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FASB clarifies guidance on licensing and identifying performance obligations

  • FASB (US Financial Accounting Standards Board) (lt blue) Image

Apr 14, 2016

On April 14, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-10 'Identifying Performance Obligations and Licensing', which amends certain aspects of the Board’s new revenue standard, ASU 2014-09 'Revenue From Contracts With Customers'.

Earlier this week, the IASB issued Clarifications to IFRS 15 that address (1) identifying performance obligations, (2) principal-versus-agent considerations, and (3) licensing. The clarifications also provide some transition relief for modified contracts and completed contracts.

The following table compares selected amendments from the FASB’s guidance on identifying performance obligations and its licensing implementation guidance under ASU 2016-10 with the IASB’s guidance as a result of its recently issued clarifications to IFRS 15:

Identifying Performance Obligations
TopicFASB’s GuidanceIASB’s GuidanceComparison
Immaterial promised goods or services An entity is permitted to evaluate the materiality of promises at the contract level; if the promises are immaterial, the entity does not need to evaluate such promises further. No changes to IFRS 15. The ASU clarifies but does not change the revenue standard’s guidance; therefore, divergence is not expected.
Shipping and handling activities Clarifies that shipping and handling activities that occur before control is transferred to the customer are fulfillment costs. Allows entities to elect an accounting policy to treat shipping and handling activities as fulfillment costs if they occur after control is transferred. No similar policy choice is available for shipping and handling activities after control is transferred. The decision to not allow a policy election will result in divergence. Entities that adopt IFRSs will need to determine whether shipping and handling after control has transferred is a performance obligation.
Identifying when promises represent performance obligations Reframes the separation criteria to focus on a bundle of goods or services. Adds illustrative examples. Same as FASB’s guidance. Continued convergence is expected.
Licensing Implementation Guidance
TopicFASB’s GuidanceIASB’s GuidanceComparison
Determining the nature of an entity’s promise in granting a license Requires an entity to characterize the nature of a license as either functional or symbolic.

Clarifies the assessment of whether an entity's activities significantly change the license intellectual property (IP) to which the customer has rights to.

The decisions are different and may result in divergence. Although the accounting for many licenses will be similar under both U.S. GAAP and IFRSs, some licenses may be accounted for differently.
Sales-based and usage-based royalties Clarifies that rather than splitting a royalty (and applying both the royalty and general constraints to it), an entity would apply the royalty constraint if the license is the predominant feature to which the royalty is related. Same as FASB’s guidance. The decisions are the same; continued convergence is expected.

The ASU’s effective date and transition provisions are aligned with the requirements in the new revenue standard, which is not yet effective. For more information, see the ASU on the FASB’s website. Do not miss our Deloitte’s Heads Up newsletter on this topic.

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