The FASB has finalized amendments to Topic 606 by issuing clarifying guidance on 13 narrow scope issues. Currently there are no other changes expected to the revenue standard prior to its effective date.
On December 21, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The amendments affect narrow aspects of the guidance issued in ASU 2014-09 (Topic 606) as summarized below.
1. Loan Guarantee Fees
ASC 606 specifically identifies a scope exception for guarantees (other than product or service warranties) within the scope of ASC 460, Guarantees. Stakeholders indicated that consequential amendments included in ASU 2014-09 are inconsistent on whether fees from financial guarantees are within the scope of ASC 606.
The amendments clarify that guarantees (other than product or service warranties), including guarantee fees, within the scope of ASC 460, Guarantees, are not within the scope of ASC 606. Entities should see Topic 815, Derivatives and Hedging, for guarantees accounted for as derivatives.
2. Contract Costs – Impairment Testing
Questions have been raised about the impairment testing for capitalized costs within the scope of the cost guidance in ASC 340-40 that was included in ASU 2014-09.
The amendments clarify that when performing impairment testing an entity should (a) consider expected contract renewals and extensions and (b) include both the amount of consideration it already has received but has not recognized as revenue and the amount the entity expects to receive in the future.
3. Contract Costs – Interaction of Impairment Testing with Guidance in Other Topics
There have been questions raised about what the interaction of the capitalized cost impairment testing guidance in ASC 340-40 with guidance in other codification Topics.
The amendments clarify that impairment testing first should be performed on assets outside the scope of ASC 340 (e.g. Topic 330, Inventory), then assets within the scope of ASC 340, then asset groups and reporting units within the scope of Topic 360, Property, Plant, and Equipment, and Topic 350, Intangibles-Goodwill and Other.
4. Provision for Losses on Construction-Type and Production-Type Contracts
Although the FASB excluded specific guidance in Topic 606 for onerous contracts, the FASB decided to retain the guidance on the provision for loss contracts in ASC 605-35, Revenue Recognition-Contraction-Type and Production-Type Contracts. The amended guidance that was issued as part of ASU 2014-09 changed the testing level to the performance obligation level from the segment level. Questions have been raised that, in some circumstances, an entity may have to perform the loss assessment at a lower level than current practice despite the FASB’s intent not to change practice in this area.
The amendments require that the provision for losses be determined at least at the contract level. However, entities are allowed to determine the provision for losses at the performance obligation level as an accounting policy election.
5. Scope of Topic 606
There is a scope exception in Topic 606 for insurance contracts within the scope of Topic 944, Financial Services-Insurance. The FASB’s intent was to exclude from Topic 606 all contracts within the scope of Topic 944, not just insurance contracts (e.g. investment contracts that do not subject an insurance entity to insurance risk).
The amendments remove the term insurance from the scope exception to clarify that all contracts within the scope of Topic 944 are excluded from Topic 606.
6. Disclosure of Remaining Performance Obligations
Topic 606 requires an entity to disclose information about its remaining performance obligations. This includes, among other things, for an entity to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially satisfied) as of the end of the reporting period. This guidance also includes practical expedients that would exclude contracts with an original duration of one year or less and performance obligations satisfied in accordance with ASC 606-10-55-18. Stakeholders questioned whether the FASB intended for an entity to estimate variable consideration for disclosure in other circumstances in which an entity is not required to estimate variable consideration to recognize revenue.
The amendments provide optional exemptions from the disclosure requirements for remaining performance obligations for specific situations in which an entity need not estimate variable consideration to recognize revenue. In addition, an entity would need to provide additional information to the users of financial statements if an entity is applying one of the optional exemptions for the disclosure of remaining performance obligations.
7. Disclosure of Prior-Period Performance Obligations
Topic 606 requires an entity to disclose revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods. Stakeholders indicated that the placement of the disclosure in the Codification results in confusion about whether this disclosure applies only to performance obligations with corresponding contract balances or to all performance obligations.
The amendments clarify that the disclosure of revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods applies to all performance obligations and is not limited to performance obligations with corresponding contract balances.
8. Contract Modifications Example
Example 7 in Topic 606 illustrates the application of the guidance on contract modifications. Some have questioned whether the example is inconsistent with the guidance in Topic 606.
The amendments improve the alignment of Example 7 with the guidance in Topic 606.
9. Contract Asset versus Receivable
Example 38, Case B in ASC 606 illustrates the application of the presentation guidance on contract assets and receivables. Some expressed concerns that the example indicates that an entity cannot record a receivable before its due date.
The amendments provide a better link between the analysis in Example 38, Case B and the receivables presentation guidance in ASC 606.
10. Refund Liability
Example 40 in ASC 66 illustrates the recognition of a receivable and a refund liability. Some have expressed concerns that the example indicates that a refund liability should be characterized as a contract liability.
The amendments remove from the journal entry in Example 40 the reference to the term contract liability.
11. Advertising Costs
ASU 2014-09 superseded much of the guidance in ASC 340-20, Other Assets and Deferred Costs, because it would have conflicted with the new cost capitalization guidance in ASC 340-40, Other Assets and Deferred Costs-Contracts with Customers. Therefore, an entity that previously capitalized advertising costs in accordance with ASC 340-20 would apply the capitalization guidance in ASC 340-40 upon the adoption of ASU 2014-09. Also, the guidance on when to recognize a liability that had been included in ASC 340-20 was also superseded by ASU 2014-09. Guidance on when to recognize a liability had been included within ASC 340-20 and was inadvertently superseded by ASU 2014-09.
The amendments in the ASU would reinstate the guidance on the accrual of advertising costs and also move the guidance to Topic 720, Other Expenses. That is, ASC 720-35-25-1A would be added as follows:
Expenditures for some advertising costs are made after recognizing revenues related to those costs. For example, some entities assume an obligation to reimburse their customers for some or all of the customers’ advertising costs (cooperative advertising). When revenues related to the transactions creating those obligations are recognized before the expenditures are made, those obligations shall be accrued and the advertising costs expensed when the related revenues are recognized.
12. Fixed-Odds Wagering Contracts in Casino Industry
Some have questioned whether fixed-odds wagering contracts are within the scope of Topic 606 or whether they should be accounted for as derivatives within the scope of Topic 815, Derivatives and Hedging. This question arose due to the fact that the industry specific guidance in ASC 934-605, Entertainment-Casinos-Revenue Recognition, was superseded by ASU 2014-09. This industry specific guidance had included explicit guidance that identifies fixed-odds wagering as gaming revenue.
The amendments would (a) create a new Topic 924-815, Entertainment-Casinos-Derivatives and Hedging, which would include a scope exception from derivatives guidance for fixed-odds wagering contracts and (b) include a scope exception within Topic 815, Derivatives and Hedging, for fixed-odds wagering contracts issued by casino entities.
13. Cost Capitalization for Advisors to Private and Public Funds
ASU 2014-09 relocated cost guidance from ASC 946-605, Financial Services-Investment Companies-Revenue Recognition, to ASC 946-720, Financial Services-Investment Companies-Other Expenses. The change was not meant to change practice, however, the change could result in inconsistent accounting for offering costs among advisors to public and private funds.
The amendments align the cost capitalization guidance for advisors to both public and private funds in Topic 946.
EFFECTIVE DATE AND TRANSITION
The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of ASU 2014-09 by one year.
Public entities must apply ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Nonpublic entities will be required to adopt the amendments for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. Earlier application is permitted for both types of entities only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early adoption prior to that date is not permitted. In addition, entities are required to adopt the ASU by using the same transition method they used to adopt the new revenue standard. That is either a full retrospective or modified retrospective approach.
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