Greg H. Carver, The Daily Record Newswire
If you follow accounting standards in any way, and even if you don't, you have probably heard about the change in accounting standards related to revenue recognition. After a very long time in the making, the standard was approved in May 2014 with an implementation date of annual reporting periods beginning after Dec. 15, 2016, for public companies and Dec. 15, 2017, for non-public companies.
After getting flooded with feedback from various industries seeking further guidance, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-14, "Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date" on Aug. 12, 2015. This update postpones the effective date for one year, meaning that public companies would apply the standard to annual reporting periods beginning after Dec. 15, 2017, and nonpublic entities after Dec. 15, 2018, with some additional rules related to interim periods.
Along with the deferral, the FASB has also voted to propose a list of clarifications and changes to the new standard. Some areas where the Board voted to seek feedback include:
Licenses of intellectual property
Among the changes proposed was a clarification that the entity's promise to the customer in granting a license is to provide a right to access the entity's intellectual property (which is satisfied over time) when the contract requires or the customer reasonably expects the entity to undertake activities that significantly affect the utility of the intellectual property. Also, the board voted to a clarification stating that an entity should not split a sales- or usage-based royalty into a portion subject to the royalties constraint and a portion not subject to the royalties constraint.
Identifying performance obligations
The board voted to propose adding examples to illustrate how they intend the guidance about identifying performance obligations to be applied. FASB also voted to propose amendments that would address implementation issues about identifying promised goods or services that would be subject to the separation guidance; application of the distinct guidance; and accounting for shipping and handling activities.
Contract modifications
They voted to propose a practical expedient upon transition for accounting for a modified contract. The board would require disclosure of the expedient, as well as a qualitative assessment of the estimated effect of applying the expedient.
Principal vs. agent considerations
The board will clarify the thought process to be applied when assessing whether an entity is a principal or an agent by specifying the unit of account and more clearly linking the identification of that specified good or service to the guidance in the revenue recognition standard on identifying performance obligations.
They will also clarify that the "specified good or service," which is the unit of account for the principal versus agent evaluation, is each distinct good or service (or each distinct bundle of goods or services). This would clarify that in a contract that includes multiple goods or services, an entity may be a principal for one or more specified goods or services and an agent for others.
Sales tax presentation gross vs. net
The board agreed to propose a practical expedient that would allow an election for net reporting for all in-scope sales taxes with disclosure of the policy.
The clarifications and changes to the standard are welcome news as there are many companies who did not even know where to start with implementation. The new guidance from the FASB should make implantation easier for everyone.
Waiting for the changes to become final however would be a mistake when thinking about implementation at your company. If you are also struggling with where to start with your own company, the time is now to begin looking into implementation as there are far reaching implications for keeping up with the standard, from changes to internal processes to changes in your accounting system.
Larger companies are creating internal teams that that will examine every aspect of the standard to determine what needs to change. Smaller companies don't often have that luxury. Here are some options for smaller companies to begin implementation:
- Stay up to date with the changes proposed directly from the FASB. The FASB website will detail changes as they are approved and you can read meeting minutes of every meeting.
- The American Institute of Certified Public Accountants has a website with multiple resources for understanding and implementing the standard (www.aicpa.org), including 16 industry task forces that provide illustrative examples for how to apply the new standard.
- Industry associations or trade associations should be on top of the changes that will affect your industry, reach out to them or read articles that concern the new standard and your industry.
The new standard is certainly likely to be modified from where it is today, but it is certainly not going away. Understanding the standard and its effect on your business is critical and the time is now to begin the process.
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Greg H. Carver, CPA, is a manager with Mengel, Metzger, Barr & Co. LLP and may be reached at gcarver@mmb-co.com.
Published: Wed, Sep 09, 2015
