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U.S. comment letter on narrow-scope improvements and practical expedients

Published on: Nov 20, 2015

Deloitte & Touche LLP comments on the FASB's proposed ASU, Narrow-Scope Improvements and Practical Expedients, issued by the FASB on September 30, 2015.

An excerpt from the comment letter is shown below:

We support the Board’s efforts to clarify and improve ASC 606 to help reduce potential diversity in practice and the initial and ongoing costs of applying the new revenue standard. We believe that most of the amendments in the proposed ASU are necessary to ensure that ASC 606 is understood and practical to implement. However, we believe that certain of the proposed amendments (1) do not sufficiently clarify how the principles in the standard should be applied and (2) will not achieve the Board’s objectives. Most importantly, we continue to be concerned that an entity’s failure to meet the collectibility criterion as part of step 1 of the new revenue model could result in accounting for nonrefundable consideration received from a customer in manner that is inconsistent with the underlying economics of the transaction. 

We appreciate that the Board deliberated the merits of our suggestion to incorporate the collectibility criterion into step 5 of the new revenue standard (i.e., the determination of when to recognize revenue), and we acknowledge that the Board has decided that collectibility should be evaluated as part of the determination of whether a contract with a customer exists. However, in certain circumstances the proposed guidance may result in unintended consequences, including the recognition of a liability when there is neither a refund obligation for amounts received (i.e., when amounts received are nonrefundable) nor an unsatisfied performance obligation related to the liability (i.e., the entity’s performance has already occurred, and there may be no future goods or service to be delivered). Further, there could be instances in which economically similar arrangements could be accounted for differently because of differences in a preparer’s conclusion about the goods or services expected to transfer to the customer. We believe that incorporating the collectibility criterion into step 5 rather than step 1 of the new revenue model would alleviate these concerns and result in greater consistency and operability in the application of ASC 606. 

Further, we understand that some believe that moving the assessment of collectibility to step 5 could result in unintended consequences. For example, a contract between an entity and a customer that may not represent a substantive transaction would nevertheless be accounted for as a contract with a customer in accordance with ASC 606. However, under paragraph 606-10-25-1 of the proposal, a contract must have commercial substance, and both parties to the contract must be committed to perform their respective obligations, to be accounted for as a contract with a customer. Both of those requirements will ensure that entities confirm that a valid and genuine transaction exists before revenue can be recognized, which is the Board’s objective. 

In addition to our concern about collectibility, we believe that certain other improvements and clarifications must be made for the Board to achieve its objectives of reducing the risk of diversity in practice and the cost and complexity of applying the guidance. Such improvements and clarifications are described in the appendix to this letter.

We encourage the FASB to continue to work with the IASB to reach converged outcomes, to the extent possible, on these and other amendments to ASC 606.  

We believe that transition resources such as the FASB-IASB joint revenue recognition transition resource group and the AICPA industry task forces have been an integral part of the implementation process and will remain so. We encourage the FASB to continue to support and monitor these groups. We also strongly support the FASB’s efforts to monitor entities’ implementation progress, publicly address implementation questions, assist entities and auditors during transition, and continue its dialogue with the IASB. 

Full text of the comment letter is available below.


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