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FASB clarifies guidance on licensing and identifying performance obligations

  • FASB document Image

Apr 14, 2016

The FASB has issued Accounting Standards Update (ASU) No. 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.”

The amendments include the following:

  • Identifying performance obligations:
    • Immaterial promised goods or services — Entities may disregard goods or services promised to a customer that are immaterial in the context of the contract.
    • Shipping and handling activities — Entities can elect to account for shipping or handling activities occurring after control has passed to the customer as a fulfillment cost rather than as a revenue element (i.e., a promised service in the contract).
    • Identifying when promises represent performance obligations — The new guidance refines the separation criteria for assessing whether promised goods and services are distinct, specifically the “separately identifiable” principle (the “distinct in the context of the contract” criterion) and supporting factors.
  • Licensing implementation guidance:
    • Determining the nature of an entity’s promise in granting a license — Intellectual property (IP) is classified as either functional or symbolic, and such classification should generally dictate whether, for a license granted to that IP, revenue must be recognized at a point in time or over time, respectively.
    • Sales-based and usage-based royalties — The sales-based and usage-based royalty exception applies whenever the royalty is predominantly related to a license of IP. The ASU therefore indicates that an “entity should not split a sales-based or usage-based royalty into a portion subject to the guidance on sales-based and usage-based royalties and a portion that is not subject to that guidance.”
    • Restrictions of time, geographical location, and use — The ASU’s examples illustrate the distinction between restrictions that represent attributes of a license and provisions specifying that additional licenses have been provided.
    • Renewals of licenses that provide a right to use IP — Revenue should not be recognized for renewals or extensions of licenses to use IP until the renewal period begins.

Editor's Note: 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 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 Deloitte's Heads Up newsletter as well as the ASU on the FASB’s Web site.

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