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The Daily

FASB Proposes Narrowly-Targeted Changes to Rev. Rec. Standard

Chris Gaetano
Published Date:
Oct 1, 2015
Change Ahead SignCroppedThe Financial Accounting Standards Board (FASB) has proposed a series of changes to the revenue recognition standard in response to feedback from the FASB/IASB Joint Transition Resource Group. The FASB noted that the proposed changes do not change the core principles of the standard, which was formally approved last May and won't be implemented until 2017. 

Under the approved revenue recognition standard, entities are advised to take the following steps: 

1. Identify the contract with a customer. 
2. Identify the performance obligations in the contract. 
3. Determine the transaction price. 
4. Allocate the transaction price to the performance obligations in the contract. 
5. Recognize revenue when, or as, the entity satisfies a performance obligation. 

The first proposed amendment in the exposure draft would clarify when revenue would be recognized for a contract that fails to meet the criteria in step 1, that is when a contract isn't valid or doesn't represent a genuine transaction. In this case, entities can recognize revenue in the amount of consideration received when control of the goods or services has been transferred, the entity has stopped transferring additional goods or services, and has no obligation to transfer further goods or services (though the consideration received from the customer must be nonrefundable). 

The second amendment would allow an entity, as an accounting policy election, to exclude the amounts collected from customers for all sales taxes from the transaction price. 

The third would specify that the measurement date for noncash consideration is set at the inception of the contract; it would also clarify that the guidance on variable consideration only applies when that variability results from reasons other than the form of consideration. 

The fourth provides a practical expedient that allows an entity to determine and allocate the transaction price on the basis of all satisfied and unsatisfied performance obligations in a modified contract as of the beginning of the earliest period presented in accordance with the guidance in Topic 606. This means that an entity will not be required to separately evaluate the effects of each contract modification. 

The fifth concerns what to do when you have a completed contract that transferred goods or services in accordance with revenue guidance that was in effect before the new standard was implemented. Transition Resource Group members said it was unclear when such a contract should be considered completed for the purposes of the new guidance. The proposal says that elements of such a contract that do not affect revenue under the prior standard would be irrelevant to the assessment of whether that contract is complete. Further, under the proposal, entities would be able to apply the modified retrospective transition approach either to all contracts, or just complete contracts. 

The final one would clarify that entities applying the guidance retrospectively to each prior reporting period are not required to disclose the effect of the accounting change for the period of adoption, though they would still need to disclose the effect of the changes on any prior periods retrospectively adjusted. 

Comments on the proposal are due Nov. 16.