The US Financial Accounting Standards Board (FASB) has issued amendments to the new US GAAP revenue recognition standard, Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606), focusing on changes to performance obligations and licensing, following similar amendments to IFRS 15 announced earlier this month
The amendments in this update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which comes into force initially for pubilc entities for fiscal years beginning affect 15 December 2017.
The key amendments, in line with changes to IFRS 15 Revenue from Contracts with Customers, issued earlier this month by the International Accounting Standards Board (IASB), affect identification of performance obligations and licensing implementation guidance.
Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract.
FASB says that ‘the amendments in this update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services’.
Revised guidance includes:
- an entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer; and
- an entity is permitted, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfil the promise to transfer the good rather than as an additional promised service.
Topic 606 includes implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments are intended to improve the operability and understandability of the licensing implementation guidance.
The main amendments afford clarity on the following:
- an entity’s promise to grant a customer a license to intellectual property that has significant standalone functionality;
- an entity’s promise to grant a customer a license to symbolic intellectual property (that is, intellectual property that does not have significant standalone functionality); and
- an entity considers the nature of its promise in granting a license, regardless of whether the license is distinct, in order to apply the other guidance in Topic 606 to a single performance obligation that includes a license and other goods or services.
In the 93-page FASB document, the US standard setter makes it clear that the amendments do not mark a major move away from the IASB’s approach, although there are differences in the approach taken which will impact on financial reporting outcomes between US GAAP and IFRS.
FASB states: ‘Although the amendments in this update are not identical, and some are incremental, to the amendments the IASB decided to make to its standard with clarifications to IFRS 15, the FASB expects that the amendments generally will maintain the convergence that was achieved with the issuance of Update 2014-09 and IFRS 15 by reducing the potential for diversity arising in practice.’
Due to a one-year deferral, the US GAAP standard is effective for public entities for fiscal years beginning after 15 December 2017 and for interim periods therein. Non-public entities are required to adopt the new guidance for fiscal years beginning after 15 December 2018, and interim periods within fiscal years beginning after 15 December 2019.