Boards discuss changes to new revenue standard

The new revenue recognition standard the FASB and the IASB issued in May 2014 to replace most current guidance has caused a flurry of implementation questions. That has led the boards to discuss making changes, as well as to propose a number of tentative clarifications regarding accounting for revenue from contracts with customers. At a recent joint meeting both boards tentatively decided to provide a practical expedient and other clarifications to assist entities in applying the new standard, but the wording of the changes is expected to differ between the FASB and the IASB.

Contract modifications
The boards tentatively decided to provide a practical expedient for accounting for modified contracts upon transition, using three steps:
  1. Identify both satisfied and unsatisfied contract performance obligations, including all modifications from the contract inception to the contract modification adjustment date (CMAD).
  2. Determine the transaction price at the CMAD, considering all modifications since the contract inception.
  3. Allocate that transaction price to the performance obligations based on historic stand-alone selling prices.

Here are actions taken by each board.
FASB: Tentatively decided that entities applying the full retrospective approach would use the beginning of the earliest presented period as the CMAD, while entities applying the modified retrospective approach would use the date of initial application of the new standard as the CMAD. Also tentatively decided not to provide an additional practical expedient for completed contracts.
IASB: Tentatively decided that entities electing either a full or a modified retrospective would use the earliest presented period as the CMAD. Also tentatively decided that entities electing the full retrospective approach would be allowed to apply that approach only to contracts that are not “completed contracts” under existing revenue standards as of the beginning of the earliest period presented ― a completed contract being a contract for which the entity has transferred all identified goods and services.
FASB and IASB: Tentatively decided that entities electing one of these practical expedients would need to disclose their use of the practical expedient(s) and provide a qualitative discussion on the estimated effect of that application.

Gross versus net presentation of sales tax
FASB: Tentatively decided to add a practical expedient allowing entities to elect to present amounts collected from customers for applicable taxes net of remitted amounts, and to disclose this policy election. Entities not electing the practical expedient would apply FASB Accounting Standards Codification® (ASC) 606 to assess whether those taxes should be included in the transaction price.
IASB: Tentatively decided not to add a similar practical expedient to International Financial Reporting Standards (IFRS) 15.

Noncash considerations
FASB: Tentatively decided to clarify that noncash consideration would be measured at contract inception. When fair value of noncash consideration varies because of the form of the consideration or other reasons, the constraint on variable consideration would apply only to the variability caused by reasons other than the form of the consideration.
IASB: Tentatively decided not to clarify the noncash guidance in IFRS 15, noting the approach required by the FASB’s amendment would not be the only acceptable interpretation; and requested that its staff monitor FASB progress on the issue.

FASB: Tentatively decided to amend the guidance on collectibility when identifying the contract to clarify these principles:

  • When a contract is considered “terminated” in accordance with ASC 606-10-25-7
  • That the objective of the collectibility threshold in ASC 606-10-25-1(e) is to assess the credit risk exposure for goods and services that will be transferred to the customer; therefore, an entity might not need to assess its ability to collect all the consideration in the contract to meet the threshold

IASB: Made no tentative decisions on this issue.