Straight Away Special Edition

Transcription

1 Straight away Special edition In transition The latest on revenue recognition implementation 19 January 2015 The new revenue standard changes on the horizon A summary of the proposed amendments At a glance Since issuing the new revenue standard in May 2014, the FASB and IASB have proposed various amendments to the guidance. This In transition summarizes the proposed changes, highlighting the key impacts and the areas where the FASB and IASB have taken different approaches. Summary of the proposed amendments The boards have proposed several amendments to the new revenue standard as a result of feedback from stakeholders and discussions by the Transition Resource Group (TRG). The TRG is a working group established by the FASB and IASB to debate and provide feedback on potential implementation issues related to the new revenue standard. The appendix to this publication includes a list of the TRG issues discussed to date. In 2015, both boards decided to defer the effective date of the new revenue standard by one year. The revised effective date is 2018 for calendar year-end public companies. The boards have also proposed amendments and clarifications to various aspects of the guidance. These amendments were proposed in a series of three FASB exposure drafts and one comprehensive IASB exposure draft. Topic FASB ED IASB ED Same proposals? * Identifying performance obligations Licenses Principal versus agent Transition Licensing and performance obligations, issued May 2015 Principal versus agent considerations, issued August 2015 Clarifications to IFRS 15, issued July 2015 Collectibility Narrow scope None No Presentation of sales improvements, issued taxes September 2015 None No Noncash consideration None No Partially Partially Yes Partially *Refers to the proposed amendments to ASC 606 and IFRS 15, Revenue from Contracts with Customers. 1

2 Identifying performance obligations A key aspect of the new revenue standard is identifying the performance obligations, which are the unit of account for applying the guidance. Various stakeholders provided feedback that it is not clear how to determine whether a good or service is separately identifiable from other promises in a contract. Additionally, some stakeholders raised concerns about the cost and complexity of applying the guidance to shipping and handling services, and immaterial performance obligations. In response, the FASB proposed amendments to clarify its guidance. The IASB proposed more limited changes to the related examples. Determining whether a good or service is separately identifiable from other promises in the contract The FASB s proposal clarifies the principle for determining whether a good or service is separately identifiable from other promises in the contract. The revised principle states that the objective is to determine whether the nature of an entity s promise is to transfer individual goods or services to the customer, or to transfer a combined item (or items) to which the individual goods and services are inputs. The FASB also proposed new examples and amendments to the existing examples illustrating these principles. The IASB s initial proposal did not include changes to the principle in the guidance. However, at its 15 December 2015 meeting, the IASB decided to pursue further convergence with the FASB s proposed language. The IASB also proposed to add new examples, and amend existing examples, to clarify how to apply the guidance. The new and amended examples are similar, but not identical, to those proposed by the FASB. However, the IASB committed to working with the FASB to pursue further convergence on the examples. The FASB s proposed amendments help clarify how to apply the guidance on identifying performance obligations in various scenarios, such as when a vendor sells a piece of equipment and a related installation service. The amendments may result in differences between the US GAAP and IFRS standards. The boards have suggested that the financial reporting outcomes are expected to be the same despite the potential differences. Shipping and handling activities The FASB s proposal would allow entities to elect to account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfilment cost rather than an additional promised service. amendment. Entities are therefore required to consider whether shipping and handling services give rise to a separate performance obligation. The FASB s proposed amendment would reduce the cost and complexity of applying the revenue standard for some US GAAP reporting entities. However, the introduction of this election may result in diversity in practice that could, in some instances, have a material impact to the financial statements. It would also create a difference between entities applying US GAAP that elect the expedient and entities applying IFRS. 2

3 Immaterial goods or services The FASB s proposal clarifies that entities are not required to identify promised goods or services that are immaterial in the context of the contract. amendment; however, the IASB included additional discussion in the basis for conclusions stating that entities should consider the overall objective of IFRS 15 as well as materiality in identifying promised goods or services in a contract. The FASB s intent is to not require US GAAP reporting entities to incur time and cost to identify and track immaterial items. The IASB did not propose a similar amendment; however, the IASB has indicated that IFRS does not require entities to account for immaterial items. The comment period for the FASB s exposure draft ended on 30 June The FASB redeliberated its proposal in October, affirming its decisions on the above matters. The FASB also decided that if revenue is recognized before shipping and handling services are performed or the transfer of immaterial goods or services, entities should accrue the related costs. The FASB directed the staff to draft a final Accounting Standards Update ( ASU ). The comment period for the IASB s exposure draft ended on 28 October The IASB redeliberated its proposal in December and generally affirmed its decisions on the above matters, but agreed to pursue further convergence with the FASB on amendments to the separately identifiable guidance and related examples. The IASB expects to issue its final amendments in Licenses The new revenue standard includes specific guidance on the accounting for licenses of intellectual property ( IP ). This guidance addresses whether the license is a right to access or a right to use the entity s IP, which determines whether revenue is recognized over time or at a point in time. The standard also states that revenue from sales-based and usage-based royalties promised in exchange for a license of IP should not be recognized until the subsequent sale or usage occurs. This is an exception to the general guidance for variable consideration, which requires entities to estimate variable fees, subject to a constraint. The license guidance has raised a number of questions and implementation challenges. These include: How to determine the nature of an entity s promise in granting a license; that is, whether the license is a right to access or a right to use IP Whether the sales-based and usage-based royalty exception applies where the royalty relates to both a license and other goods or services 3

4 Whether restrictions of time, geography, or use in a license impact the number of promises in the contract; that is, whether a contract can include multiple distinct licenses How to apply the license guidance in the event a license is not distinct from other goods or services As a result, both the FASB and IASB proposed amendments to the license guidance. The nature of a company s promise in granting a license Under the FASB s proposal, licenses would be classified as either symbolic IP (for example, brand names or logos) or functional IP (for example, software or completed media content). All licenses of symbolic IP would be recognized over time as a right to access license. Functional IP would be recognized at a point in time as a right to use license unless the functionality of the IP is expected to substantively change as a result of activities of the entity that do not transfer a good or service to the customer. The FASB also proposed new examples and amendments to the existing examples. The IASB proposed limited amendments to clarify the existing principle. The proposal clarifies that an entity s activities significantly affect the IP (a criterion to determine if the license is a right to access IP) if (a) the entity s activities change the form or functionality of the IP or (b) the utility of the IP is substantially derived from or dependent upon those activities (e.g., a brand name). The IASB also proposed amendments to the existing examples to illustrate the clarified principle. The FASB s proposal is intended to make the guidance more operational and reduce diversity by establishing a bright line between functional and symbolic IP. The amendments would result in divergence between the US GAAP and IFRS standards. The boards have indicated that they believe the financial reporting results will be the same in most cases. We believe there will be some instances where the conclusion would differ under US GAAP and IFRS. For example, under US GAAP, revenue from a license of symbolic IP would be recognized over time even if the licensor is clearly performing no activities related to the IP. The licensor would recognize revenue at a point in time under IFRS, however, since it is no longer supporting the IP. The exception for licenses of IP with salesand usagebased royalties The FASB s proposal would not require an entity to split a royalty into the portion that is subject to the royalty exception and the portion that is not. The amendment clarifies that the royalty exception applies when the predominant item to which the royalty relates is a license. The IASB proposed the same amendment. 4

5 The boards proposal helps clarify in which circumstances the royalty exception applies. The boards do not intend to provide further guidance on the definition of predominant, so this assessment will require judgment. Determining whether contractual restrictions impact the number of promises in a contract The FASB proposed an amendment to clarify that contractual restrictions of time, geography, or use are attributes of the license and do not affect the number of promised goods or services in a contract. amendment; however, the IASB included additional discussion in the basis for conclusions stating that restrictions of time, geography, or use are attributes of the license and do not affect the number of promised goods or services in a contract. There continues to be debate regarding how the guidance on restrictions should be interpreted. The topic was discussed at the TRG s November meeting where TRG members expressed differing views. The guidance in this area will have a significant impact to entities that license IP if those licenses contain contractual restrictions. Determining whether the license guidance applies when the license is not distinct The FASB s proposal clarifies that an entity may need to consider the nature of a license, even if it is not distinct from other goods or services in the contract. An example is a tenyear term license that is combined with a two-year service into a single performance obligation. In that situation, it could be necessary to assess whether the license is a right to use IP (revenue recognized at a point in time) or a right to access IP (revenue recognized over time) to determine the pattern of recognition for the combined performance obligation. amendment; however, the IASB included discussion in the basis for conclusions stating that, in some cases, an entity might need to consider the nature of its promise in granting a license, even when the license is not distinct. The FASB s and IASB s guidance would differ in this area; however, we do not believe the different wording will result in significant differences in accounting conclusions. 5

6 The comment period for the FASB s exposure draft ended on 30 June The FASB redeliberated its proposal in October, affirming its decisions on the majority of the above matters. As noted above, the impact of license restrictions continues to be debated and was recently discussed at the TRG s November meeting. We expect the boards to discuss this issue further as they finalize their proposed amendments to the licensing guidance. The comment period for the IASB s exposure draft ended on 28 October The IASB redeliberated its proposal in December, largely affirming its decisions on the above matters. The IASB expects to issue its final amendments in Principal versus agent When more than one party is involved in a revenue transaction, the new revenue standard requires an entity to determine whether it is the principal (providing the goods or services itself) or an agent (arranging for another party to provide those goods or services). A principal reports revenue based on the gross amount received from the customer and an agent reports only its fee or commission (that is, net of the amount it remits to the other party). The standard states that an entity is a principal if it controls a good or service before it is transferred to the customer. Stakeholders expressed concerns with how to identify the unit of account for the assessment, how to apply the control principle to services, and the relationship between the control principle and the indicators in the guidance. As such, both boards agreed to make targeted improvements to clarify the guidance and the related examples. Identifying the unit of account for the principal versus agent assessment The FASB s proposal clarifies the unit of account for the principal versus agent assessment and requires an entity to first identify the specified good or service being provided to the customer. The amendments clarify that an entity may be a principal for one or more specified goods or services in a contract and an agent for others. The IASB proposed the same amendments. Applying the notion of control to services performed by another party The FASB s proposal clarifies that a principal can control a service if it directs another party to perform the service for the customer on its behalf. The proposal also clarifies that an entity can control a good or service when it provides a significant service to integrate other goods or services into the specified good or service for which the customer has contracted. The IASB proposed the same amendments. The relationship between the The FASB s proposal clarifies that the indicators assist an entity in The IASB proposed the same amendments. 6

7 notion of control and the indicators evaluating whether it controls a good or service before it is transferred to a customer (that is, the indicators do not override or replace the control evaluation). The proposal reframes the existing indicators to provide evidence of when an entity is a principal, rather than when an entity is an agent, and to add explanatory language on how each indicator supports the control evaluation. We do not expect that the proposed amendments would result in pervasive changes in gross versus net reporting conclusions as compared to existing guidance. It is possible, however, that some conclusions could change under the new revenue standard based on the control principle and other clarifications to the guidance. Entities should plan sufficient time to review and understand the terms of their contracts with customers and vendors, which can often be complex, to ensure appropriate conclusions are reached under the new revenue standard. The boards have remained converged in their proposed amendments to the standard relating to principal versus agent considerations. However, the boards included differing discussion in the basis for conclusions regarding the accounting by an entity that is a principal, but does not know the price for which the intermediary (agent) sells goods or services to the customer. The FASB s discussion suggests the principal should generally recognize revenue equal to the amount it receives from the intermediary (i.e., on a net basis), while the IASB s discussion suggests it could be appropriate for the principal to estimate the transaction price. The comment periods for the FASB s and IASB s exposure drafts ended on 15 and 28 October, respectively. The boards jointly redeliberated the principal versus agent proposals in December, and largely affirmed their decisions on the above matters. At that meeting, the boards voted to eliminate the credit risk indicator because it does not readily link to the control principle and is typically less relevant to the evaluation. Both boards expect to issue their final amendments in Transition The new revenue standard includes two transition alternatives: the modified retrospective transition approach and the full retrospective transition approach. The standard also includes some practical expedients to simplify transition. Both boards proposed clarifications and new practical expedients in response to stakeholder feedback in order to further ease transition. 7

8 Contract modifications The FASB proposed a use of hindsight practical expedient intended to simplify the transition for contracts modified multiple times prior to the initial application of the standard. An entity applying the expedient would determine the transaction price of a contract at the date of initial application and perform a single, standalone selling price allocation (with the benefit of hindsight) to all of the satisfied and unsatisfied performance obligations in the contract from inception. The IASB proposed the same practical expedient; however, the date the expedient is applied is the beginning of the earliest period presented. At its 15 December 2015 meeting, the IASB decided to allow entities, as an alternative, to apply this practical expedient at the date of initial application. The boards have made similar, but not identical, proposals intended to ease transition for contracts that have been modified multiple times. The difference in the proposals is primarily that the FASB proposed one date at which the expedient can be applied, whereas the IASB will permit a choice of dates at which the expedient can be applied. Completed contracts at transition An entity using the modified retrospective transition approach will not apply the new standard to contracts that are complete as of the date of initial application. The FASB s proposed amendments change the definition of a completed contract to a contract for which all, or substantially all, of the revenue was recognized under previous revenue guidance before the date of initial application. Additionally, the proposed amendments would permit entities to apply the new standard to either all contracts or only contracts that are not complete under the modified retrospective transition approach. The IASB did not propose a change to the definition of completed contracts. A completed contract is a contract for which the entity has transferred all of the goods or services identified in accordance with previous revenue guidance. At its 15 December 2015 meeting, the IASB voted to permit entities to apply the new standard either to all contracts or only contracts that are not complete under the modified retrospective transition approach. The IASB also proposed to permit entities using the full retrospective transition approach to not restate contracts that are completed contracts as of the beginning of the earliest period presented. The FASB s proposal to change the definition of a completed contract is intended to resolve certain implementation issues that were raised at the TRG s July meeting. The different definitions of a "completed contract," however, could lead to reduced comparability between US GAAP and IFRS reporters upon transition. More contracts are likely to meet the IASB s definition of a completed contract than the FASB s definition. Further, IFRS reporters might encounter fact patterns where they will 8

9 continue to recognize revenue based on the previous revenue guidance related to a completed contract after adoption of the new revenue standard. Disclosure requirements for the full retrospective transition approach The FASB proposed a technical correction to clarify the disclosure requirements for entities applying the full retrospective transition method. Entities applying that method will record a cumulative effect adjustment in the earliest period presented and disclose the impact of applying the standard to the periods retrospectively adjusted, but are not required to disclose the effect of the accounting change for the year of adoption. The disclosure requirements under IFRS do not require entities to disclose the effect of the accounting change in the year of adoption; therefore, no technical correction was necessary. The FASB s proposed technical correction provides relief to entities applying the full retrospective transition method as they will not be required to track the differences between applying the current guidance and the new standard in the year of adoption. The comment period for the FASB s exposure draft ended on 16 November 2015 and the FASB is in the process of reviewing responses received. The comment period for the IASB s exposure draft ended on 28 October The IASB redeliberated its proposal in December and decided to permit certain transition expedients that align with the FASB s proposals, as noted above, to ease transition for entities reporting under both US GAAP and IFRS. Both boards expect to issue their final amendments in Collectibility The new standard requires an entity to assess whether collection of consideration is probable. If collection is not probable, the standard provides specific guidance for recognizing revenue for any consideration received. Some stakeholders expressed concerns that the accounting for contracts that fail the collectibility criterion is punitive and stakeholders expressed differing views about how the collectibility assessment should be performed. The FASB decided to propose amendments to the guidance to address these concerns. The IASB did not propose amendments in this area as it believes the discussion in the standard and the basis for conclusions provides adequate guidance. Assessing collectibility of contract consideration The FASB s proposal clarifies that entities should consider, as part of the collectibility assessment, their ability to mitigate their exposure to credit risk, for example by ceasing to provide goods or services in the event of nonpayment. The proposed amendment; however, the IASB included additional discussion in the basis for conclusions stating that entities should consider, as part of the collectibility assessment, their ability to 9

10 amendments also clarify when revenue should be recognized for nonrefundable consideration received if a contract fails the collectibility assessment. The FASB has proposed new examples and amendments to the existing example to illustrate the collectibility guidance. mitigate exposure to credit risk throughout the contract, for example, by ceasing to provide goods or services or requiring advance payments. The FASB s proposal is intended to narrow the population of contracts that fail the collectibility assessment. The FASB s amendments would result in differences between the US GAAP and IFRS standards. Based on the IASB s clarifications in the basis of conclusions, we do not expect a significant difference in financial reporting outcomes in most cases. The FASB s proposed amendments to Example 1, however, would result in differing conclusions regarding the timing of transfer of control for the same fact pattern in the two standards. The comment period for the FASB s exposure draft ended on 16 November The FASB is in the process of reviewing responses received and expects to issue its final amendments in The comment period for the IASB s exposure draft ended on 28 October The IASB redeliberated its proposal in December and affirmed its decision not to amend the collectibility guidance. The IASB expects to issue its final amendments in Sales tax presentation The new revenue standard requires taxes collected from customers to be assessed on a jurisdiction-by-jurisdiction basis to determine if these amounts should be presented net against revenue or gross (as revenue and an operating expense). Assessing each tax on a jurisdiction-by-jurisdiction basis might be a complicated and time consuming process, particularly for US GAAP reporters that previously could elect to present these taxes on a gross or net basis. The FASB decided to propose an amendment providing a practical expedient in this area. The IASB decided not to provide a practical expedient, largely because there is not a similar policy election under IFRS today. Sales tax presentation The FASB s proposal would allow an entity to make an accounting policy election to present all sales taxes collected from customers on a net basis. Entities that do not elect the new practical expedient would evaluate each type of tax on a jurisdiction-by-jurisdiction basis to determine which amounts to amendment. 10

11 exclude from revenue (as amounts collected on behalf of third parties) and which amounts to include. Entities would be required to disclose the policy, if elected. The FASB s proposal could reduce cost and complexity for certain US GAAP reporters. However, it is a change from today s US GAAP, which allows entities to elect to present such amounts on a gross or net basis. The proposal would also result in a specific difference between entities applying US GAAP that make the election (if sales tax would have otherwise been reported on a gross basis) and entities applying IFRS. The comment period for the FASB s exposure draft ended on November 16, The FASB is in the process of reviewing responses received and expects to issue its final amendments in The comment period for the IASB s exposure draft ended on 28 October The IASB redeliberated in December and affirmed its decision not to provide a similar election. The IASB expects to issue its final amendments in Noncash consideration The new revenue standard states that entities should measure noncash consideration received from a customer at fair value. Stakeholders questioned at which date fair value should be measured and how to apply the constraint on variable consideration to noncash consideration. As a result, the FASB proposed amendments to address these matters. The IASB did not propose an amendment as it believes measurement date should be addressed more comprehensively in a separate project to avoid unintended consequences. Determining the measurement date for noncash consideration The FASB s proposal specifies that the measurement date for noncash consideration is at contract inception and amends the related example. amendment. Determining how to apply the variable consideration guidance to contracts with noncash consideration The proposal clarifies that the guidance on constraining the estimate of variable consideration applies to variability resulting from reasons other than the form of consideration. Therefore, the variable consideration guidance would not apply, for example, to amendment. 11

12 variability related to changes in stock price when consideration is in the form of equity instruments. The FASB s proposal is a significant change from existing US GAAP related to equity instruments received in exchange for goods or services [ASC , Equity-Based Payments to Non-Employees]. Under current guidance, the fair value of an equity instrument is typically measured when the entity s performance is complete. The FASB s proposal would require entities to recognize changes in the fair value of noncash consideration after contract inception as a gain or loss in earnings (that is, excluded from revenue from contracts with customers). This may raise additional accounting questions, such as the implication of changes in the fair value of noncash consideration that occur prior to an entity s performance. The proposal would also result in a difference between the US GAAP and IFRS standards; in particular, it would result in the same example (i.e., Example 31, Entitlement to Noncash Consideration) having differing conclusions under the two standards. There might also be more diversity in practice under IFRS given that there will not be specific guidance regarding measurement date. The comment period for the FASB s exposure draft ended on 16 November The FASB is in the process of reviewing responses received and expects to issue its final amendments in The comment period for the IASB s exposure draft ended on 28 October The IASB redeliberated in December and affirmed its decision not to amend the noncash consideration guidance. The IASB expects to issue its final amendments in

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