FASB reaffirms decisions on narrow-scope revenue topics
At its meeting yesterday, the FASB (1) reaffirmed its previous tentative decisions about collectibility and completed contracts upon transition and (2) directed its staff to draft a proposed Accounting Standards Update (ASU) on certain implementation issues related to ASU 2014-091 (the “new revenue model”).
The Board had tentatively decided at its March 18, 2015, meeting to clarify its guidance on collectibility and to add practical expedients intended to simplify (1) the presentation of sales tax collected from customers, (2) the measurement of noncash consideration, and (3) the treatment of completed contracts at transition. (See Deloitte’s March 20, 2015, Heads Up for additional information on the Board’s March 18, 2015, meeting.) However, in response to feedback from external reviewers on the proposed changes, at yesterday’s meeting the Board redeliberated collectibility and the transition guidance on completed contracts and made the tentative decisions discussed below.
Collectibility
As outlined in the meeting handout, the staff presented two overall approaches2 to the Board:
- Continue to assess collectibility as a criterion for the existence of a contract in step 1 of the new revenue model for accounting purposes (i.e., a contract only exists if it is probable that the consideration to which an entity is entitled from a customer will be collected; otherwise, revenue could only be recognized after the criteria in ASC 606-10-25-73 are met).
- Apply the collectibility assessment in determining the amount of revenue to recognize (remove it from step 1).
Because removing the collectibility assessment from step 1 would be a fundamental change to the new revenue model rather than a clarification of the guidance, and to maintain convergence with IFRS 15,4 the Board narrowly decided to reaffirm its tentative decisions reached at the March 18 meeting. The Board therefore indicated that collectibility should continue to be assessed in step 1 but that the guidance would be amended — including the guidance on contract terminations — and illustrative examples would be added.
Completed Contracts at Transition
The Board agreed to permit entities to apply the modified retrospective transition method to all contracts (i.e., regardless of whether they are completed). Further, the FASB clarified that a completed contract is one in which all or substantially all of the revenue was recognized under current GAAP.
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Editor’s Note: One board member indicated his intention to dissent to the entire proposed ASU because the Board had an opportunity to improve the guidance but failed to do so. Another board member acknowledged that he may dissent, but that if he did so, his dissent would most likely be limited to the FASB’s decision to retain collectibility in step 1. |
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1 FASB Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers.
2 The staff’s approaches included various alternatives such as lowering the collectability threshold from “probable” to “more likely than not,” using a “cash basis” approach similar to current GAAP, and moving collectability to step 5 of the new revenue model.
3 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s "Titles of Topics and Subtopics in the FASB Accounting Standards Codification."
4 IFRS 15, Revenue From Contracts With Customers.
