estate Projects
970-340-35-2 Capitalized rental costs directly related to revenue from a specific
operating lease shall be amortized over the lease term. Capitalized rental costs
not directly related to revenue from a specific operating lease shall be amortized
over the period of expected benefit. The amortization period shall begin when the
project is substantially completed and held available for occupancy. See
paragraph 970-340-25-19paragraphs 970-605-25-1 through 25-2 for the
definition of substantially completed and held available for occupancy.
229. Supersede Section 970-340-40, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 970-360
230. Amend paragraph 970-360-25-4 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Real Estate—General—Property, Plant, and Equipment
Recognition
Real Estate Project Costs
> Assets Transferred Betweenbetween Entities
970-360-25-4 See Section 974-605-25974-720-25 for adjustment of assets that
will be transferred between a real estate investment trust and its adviser.
231. Supersede paragraphs 970-360-55-4 through 55-5 and their related
headings, with a link to transition paragraph 605-10-65-1, as follows:
Implementation Guidance and Illustrations
Real Estate Project Costs
416
> Implementation Guidance
970-360-55-4 Paragraph superseded by Accounting Standards Update 201XXX.In the following transaction, a homebuilder enters into a contract for the
construction of a single-family home on the homebuilder’s lot. Although the
transaction includes both a lot sale and construction of a house, the contract
does not distinguish between those two elements. The homebuilder does not
relinquish title to the lot until closing.
970-360-55-5 Paragraph superseded by Accounting Standards Update 201XXX.The accounting guidance for this transaction is provided in Subtopic 360-20,
that is, profit recognition is not appropriate until the conditions in paragraph 36020-40-5 are met. Until that time, deposit accounting should be used for the
construction activity and the land.
Amendments to Subtopic 970-470
232. Amend paragraph 970-470-25-5, with a link to transition paragraph 60510-65-1, as follows:
Real Estate—General—Debt
Recognition
970-470-25-5 See Section 974-605-25974-720-25 for adjustment of assets (or
liabilities) transferred between a real estate investment trust and its adviser.
Amendments to Subtopic 970-605
233. Supersede Subtopic 970-605, with a link to transition paragraph 605-1065-1. [Paragraph 970-605-25-1 amended and moved to paragraph 970-34025-18 and paragraph 970-605-25-2 moved to paragraph 970-340-25-19]
Amendments to Subtopic 972-10
234. Amend paragraphs 972-10-05-1 through 05-2, with a link to transition
paragraph 605-10-65-1, as follows:
Real Estate—Common Interest Realty Associations—Overall
Overview and Background
General
417
972-10-05-1 The Codification contains several Topics for real estate due to the
differing accounting treatment for various real estate subindustries. The Topics
include:
a.
b.
c.
d.
e.
Real Estate—General
Real Estate—Common Interest Realty Associations
Real Estate—Real Estate Investment Trusts
Real Estate—Time-Sharing ActivitiesRetail Land
Real Estate—Retail Land.Time-Sharing Activities.
See also Subtopic 360-20 for accounting guidance for the sale of real estate
other than retail land.
972-10-05-2 The Real Estate—Common Interest Realty Associations Topic
addresses the unique accounting and reporting issues for common interest
realty associations. This Topic includes the following Subtopics:
a.
b.
c.
d.
e.
f.
g.
h.
i.
Overall
Presentation of Financial Statements
Notes to Financial Statements
Property, Plant, and Equipment
Subparagraph superseded by Accounting Standards Update 201XXX.Deferred Revenue
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Other Expenses
Income Taxes
Related Party Disclosures.
Amendments to Subtopic 972-235
235. Add paragraph 972-235-50-1A, with a link to transition paragraph 605-1065-1, as follows:
Real Estate—Common Interest Realty Associations—Notes to
Financial Statements
Disclosure
972-235-50-1A In addition to disclosures required by generally accepted
accounting principles (GAAP) for other entities, the notes to a common interest
realty association’s financial statements shall also include disclosures about
both of the following:
418
a.
b.
The proposed use for funds collected in special assessments
Assessments that were used for purposes other than those for which
they were designated. [Content moved from paragraph 972-605-50-1]
Amendments to Subtopic 972-430
236. Supersede Subtopic 972-430, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 972-605
237. Supersede Subtopic 972-605, with a link to transition paragraph 605-1065-1. [Paragraph 972-605-50-1 moved to paragraph 972-235-50-1A]
Amendments to Subtopic 974-10
238. Amend paragraphs 974-10-05-1 through 05-2, with a link to transition
paragraph 605-10-65-1, as follows:
Real Estate—Real Estate Investment Trusts—Overall
Overview and Background
General
974-10-05-1 The Codification contains several Topics for real estate due to the
differing accounting treatment for various real estate subindustries. The Topics
include:
a.
b.
c.
d.
e.
Real Estate—General
Real Estate—Common Interest Realty Associations
Real Estate—Real Estate Investment Trusts
Real Estate—Time-Sharing ActivitiesRetail Land
Real Estate—Retail Land.Time-Sharing Activities.
See also Subtopic 360-20 for accounting guidance for the sale of real estate
other than retail land.
974-10-05-2 The Real Estate—Real Estate Investment Trusts Topic addresses
the unique accounting and reporting issues for real estate investment trusts. This
Topic includes the following Subtopics:
419
a.
b.
c.
d.
e.
f.
Overall
Investments—Equity Method and Joint Ventures
Revenue RecognitionOther Expenses
Consolidation
Interest
Leases.
Amendments to Subtopic 974-605
239. Supersede Subtopic 974-605, with a link to transition paragraph 605-1065-1. [Subtopic 974-605 moved to Subtopic 974-720]
Addition of Subtopic 974-720
240. Add Subtopic 974-720, with a link to transition paragraph 605-10-65-1, as
follows:
Real Estate—Real Estate Investment Trusts—Other Expenses
Overview and Background
General
974-720-05-1 This Subtopic addresses revenue recognition, disclosure, and
other presentation matters for real estate investment trusts. [Content
amended as shown and moved from paragraph 974-605-05-1]
Scope and Scope Exceptions
General
> Overall Guidance
974-720-15-1 This Subtopic follows the same Scope and Scope Exceptions as
outlined in the Overall Subtopic, see Section 974-10-15. [Content moved from
paragraph 974-605-15-1]
Recognition
General
> Operating Support of the Real Estate Investment Trust by the Adviser
420
974-720-25-1 Various methods are employed by advisers to ensure a certain
return to the real estate investment trust for certain periods. Some of these
methods are:
a.
b.
c.
d.
e.
Purchasing a loan or a property at an amount in excess of market value
Forgiving indebtedness
Reducing advisory fees
Providing required compensating balances
Making outright cash payments. [Content moved from paragraph 974605-25-1]
974-720-25-2 Appropriate accounting by a real estate investment trust for
operating support from its adviser would include either of the following:
a.
b.
Adjustment of any assets (or liabilities) which will be transferred
between the entities to current market value as of the date of the
transaction
Recognition, as income or as a reduction of advisory fees, of the
operating support effectively obtained. [Content moved from
paragraph 974-605-25-2]
Other Presentation Matters
General
> Operating Support of the Real Estate Investment Trust by the Adviser
974-720-45-1 The effect of the operating support transactions described in
paragraphs 974-605-25-2974-720-25-2 and 974-605-50-1974-720-50-1 shall be
reported separately in the income statement. [Content amended as shown and
moved from paragraph 974-605-45-1]
Disclosure
General
> Operating Support of the Real Estate Investment Trust by the Adviser
974-720-50-1 A real estate investment trust with operating support from its
adviser shall make full disclosure of the relationship between the parties and the
nature and amount of the transactions. [Content moved from paragraph 974605-50-1]
421
Amendments to Subtopic 976-10
241. Amend paragraphs 976-10-05-1 through 05-2, with a link to transition
paragraph 605-10-65-1, as follows:
Real Estate—Retail Land—Overall
Overview and Background
General
976-10-05-1 The Codification contains several Topics for real estate due to the
differing accounting treatment for various real estate subindustries. The Topics
include:
a.
b.
c.
d.
e.
Real Estate—General
Real Estate—Common Interest Realty Associations
Real Estate—Real Estate Investment Trusts
Real Estate—Retail Land
Real Estate—Time-Sharing Activities.
See also Subtopic 360-20 for accounting guidance for the sale of real estate
other than retail land.
976-10-05-2 The Real Estate—Retail Land Topic addresses the unique
accounting and reporting issues for retail land sales that are sales, on a volume
basis, of lots that are subdivisions of large tracts of land. The sales are
characterized by very small down payments and a sales contract or buyer’s note
for the balance of the purchase price. This Topic includes the following
Subtopics:
a.
b.
c.
d.
e.
Overall
Receivables
Inventory
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Cost of Sales and Services.
242. Supersede paragraph 976-10-15-2, with a link to transition paragraph 60510-65-1, as follows:
422
Scope and Scope Exceptions
> Entities
976-10-15-2 Paragraph superseded by Accounting Standards Update 201X-XX.
The Real Estate—Retail Land Topic establishes standards for recognition of
profit on retail land real estate sales transactions without regard to the nature of
the seller’s business. This Topic distinguishes between retail land sales and
other sales of real estate because differences in terms of sales and selling
procedures lead to different profit recognition criteria and methods. Real estate
sales transactions other than retail land are addressed in Subtopic 360-20.
Amendments to Subtopic 976-310
243. Supersede Section 976-310-30, with a link to transition paragraph 605-1065-1.
244. Supersede paragraph 976-310-35-3, with a link to transition paragraph
605-10-65-1, as follows:
Real Estate—Retail Land—Receivables
Subsequent Measurement
976-310-35-3 Paragraph superseded by Accounting Standards Update 201X-XX.
Paragraphs 976-605-30-1 through 30-4 explains that many sellers have
programs to accelerate collections of receivables or contract provisions that
encourage prepayment with a reduction of the principal as the major incentive for
prepayment. Reductions of principal balances that are given sporadically are
charged to income in the period they occur.
Amendments to Subtopic 976-605
245. Supersede Subtopic 976-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 976-705
246. Supersede paragraph 976-705-30-1 and amend paragraph 976-705-30-2,
with a link to transition paragraph 605-10-65-1, as follows:
423
Real Estate—Retail Land—Cost of Sales and Services
Initial Measurement
976-705-30-1 Paragraph superseded by Accounting Standards Update 201XXX.Under the full accrual method costs of sales (land and improvement costs
incurred, carrying costs, and so forth) shall be based on sales net of those sales
expected to be cancelled in future periods.
976-705-30-2 See Section 970-340-25 and paragraph 970-340-40-1 for guidance
on selling costs of real estate projects.
Amendments to Subtopic 978-10
247. Amend paragraphs 978-10-05-1 through 05-2 and supersede paragraph
978-10-05-4, with a link to transition paragraph 605-10-65-1, as follows:
Real Estate—Time-Sharing Activities—Overall
Overview and Background
978-10-05-1 The Codification contains several Topics for real estate due to the
differing accounting treatment for various real estate subindustries. The Topics
include:
a.
b.
c.
d.
e.
Real Estate—General
Real Estate—Common Interest Realty Associations
Real Estate—Real Estate Investment Trusts
Real Estate—Time-Sharing ActivitiesRetail Land
Real Estate—Retail Land.Time-Sharing Activities.
See also Subtopic 360-20 for accounting guidance for the sale of real estate
other than retail land.
978-10-05-2 The Real Estate—Time-Sharing Activities Topic addresses the
unique accounting and reporting issues for real estate time-sharing activities.
This Topic includes the following Subtopics:
a.
b.
c.
d.
e.
424
Overall
Statement of Cash Flows
Subparagraph superseded by Accounting Standards Update 201XXX.Accounting Changes and Error Corrections
Receivables
Inventory
f.
g.
h.
i.
j.
Other Assets and Deferred Costs
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Other Expenses
Consolidation
Leases.
978-10-05-4 Paragraph superseded by Accounting Standards Update 201XXX.The accounting for real estate time-sharing transactions (also referred to in
this Topic as time-sharing transactions) is based principally on Subtopic 360-20.
248. Amend paragraph 978-10-15-4, with a link to transition paragraph 605-1065-1, as follows:
Scope and Scope Exceptions
978-10-15-4 Section 360-20-15Paragraphs 605-40-15-4 through 15-9 provides
provide guidance that is useful in determining what constitutes real estate for
purposes of this Subtopic.
Amendments to Subtopic 978-250
249. Supersede Subtopic 978-250, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 978-310
250. Supersede Section 978-310-30, with a link to transition paragraph 605-1065-1.
251. Amend paragraphs 978-310-35-4 through 35-6 and supersede paragraph
978-310-35-7 and its related heading, with a link to transition paragraph 605-1065-1, as follows:
Real Estate—Time-Sharing Activities—Receivables
Subsequent Measurement
978-310-35-4 A note receivable modification, deferment, or downgrade
represents a troubled debt restructuring involving only the modification of the
terms of a note receivable. Therefore, the creditor (time-share seller) shall
account for those transactions in accordance with Topic 310. Any reductions in
the recorded investment in a note receivable resulting from the application of that
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Topic shall be charged against the allowance for uncollectibles.uncollectibles,
because the estimated losses were recorded against revenue at the time the
time-share sale was recognized or were recorded subsequently against revenue
as a change in estimate. Incremental, direct costs associated with uncollectibility,
such as costs of collection programs, shall be charged to expense as incurred.
978-310-35-5 Once an initial time-sharing sale transaction has been recorded
(which includes a reduction of recognized revenue for estimated uncollectibles),
accounting for the allowance for uncollectibles follows similar valuation principles
as any receivable, except that there is no bad debt expense. receivable. Each
reporting period and at least quarterly a seller evaluates its receivables,
estimates the amount it expects to ultimately collect, and evaluates the adequacy
of its allowance pursuant to Section 310-10-35. The allowance is then adjusted,
with a corresponding adjustment to current-period revenue through the estimated
uncollectibles account, which is a contra-revenue account. adjusted and
presented in accordance with paragraph 605-10-30-23. A corresponding
adjustment is also made to cost of sales and inventory.
978-310-35-6 The allowance for uncollectibles shall be determined based on
consideration of uncollectibles by year of sale, as well as the aging of notes
receivable and factors such as the location of the time-sharing units, contract
terms, collection experience, economic conditions, and other qualitative factors
as appropriate in the circumstances. See Example 5 (paragraph 978-605-55-50)
for an illustration of the determination of the allowance for uncollectibles.
> Sale of Receivable Without Recourse
978-310-35-7 Paragraph superseded by Accounting Standards Update 201XXX.See paragraph 978-310-40-2 for guidance concerning revenue recognition
and measurement of receivables sold without recourse.
252. Supersede Section 978-310-40, with a link to transition paragraph 605-1065-1.
253. Supersede Section 978-310-45, with a link to transition paragraph 605-1065-1.
254. Amend paragraph 978-310-50-1, with a link to transition paragraph 60510-65-1, as follows:
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Disclosure
978-310-50-1 As noted in paragraph 978-330-35-1, the effects of changes in
estimate in the relative sales value method shall be disclosed in accordance
with Topic 250. In addition to the information otherwise required by generally
accepted accounting principles (GAAP), the financial statements of entities with
time-sharing transactions shall disclose all of the following:
a.
b.
c.
d.
e.
Maturities of notes receivable for each of the five years following the
date of the financial statements and in the aggregate for all years
thereafter. The total of the notes receivable balances displayed with the
various maturity dates shall be reconciled to the balance-sheet amount
of notes receivable.
The weighted average and range of stated interest rates of notes
receivable.
The estimated cost to complete improvements and promised
amenities.
The activity in the allowance for uncollectibles, including the balance in
the allowance at the beginning and end of each period, additions
associated with current-period sales, direct writeoffs charged against
the allowance, and changes in estimate associated with prior-period
sales. If the developer sells receivables with recourse, the seller shall
provide the same disclosure of activity on receivables sold.
Subparagraph superseded by Accounting Standards Update 201XXX.The seller’s policies with respect to meeting the criteria for buyer’s
commitment and collectibility of sales prices in paragraphs 360-20-405(b) and 360-20-40-50(b), respectively.
Amendments to Subtopic 978-330
255. Amend paragraph 978-330-15-3 and supersede paragraph 978-330-15-4,
with a link to transition paragraph 605-10-65-1, as follows:
Real Estate—Time-Sharing Activities—Inventory
Scope and Scope Exceptions
> Transactions
978-330-15-3 The guidance in this Subtopic applies to the following transactions
and activities:
a.
All time-sharing sale transactions that are within the scope of Subtopic
605-10.accounted for under the full accrual, percentage-of-completion,
427
installment, cost recovery, or reduced profit methods of revenue
recognition as discussed in Subtopic 360-20.
978-330-15-4 Paragraph superseded by Accounting Standards Update 201XXX.The guidance in this Subtopic does not apply to the following transactions
and activities:
a.
Time-sharing transactions accounted for under the deposit method, as
discussed in paragraphs 360-20-55-17 and 360-20-55-19 through 5520.
256. Amend paragraph 978-330-30-1 and supersede paragraph 978-330-30-2,
with a link to transition paragraph 605-10-65-1, as follows:
Initial Measurement
> Accounting for Cost of Sales and Time-Sharing Inventory
978-330-30-1 Sellers of time-sharing intervals shall account for cost of sales
and time-sharing inventory using the relative sales value method. The relative
sales value method shall be applied to each phase separately. Common costs,
including amenities, shall be allocated to inventory among the phases that those
costs will benefit. The relative sales value method is illustrated in Example 1 (see
paragraph 978-605-55-38), Example 2 (see paragraph 978-605-55-41), Example
3 (see paragraph 978-605-55-44) and Example 4 (see paragraph 978-605-5546).
978-330-30-2 Paragraph superseded by Accounting Standards Update 201XXX.See Section 978-605-30 for additional guidance related to the impact of
seller-provided incentives on the cost of sales.
257. Amend paragraphs 978-330-35-1 through 35-2 and 978-330-35-4 and its
related heading, with a link to transition paragraph 605-10-65-1, as follows:
Subsequent Measurement
> Accounting for Cost of Sales and Time-Sharing Inventory
978-330-35-1 At least quarterly, both total revenue and total cost estimates shall
be recalculated. A time-sharing entity shall adjust at least quarterly even if it
does not issue quarterly financial reports under Securities and Exchange
Commission (SEC) reporting requirements. The estimate of total revenue (actual
to-date plus expected future revenue) for use in the relative sales value method
shall incorporate factors such as incurred or estimated uncollectibles, changes in
sales prices or sales mix, repossession of intervals that the seller may or may not
be able to resell, effects of upgrade programs, and past or expected sales
428
incentives to sell slow-moving inventory units. The cost-of-sales percentage shall
be similarly recalculated each time estimated revenue or cost is adjusted, using
the new estimate of total revenue and total cost (including costs to complete, if
any). The effects of changes in estimate for cost shall be accounted for in each
period using a current-period adjustment, that is, the time-share seller shall
account for a change in estimate in the period of change so that the balance
sheet at the end of the period of change and the accounting in subsequent
periods are as they would have been if the revised estimates had been the
original estimates. The effects of changes in estimate shall be disclosed in
accordance with paragraph 250-10-50-4. See paragraph 978-605-55-37 for
illustrations of the relative sales value method; Examples 2 and 4 (see
paragraphs 978-605-55-41 and 978-605-55-46) illustrate changes in estimate.
The inventory balance reported in the balance sheet, plus estimated costs to
complete that inventory, if any, represents a pool of costs that will be charged
against future revenue.
978-330-35-2 As discussed in paragraph 978-310-30-2, theThe recording of an a
sales revenue adjustment for expected uncollectibles is accompanied by a
corresponding adjustment to cost of sales and inventory that is effected through
the application of the cost-of-sales percentage. However, under the relative sales
value method, there is no accounting effect on inventory if a time-sharing
interval is repossessed or otherwise reacquired unless the repossession causes
a change in expected uncollectibles (and, thereby, estimated revenue) as
discussed in the preceding paragraph. uncollectibles. The seller shall, however,
perform impairment testing on its inventory in accordance with paragraphs 36010-35-38 through 35-40, 360-10-35-43, and 360-10-40-5.
> Operations Duringduring Holding Periods
978-330-35-4 Holding period operations include sampler programs and minivacations (see paragraph 978-605-25-14). During holding periods, time-sharing
intervals shall be accounted for as inventory and shall not be depreciated. Costs
of operations during holding periods include seller subsidies and maintenance
and related costs on time-sharing intervals held for sale.
Amendments to Subtopic 978-340
258. Amend paragraph 978-340-25-1 and supersede paragraphs 978-340-25-2
through 25-3, with a link to transition paragraph 605-10-65-1, as follows:
Real Estate—Time-Sharing Activities—Other Assets and
Deferred Costs
Recognition
429
> Costs to Sell Time-Sharing Intervals
978-340-25-1 All costs incurred to sell time-sharing intervals should be charged
to expense as incurred unless they specifically qualify for capitalization under the
following conditions in accordance with the guidance in paragraphs 978-340-25-1
through 25-3, 978-340-40-1 through 40-2 and 978-720-25-2.340-40-25-4 through
25-7.Costs incurred to sell time-sharing intervals shall be deferred until a sale
transaction occurs if the costs are both:
a.
b.
Subparagraph superseded by Accounting Standards Update 201XXX.Reasonably expected to be recovered from the sale of the timesharing intervals or from incidental operations
Subparagraph superseded by Accounting Standards Update 201XXX.Incurred for either of the following:
1. Tangible assets that are used directly throughout the selling period
to aid in the sales of the time-sharing intervals. This guidance on
tangible assets is not intended to prohibit capitalization specifically
addressed in other Subtopics, such as internal-use software under
Subtopic 350-40. Examples of costs incurred to sell time-sharing
intervals that meet the condition of this item include the costs of
model units and their furnishings, sales property and equipment,
and semipermanent signs.
2. Services that have been performed to obtain regulatory approval of
sales. An example of costs that meet this condition is the costs of
preparation and filing of prospectuses, including printing and legal
fees.
978-340-25-2 Paragraph superseded by Accounting Standards Update 201XXX.Other costs incurred to sell time-sharing intervals shall be deferred until a
sale transaction occurs if the costs are all of the following:
a.
b.
c.
Reasonably expected to be recovered from the sale of the time-sharing
units
Directly associated with sales transactions that are being accounted for
under the percentage-of-completion, installment, reduced profit, or
deposit method of accounting
Incremental, that is, the costs would not have been incurred by the
seller had a particular sale transaction not occurred.
See paragraph 978-720-25-2 for examples of costs that are not eligible for
deferral.
978-340-25-3 Paragraph superseded by Accounting Standards Update 201XXX.Under the deposit method of accounting, deferred selling costs shall be
limited to the nonrefundable portion of the deposits received by the seller.
Examples of directly associated, incremental costs include commissions and
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payroll and payroll benefit-related costs of sales personnel for time spent directly
on successful sales efforts.
259. Supersede Section 978-340-40, with a link to transition paragraph 605-1065-1.
260. Amend paragraph 978-340-60-1, with a link to transition paragraph 60510-65-1, as follows:
Relationships
> Real Estate—Time-Sharing Activities
978-340-60-1 For expense determination of all costs incurred to sell timesharing intervals see paragraphs 978-340-25-1 through 25-3, 978-340-40-1
through 40-2, 978-340-25-1 and 978-720-25-2.
Amendments to Subtopic 978-605
261. Supersede Subtopic 978-605, with a link to transition paragraph 605-1065-1.
Amendments to Subtopic 978-720
262. Amend paragraphs 978-720-25-1 through 25-2, with a link to transition
paragraph 605-10-65-1, as follows:
Real Estate—Time Sharing Activities—Other Expenses
Recognition
> Selling Costs
978-720-25-1 All costs incurred to sell time-sharing intervals shall be charged to
expense as incurred unless they specifically qualify for capitalization under
paragraphs 978-340-25-1 through 25-3, 978-340-40-1 through 40-2, and 978720-25-2.340-40-25-4 through 25-7.
978-720-25-2 Examples of costs that do not meet the requirementsany of the
criteria in paragraphs 978-340-25-1 through 25-2340-40-25-4 through 25-7 for
deferral, and that shall therefore be charged to expense as incurred, include all
costs incurred to induce potential buyers to take sales tours (for example, the
costs of telemarketing call centers); all costs incurred for unsuccessful sales
transactions; and all sales overhead such as on-site and off-site sales office rent,
utilities, maintenance, and telephone expenses. Advertising costs shall be
431
accounted for in accordance with Subtopic 720-35. Direct incremental costs of
tour fulfillment, such as costs of airline tickets to bring customers to a tour
location, shall be charged to expense at the time the tour takes place.
Amendments to Subtopic 980-340
263. Amend paragraphs 980-340-55-10, 980-340-55-13, and 980-340-55-16,
with a link to transition paragraph 605-10-65-1, as follows:
Regulated Operations—Other Assets and Deferred Costs
Implementation Guidance and Illustrations
980-340-55-10 Utility B sells its interest in a newly completed electric generating
plant for an amount equal to its cost and leases that interest back under a lease
that requires equal annual payments. The sale meets the criteria of Section 36020-40 for recognition as a sale, and theUtility B transfers control of the plant in
accordance with Subtopic 605-10. The leaseback meets the criteria of Subtopic
840-30 for a capital lease. Utility B’s regulator includes the lease rentals in
allowable cost as they accrue. In the past, Utility B’s regulator has treated other
leases entered into by Utility B in the same manner, but those leases were for
much less significant items of equipment—not for an interest in an electric
generating plant.
980-340-55-13 Utility C sells its interest in a newly completed electric generating
plant for an amount equal to its cost and leases that interest back under a lease
that requires equal annual payments. The sale meets the criteria of Section 36020-40 for recognition as a sale, and theUtility C transfers control of the plant in
accordance with Subtopic 605-10. The leaseback meets the criteria of Subtopic
840-20 for an operating lease. Utility C’s regulator includes the lease rentals in
allowable cost as they accrue. In the past, Utility C’s regulator has treated other
leases entered into by Utility C in the same manner, but those leases were not
for an interest in an electric generating plant.
980-340-55-16 Utility D sells its interest in a 5-year-old electric generating plant
for an amount that exceeds its undepreciated cost by $500,000 and leases that
interest back. The leaseback term is 20 years, and there are no renewal options.
The sale meets the criteria of Section 360-20-40 for recognition as a sale with full
profit recognition, and theUtility D transfers control of the plant in accordance with
Subtopic 605-10. The leaseback meets the criteria of Subtopic 840-20 for an
operating lease. Utility D’s regulator includes the lease rentals in allowable cost
as they accrue and orders Utility D to amortize the profit, for rate-making
purposes, over 10 years. The sale occurred at a time when Utility D was about to
place a newly completed plant in service. Utility D has not had any similar
transactions in the past.
432
Amendments to Subtopic 980-350
264. Supersede paragraph 980-350-35-3, amend paragraph 980-350-35-5, and
add paragraphs 980-350-35-6 through 35-7, with a link to transition paragraph
605-10-65-1, as follows:
Regulated Operations—Intangibles—Goodwill and Other
Subsequent Measurement
> Long-Term Power Sales Contracts
980-350-35-3 Paragraph superseded by Accounting Standards Update 201XXX.A long-term power sales contract that is not accounted for as a derivative
instrument under Topic 815 shall be periodically reviewed to determine whether it
is a loss contract in which the loss shall be recognized immediately.
980-350-35-5 See paragraph 980-605-25-15 for a discussion of a long-term
power sales contract that meets the definition of a derivative.If a long-term power
sales contract meets the definition of a derivative under Topic 815, then it would
be marked to fair value through earnings, unless designated as a hedging
instrument in certain types of hedging relationships. Otherwise, the guidance in
this SectionSubtopic 605-10 would apply. Some long-term power sales contracts
that meet the definition of a derivative may qualify for the normal purchases and
normal sales scope exception contained in paragraph 815-10-15-17(b), in which
case the long-term power sales contract would be accounted for under this
SectionSubtopic 605-10. [Content amended as shown and moved from 980605-25-14]
980-350-35-6 Long-term power sales contracts that are accounted for as
derivatives may possibly qualify as hedging instruments in all-in-one hedges.
The guidance in Section 815-10-55 may be relevant. [Content moved from
paragraph 980-605-25-15]
980-350-35-7 For a discussion of issues involved in accounting for derivative
contracts held for trading purposes and contracts involved in energy trading and
risk management activities, see paragraph 815-10-45-9. [Content moved from
paragraph 980-605-25-16]
Amendments to Subtopic 980-605
265. Amend paragraph 980-605-05-1, with a link to transition paragraph 60510-65-1, as follows:
433
Regulated Operations—Revenue Recognition
Overview and Background
980-605-05-1 This Subtopic provides guidance for revenue recognition for
entities
with
regulated
operations,
including
alternative
revenue
programs.programs and long-term power sales contracts.
266. Supersede paragraphs 980-605-15-2 through 15-3 and their related
headings, with a link to transition paragraph 605-10-65-1, as follows:
Scope and Scope Exceptions
> Entities
980-605-15-2 Paragraph superseded by Accounting Standards Update 201XXX.The guidance in this Subtopic also applies to nonutility generators as they
provide many of the services of entities with regulated operations.
> Transactions
980-605-15-3 Paragraph superseded by Accounting Standards Update 201XXX.As described in paragraph 980-605-25-9, the scope of this Subtopic excludes
long-term power supply contracts that would qualify for lease accounting
pursuant to Topic 840.
267. Supersede paragraphs 980-605-25-5 through 25-18 and their related
headings, with a link to transition paragraph 605-10-65-1, as follows:
Recognition
> Long-Term Power Sales Contracts
980-605-25-5 Paragraph superseded by Accounting Standards Update 201XXX.In general, nonutility generators are not regulated and do not meet the
criteria of an entity with regulated operations as provided in paragraph 980-1015-2. However, since nonutility generators provide many of the same services as
entities with regulated operations, the guidance for nonutility generators is
included in paragraphs 980-605-25-5 through 25-18. That portion of this
Subsection assumes the seller of power under the long-term contract does not
meet the criteria for application of this Topic.
980-605-25-6 Paragraph superseded by Accounting Standards Update 201XXX.Nonutility generators provide a significant percentage of new electric
434
generating capacity in the United States. Some of these generating plants are
built by users primarily for their own energy needs while others are built
specifically to sell power, usually to rate-regulated utilities, under long-term power
sales contracts. Those contracts price the power sold under a wide variety of
terms and arrangements.
980-605-25-7 Paragraph superseded by Accounting Standards Update 201XXX.The long-term power sales contracts may provide for any of the following:
a.
b.
c.
Stated prices per kilowatt hour that increase, decrease, or remain level
over the term of the contract
Formula-based prices per kilowatt hour
Billings that are a combination of stated prices and formula-based prices
per kilowatt hour.
980-605-25-8 Paragraph superseded by Accounting Standards Update 201XXX.One example of a combination is a contract that provides for billings pursuant
to a stated price schedule but also provides for a payment to be made or
received by the nonutility generator at the end of the contract so that total
revenue recognized and payments made over the contract term equal the
amount computed pursuant to the formula-based pricing arrangement. The
differences between payments made and the amount computed under the
formula-based pricing arrangement are recorded in an interest-bearing tracker
account. In other cases, the cumulative balance in the tracker account at a
defined point in the contract life may be amortized to zero through adjustments to
subsequent billings. Another example of such a combination is a contract that
provides for billings pursuant to a stated price schedule but that provides for a
payment to be made by the nonutility generator, if necessary, at the end of the
contract so that the total revenue recognized and total amounts received by the
nonutility generator over the contract term are limited to the lesser of the amount
computed pursuant to the stated price schedule or the formula-based pricing
arrangement.
980-605-25-9 Paragraph superseded by Accounting Standards Update 201XXX.Long-term power supply contracts that would qualify for lease accounting
pursuant to Topic 840 are outside the scope of this Subtopic.
980-605-25-10 Paragraph superseded by Accounting Standards Update 201XXX.For a discussion of the considerations required to determine whether a longterm power sales contract arrangement contains a lease, see Subtopic 840-10.
> > Contracts Containing Scheduled Price Changes
980-605-25-11 Paragraph superseded by Accounting Standards Update 201XXX.For a power sales contract that contains scheduled price changes a nonutility
generator shall recognize as revenue the lesser of the following:
435
a.
b.
The amount billable under the contract
An amount determined by the kilowatt hours made available during the
period multiplied by the estimated average revenue per kilowatt hour
over the term of the contract.
980-605-25-12 Paragraph superseded by Accounting Standards Update 201XXX.The determination of the lesser amount shall be made annually based on the
cumulative amounts that would have been recognized had each method been
consistently applied from the beginning of the contract term.
> > Contracts Providing for Revenue Determination or Limitation Under
Formula-Based Pricing Arrangements
980-605-25-13 Paragraph superseded by Accounting Standards Update 201XXX.A nonutility generator shall recognize revenue in each period determined
under the separate, formula-based pricing arrangement if it determines or limits
total revenues billed under the contract (see the preceding two paragraphs). The
separate, formula-based pricing arrangement shall not be used to recognize
revenue if its only purpose is to establish liquidating damages. The nonutility
generator shall recognize a receivable only if the contract requires a payment to
the nonutility generator at the end of the contract term and such payment is
probable of recovery. A receivable arises when amounts billed are less than the
amount computed pursuant to the formula-based pricing arrangement.
> > Contracts Meeting Definition of Derivative
980-605-25-14 Paragraph superseded by Accounting Standards Update 201XXX.If a long-term power sales contract meets the definition of a derivative under
Topic 815, then it would be marked to fair value through earnings, unless
designated as a hedging instrument in certain types of hedging relationships.
Otherwise, the guidance in this Section would apply. Some long-term power
sales contracts that meet the definition of a derivative may qualify for the normal
purchases and normal sales scope exception contained in paragraph 815-10-1517(b), in which case the long-term power sales contract would be accounted for
under this Section. [Content amended and moved to paragraph 980-350-35-5]
980-605-25-15 Paragraph superseded by Accounting Standards Update 201XXX. Long-term power sales contracts that are accounted for as derivatives may
possibly qualify as hedging instruments in all-in-one hedges. The guidance in
Section 815-10-55 may be relevant. [Content moved to paragraph 980-35035-6]
980-605-25-16 Paragraph superseded by Accounting Standards Update 201XXX.For a discussion of issues involved in accounting for derivative contracts held
for trading purposes and contracts involved in energy trading and risk
436
management activities, see paragraph 815-10-45-9. [Content moved to
paragraph 980-350-35-7]
> > Contracts Containing Both Fixed and Variable Pricing Terms
980-605-25-17 Paragraph superseded by Accounting Standards Update 201XXX.The following addresses a power sales contract that has both fixed and
variable-based pricing (based on market prices, actual avoided costs, or formulabased pricing arrangements) terms, where the variable-based pricing does not
determine or limit the total billings under the contract. It is limited to variable price
arrangements in which the rate is at least equal to expected costs. The guidance
only addresses the revenue recognition associated with the energy component of
these long-term power sales contracts.
980-605-25-18 Paragraph superseded by Accounting Standards Update 201XXX.Long-term power sales contracts that have both fixed and variable pricing
terms shall be bifurcated and accounted for as follows:
a.
b.
The revenue associated with the fixed or scheduled price period of the
contract shall be recognized in accordance with paragraphs 980-60525-11 through 25-12 (that is, the lesser of the amount billable under the
contract or an amount determined by the kilowatt hours made available
during the period multiplied by the estimated average revenue per
kilowatt hour over the term of the contract).
The revenue associated with the variable price period of the contract
shall be recognized as billed, in accordance with the provisions of the
contract for that period.
If the contractual terms during the separate fixed and variable portions of the
contract are not representative of the expected market rates at the inception of
the contract, the revenue associated with the entire contract shall be recognized
in accordance with paragraphs 980-605-25-11 through 25-12.
268. Amend paragraph 980-605-30-2, with a link to transition paragraph 60510-65-1, as follows:
Initial Measurement
980-605-30-2 When the revenue is originally recorded, the criteria in paragraph
450-20-25-2 shall determine whether a provision for estimated refunds shall be
accrued as a loss contingency. Revenue collected subject to refund is similar to
sales with warranty obligations. Paragraph 460-10-25-6 states thatThe inability to
make a reasonable estimate of the amount of thea warranty obligation at the time
of sale because of significant uncertainty about possible claims precludes accrual
and, if the range of possible loss is wide, may raise a question about whether a
437
sale should be recorded. Similarly, if the range of possible refund is wide and the
amount of the refund cannot be reasonably estimated, there may be a question
about whether it would be misleading to recognize the provisional revenue
increase as income.
269. Add Section 980-605-45, with a link to transition paragraph 605-10-65-1,
as follows:
Other Presentation Matters
General
> Alternative Revenue Program Presentation
980-605-45-1 Revenue arising from alternative revenue programs shall be
presented separately from revenue arising from contracts with customers in the
statement of comprehensive income.
Amendments to Subtopic 985-10
270. Amend paragraph 985-10-05-1, with a link to transition paragraph 605-1065-1, as follows:
Software—Overall
Overview and Background
985-10-05-1 The Software Topic specifies standards of financial accounting and
reporting for certain computer software. This Topic includes the following
Subtopics:
a.
b.
c.
d.
e.
f.
g.
h.
Overall
Costs of Software to be Sold, Leased, or Marketed
Inventory
Intangibles—Goodwill and Other
Subparagraph superseded by Accounting Standards Update 201XXX.Revenue Recognition
Cost of Sales and Services
Research and Development
Nonmonetary Transactions.
271. Amend paragraph 985-10-15-3, with a link to transition paragraph 605-1065-1, as follows:
438
Scope and Scope Exceptions
> Transactions
985-10-15-3 Except as follows, the guidance in the Software Topic applies to
computer software to be sold, leased, or otherwise marketed as a separate
product or as part of a product or process:
a.
b.
As to software marketed as part of a product or process, Subtopics 985605 and 985-845 applySubtopic 985-845 applies only if software and
software-related elements are more than incidental to the products or
services as a whole.
Subtopics 985-20, 985-330, 985-350, 985-705, and 985-730 do not
apply to software created for internal use (see Section 350-40-15) or for
others under a contractual arrangement (see paragraph 605-35-15-3(f)).
Amendments to Subtopic 985-20
272. Amend paragraph 985-20-15-3, with a link to transition paragraph 605-1065-1, as follows:
Software—Costs of Software to Be Sold, Leased, or Marketed
Scope and Scope Exceptions
985-20-15-3 The guidance in this Subtopic does not apply to the following
transactions and activities:
a.
b.
Software developed or obtained for internal use (see Subtopic 350-40)
or for others under a contractual arrangement (see Subtopic 605-35).
Research and development assets acquired in a business combination
or an acquisition by a not-for-profit entity. If tangible and intangible
assets acquired in those combinations are used in research and
development activities, they are recognized and measured at fair value
in accordance with Subtopic 805-20.
273. Add paragraph 985-20-25-12 and its related heading, with a link to
transition paragraph 605-10-65-1, as follows:
Recognition
> > > Funded Software-Development Arrangements
985-20-25-12 A funded software-development arrangement within the scope of
Subtopic 730-20 shall be accounted for in conformity with that Subtopic. If the
439
technological feasibility of the computer software product pursuant to the
provisions of Subtopic 985-20this Subtopic has been established before the
arrangement has been entered into, Subtopic 730-20 does not apply because the
arrangement is not a research and development arrangement. Accounting for
costs related to funded software-development arrangements is beyond the scope
of this Subtopic. However, ifIf capitalization of the software-development costs
commences pursuant to this Subtopic 985-20 and the funding party is a
collaborator or a partner, any income from the funding party under a funded
software-development arrangement shall be credited first to the amount of the
development costs capitalized. If the income from the funding party exceeds the
amount of development costs capitalized, the excess shall be deferred and
credited against future amounts that subsequently qualify for capitalization. Any
deferred amount remaining after the project is completed (that is, when the
software is available for general release to customers and capitalization has
ceased) shall be credited to income. If the counterparty is a customer, the entity
shall apply the guidance in Subtopic 605-10. [Content amended as shown and
moved from 985-605-25-87]
274. Amend paragraph 985-20-55-2, with a link to transition paragraph 605-1065-1, as follows:
Implementation Guidance and Illustrations
> > > Relationship to Software Revenue Recognition Guidance
985-20-55-2 If the vendor sells, leases, or licenses software that is within the
scope of Subtopic 985-605605-10, then the development costs of such software
should be accounted for in accordance with this Subtopic. Conversely, if the
vendor never sells, leases, or licenses the software in an arrangement within the
scope of that Subtopic, then the software is used in providing services and the
development costs of the software should be accounted for in accordance with
Subtopic 350-40. However, if during such software’s development or
modification, the vendor develops a substantive plan to sell, lease, or otherwise
market the software externally, the development costs of the software should be
accounted for in accordance with this Subtopic. Paragraph 350-40-35-7 provides
guidance if, after the development of internal-use software is completed, an entity
decides to market the software.
275. Amend paragraph 985-20-60-3, with a link to transition paragraph 605-1065-1, as follows:
Relationships
> Software
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985-20-60-3 For the application of income from the funding party under a funded
software-development arrangement to development costs capitalized, see
paragraph 985-605-25-87.For software-development arrangements that are fully
or partially funded by a party other than the vendor that is developing the
software and technological feasibility of the computer software product has not
been established before entering into the arrangement, see Subtopic 730-20.
Amendments to Subtopic 985-605
276. Supersede Subtopic 985-605, with a link to transition paragraph 605-1065-1. [Paragraph 985-605-25-86 amended and moved to paragraph 730-2015-1A and paragraph 985-605-25-87 amended and moved to paragraph 98520-25-12]
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Amendments to the XBRL Taxonomy
The FASB will expose for public comment the changes to the U.S. GAAP
Financial Reporting Taxonomy (UGT) that would be required were the provisions
of this Exposure Draft finalized as proposed. The proposed changes to the UGT
will be available on the FASB website on or about January 31, 2012.
The FASB will alert the public of the availability of proposed UGT changes and
the deadline for comment through an announcement on its website and in its
Action Alert email service.
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Appendix A: Glossary
Defined terms to be added to the Master Glossary include the following:
Contract
An agreement between two or more parties that
creates enforceable rights and obligations.
Contract asset
An entity’s right to consideration in exchange for
goods or services that the entity has transferred to a
customer, when that right is conditioned on
something other than the passage of time (for
example, the entity’s future performance).
Contract liability
An entity’s obligation to transfer goods or services to
a customer for which the entity has received
consideration from the customer.
Customer
A party that has contracted with an entity to obtain
goods or services that are an output of the entity’s
ordinary activities.
Performance
obligation
A promise in a contract with a customer to transfer a
good or service to the customer.
Revenue
Inflows or other enhancements of assets of an entity
or settlements of its liabilities (or a combination of
both) from delivering or producing goods, rendering
services, or other activities that constitute the entity’s
ongoing major or central operations.
Standalone selling
price (of a good or
service)
The price at which an entity would sell a promised
good or service separately to a customer.
Transaction price
(for a contract with
a customer)
The amount of consideration to which an entity
expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding
amounts collected on behalf of third parties (for
example, sales taxes).
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Appendix B: Summary of Changes from the
2010 Proposed Update
The following table summarizes the changes to the Boards’ June 2010 proposals
in response to feedback received:
Steps to Apply the
Proposals
Step 1: Identify the
contract(s) with the
customer
Step 2: Identify the separate
performance obligations in
the contract
Step 3: Determine the
transaction price
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Description of Changes to the Proposals
• Changed the proposed indicators on
combining contracts to criteria. The criteria
are limited to contracts that are entered into
at or near the same time with the same
customer (or related parties). Added a
criterion for goods or services across
contracts that are a single performance
obligation.
• Eliminated the proposal on contract
segmentation (but moved the principle to
Step 4 on allocating the transaction price).
• Revised the proposal on contract
modifications to reduce the instances in
which an entity would account for a
modification on a cumulative catch-up
basis.
• Retained the definition of a performance
obligation subject to the deletion of the term
enforceable (to clarify the June 2010
proposals).
• Clarified the proposals for identifying
separate performance obligations (distinct
goods or services) mainly by moving the
guidance on a significant contract
management service from the
implementation guidance/basis into the
proposed standard and by deleting
reference to distinct profit margin in the
proposed standard.
• Modified the definition of transaction price
to refer to the amount to which the entity
expects to be entitled rather than the
expected amount to be received.
Steps to Apply the
Proposals
Step 4: Allocate the
transaction price
Step 5: Recognize revenue
when a performance
obligation is satisfied
Description of Changes to the Proposals
• Modified the proposals on determining the
transaction price as follows:
o Collectibility: credit risk no longer
included in the transaction price.
Accounted for similarly to current
practice (except for the presentation
adjacent to revenue).
o Time value of money: added a one-year
practical expedient and clarified when a
financing component is significant.
o Variable consideration: either an
expected value or a most likely amount
is required (to simplify the proposals,
which would have required a
probability-weighted estimate in all
cases).
• Clarified that it may be appropriate for an
entity to estimate a selling price using a
residual approach if the price of a good or
service is highly variable or uncertain.
• Added guidance on when it is appropriate to
restrict allocations of discounts, contingent
payments, and changes in the transaction
price to only some promised goods or
services. That guidance uses the 2010
proposed Update’s principle of price
independence (from contract segmentation)
but has specific criteria to clarify when
goods or services are priced independently
(that is, the payment terms relate to the
particular good or service and the amount is
consistent with the objective of allocating
the transaction price).
• Added risks and rewards of ownership as
an indicator of when control is transferred at
a point in time.
• Added criteria for determining when a
performance obligation is satisfied over
time.
• Retained the objective of measuring
progress toward completion of a
performance obligation, but:
o Clarified the discussion of alternative
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Steps to Apply the
Proposals
Other Issues
Warranties
Licenses and rights to use
Onerous test
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Description of Changes to the Proposals
methods (that is, output and input
methods)
o Added guidance on uninstalled
materials
o Added guidance on reasonable
measures of progress
o Clarified the meaning of abnormal
costs.
• Changed the proposed constraint from an
entity’s reasonable estimate of the
transaction price to the entity being
reasonably assured to be entitled to the
amount of consideration recognized as
revenue to date. No change made to the
factors to consider when making that
determination other than clarifying that an
entity is not reasonably assured to be
entitled to a sales-based royalty amount
until the occurrence of the event that makes
the payment due.
• Revised the proposed guidance to require
an entity to account for some warranties as
a cost accrual, which is more consistent
with current practice.
• Eliminated the distinction between
nonexclusive and exclusive licenses. All
rights to use are transferred at a point in
time (subject to the separation criteria and
the proposal to constrain cumulative
revenue recognized to the amount to which
the entity is reasonably assured to be
entitled).
• Modified the scope of the test to a
performance obligation that an entity
satisfies over a period of time greater than
one year.
• Added guidance on which costs to include
when performing the test (an entity would
use the lower of the direct costs to satisfy
the performance obligation and the amount
the entity would pay to exit the performance
obligation, if permitted under the contract).
Steps to Apply the
Proposals
Acquisition costs
Fulfillment costs
Sale and repurchase
agreements
Disclosures
Breakage
Description of Changes to the Proposals
• Provided an exemption from recognizing a
liability for an onerous performance
obligation for not-for-profit entities if the
purpose of the contract is to provide a
social or charitable benefit.
• Changed the guidance in the 2010
proposed Update so that the incremental
costs of obtaining the contract (for example,
sales commissions) would be recognized as
an asset. As a practical expedient,
permitted the option to recognize
acquisition costs as an expense if the
contract is one year or less.
• Added disclosure requirements.
• Clarified how an entity would amortize the
asset recognized from fulfillment costs (that
is, the asset would be amortized in
accordance with the pattern of transfer of
goods or services to which the asset
relates, which might be provided in specific
anticipated contracts).
• Clarified the guidance on how an entity
would test the asset for impairment (that is,
revised the wording for precontract costs
and specified whether a reversal of an
impairment is required).
• Added disclosure requirements.
• Clarified the scope of the cost guidance
developed as part of the revenue project.
• Added guidance to specify that an entity
should account for a sale with a put option
as a lease if the customer has a significant
economic incentive to exercise the option.
• Limited the instances in which an entity
would provide a maturity analysis of
remaining performance obligations.
• Provided exemption from some disclosure
requirements for nonpublic entities.
• Added guidance on how to apply the model
when the customer purchases a material
right but chooses not to fully exercise that
right (that is, breakage). That guidance is
consistent with the 2010 proposed Update’s
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Steps to Apply the
Proposals
Transition
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Description of Changes to the Proposals
guidance in the example on customer
loyalty points.
• Provided some specified reliefs for
transitioning to the proposed standard on a
retrospective basis.