In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The issuance of this long-awaited standard completed the FASB’s joint project with its international counterpart, the International Accounting Standards Board (IASB), to clarify the principles of revenue recognition and to develop a common revenue standard for US GAAP and IFRS. Shortly after issuing the ASU, the FASB and the IASB created the FASB-IASB Joint Transition Resource Group for Revenue Recognition (TRG) to identify issues arising from the implementation of the new guidance. The TRG meets regularly and provides feedback to the FASB and the IASB. As a result of feedback received from the TRG related to performance obligations and licensing, the FASB issued a proposed ASU on May 12, 2015 to clarify the guidance surrounding these topics.
Performance Obligations Clarification - ASU No. 2014-09, Revenue from Contracts with Customers
The implementation issues surrounding performance obligations are related to the treatment of immaterial goods and services, shipping and handling activities, and the distinction between individual goods and services and combined goods and services.
- The proposed ASU states that an entity is not required to identify and allocate revenue to promised goods or services that are immaterial in the context of the contract and expresses that the Board’s intention was generally not to cause an entity to identify significantly more promised goods and services and performance obligations than under the existing revenue guidance.
- The proposed ASU would permit an entity to account for shipping and handling activities occurring after the transfer of the good to the customer as an act to fulfill the promise to transfer a good rather than as an additional promised service. This is an important clarification for manufacturers, retailers and other industries where sales transactions were not previously treated as multiple deliverable transactions that included a separate delivery component.
- The proposed ASU provides further guidance on whether a promise relates to the delivery of certain goods and services that are distinct and present multiple performance obligations or whether those goods and services are inputs to a combined deliverable that presents a single performance obligation.
Licensing Clarification - ASU No. 2014-09, Revenue from Contracts with Customers
The implementation issues around licensing are primarily related to the distinction between licenses that provide a right to access intellectual property and licenses that provide a right to use intellectual property.
- The ASU clarifies that when an entity provides a customer with a license to use intellectual property, the promise is satisfied at a point in time when the customer is able to use and benefit from the license. In this instance, the intellectual property has standalone functionality and is considered functional intellectual property. Functional intellectual property generally includes software, completed media content, and biological or drug formulas.
- The ASU states that when an entity provides a customer with a license to access intellectual property, the promise is satisfied over time because the entity has promised to provide continued support and maintenance over the license period.In this instance, the intellectual property does not have standalone functionality and is considered symbolic intellectual property.Symbolic intellectual property generally includes brands, logos, trade names and franchise rights.
The comment period for this exposure draft ends on June 30, 2015. Contact us with questions regarding implementation of the new revenue recognition guidance and visit our Construction Services Industry Group page to learn more about our practice group.