FASB Issues Technical Corrections and Improvements to New Revenue Standard
The FASB recently issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, amending the new revenue recognition standard that it issued jointly with the IASB in 2014. The amendments do not change the core principles of the standard, but clarify certain narrow aspects of the standard including its scope, contract cost accounting, disclosures, illustrative examples, and other matters. The ASU becomes effective concurrently with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and is available here.
In May 2014, the FASB issued ASU 2014-09 establishing a comprehensive revenue recognition standard for virtually all industries, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. In May 2016, the FASB issued an exposure draft entitled “Technical Corrections and Improvements to Update 2014-09” which included nine proposed narrow amendments resulting from implementation issues discussed by the FASB Transition Resource Group, as well as technical inquiries and routine Codification feedback. In September 2016, the FASB issued a second exposure draft which included four additional proposed narrow amendments. The amendments in ASU 2016-20 finalize all of the changes proposed in both exposure drafts with the exception of proposed changes to the guidance on accounting for pre-production costs related to long-term supply arrangements, which the Board decided not to amend based on feedback from constituents. Based on comments from FASB staff and Board members, no additional changes to the new revenue standard are expected.
The amendments in ASU 2016-20 clarify the following items:
|Topic within ASC 606||Description|
|Loan guarantee fees||Topic 606 contains a scope exception for guarantees (other than product or service warranties) within the scope of Topic 460, Guarantees. Stakeholders indicated that consequential amendments related to the standard are inconsistent on whether fees from financial guarantees are within its scope. The ASU clarifies that guarantee fees within the scope of Topic 460 (other than product or service warranties) are not within the scope of Topic 606. Entities should apply Topic 815, Derivatives and Hedging, to guarantees accounted for as derivatives.|
|Contract costs – impairment testing||Subtopic 340-40, Other Assets and Deferred Costs, includes impairment guidance for certain capitalized costs. The ASU clarifies that when performing impairment tests of these costs 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 it expects to receive in the future.|
|Contract costs – interaction of impairment testing with guidance in other topics||Stakeholders questioned how the impairment testing in Subtopic 340-40 interacts with guidance in other Topics. The ASU clarifies that impairment testing should be performed in the following order:
|Provisions for losses on construction-type and production-type contracts||The new revenue standard retains existing guidance on the provision for loss contracts in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, but changed the assessment from the “segment” level in prior guidance to the “performance obligation” level under Topic 606. Stakeholders indicated that this change, in some circumstances, may require an entity to perform the loss assessment at a lower level than current practice. The ASU requires that the provision for losses be determined at least at the contract level, but also allows an accounting policy election to determine the provision for losses at the performance obligation level.|
|Scope of Topic 606||Topic 606 contains a scope exception for insurance contracts within the scope of Topic 944, Financial Services—Insurance. The Board’s intention was to exclude from Topic 606 all contracts that are within the scope of Topic 944, not only insurance contracts (e.g., investment contracts that do not subject an insurance entity to insurance risk). The ASU removes the term insurance from the scope exception to clarify that all contracts within the scope of Topic 944 are excluded from the scope of Topic 606.|
|Disclosure of remaining performance obligations||Topic 606 requires an entity to disclose information about its remaining performance obligations, including the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period. Topic 606 also includes certain optional exemptions from that disclosure requirement. The ASU provides additional optional exemptions for variable consideration when the variable consideration is either a sales-based or usage-based royalty promised in exchange for a license of intellectual property or is allocated entirely to a wholly unsatisfied performance obligation or a distinct unsatisfied portion of a series accounted for as a single performance obligation. However, the ASU expands the information to be disclosed when an entity applies one of the optional exemptions.|
|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 in this ASU 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.|
|Contract modifications example||The amendments in this ASU better align Example 7 with the principles in Topic 606 regarding contract modifications.|
|Contract asset versus receivable||Example 38, Case B in Topic 606 illustrates the application of the presentation guidance on contract assets and receivables. Some stakeholders expressed concern that the example indicates that an entity cannot record a receivable before its due date. The amendments in this ASU provide a better link between the analysis in Example 38, Case B and the receivables presentation guidance in Topic 606.|
|Refund liability||Example 40 in Topic 606 illustrates the recognition of a receivable and a refund liability. Some stakeholders expressed concern that the example indicates that a refund liability should be characterized as a contract liability. The ASU removes the reference to the term contract liability from the journal entry in Example 40.|
|Advertising costs||Guidance on when to recognize a liability for certain advertising costs had been included within Subtopic 340-20 and was inadvertently superseded by Topic 606. The amendments in this ASU reinstate the guidance on the accrual of advertising costs and also move it to Topic 720, Other Expenses.|
|Fixed-odds wagering contracts in the casino industry||Subtopic 924-605, Entertainment—Casinos—Revenue Recognition, currently includes explicit guidance that identifies fixed-odds wagering as gaming revenue. That industry-specific guidance was superseded by Topic 606. Therefore, some stakeholders 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. The ASU clarifies that fixed-odds wagering contracts issued by casino entities are exempt from derivative accounting and are within the scope of Topic 606.|
|Cost capitalization for advisors to private funds and public funds||The new revenue standard moved cost guidance from Subtopic 946-605, Financial Services—Investment Companies—Revenue Recognition, to Subtopic 946-720, Financial Services—Investment Companies—Other Expenses. This amendment was intended to move the guidance only and was not intended to change practice. However, it could have resulted in inconsistent accounting for offering costs among advisors to public funds and private funds. The ASU aligns the cost-capitalization guidance for advisors to both public funds and private funds in Topic 946.|
Effective Date and Transition
The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements of Topic 606, specifically:
Public business entities will adopt the standard for annual reporting periods beginning after December 15, 2017, including interim periods within that year. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.
All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted as of either:
- An annual reporting period beginning after December 15, 2016, including interim periods within that year; or
- An annual reporting period beginning after December 15, 2016 and interim periods within annual reporting periods beginning one year after the annual period in which an entity first applies the new standard.
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