FASB clarifies guidance on licensing and identifying performance obligations

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14 Apr 2016

The US Financial Accounting Standards Board (FASB) has 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'.

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.

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 website.

Comparison with the IASB's guidance

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 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 a 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 guidance on when an entity is expected to undertake activities that will significantly affect intellectual property and, if so, to characterize a license as a right to use. The decisions are different and will 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.

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