The FASB has issued an Exposure Draft intended to improve the guidance on collectibility, noncash consideration, and completed contracts at transition in the new revenue recognition standard.
Additionally, the proposed amendments would provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.
The amendments in the Exposure Draft would not change the core principle of the guidance in Topic 606, Revenue from Contracts with Customers
. Rather, the proposals would affect only the narrow aspects discussed below.
The proposed amendments would clarify the objective of the collectibility criterion in Step 1 of the revenue model. The objective of this assessment is to determine whether the contract is valid and represents a genuine transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services that will be transferred to the customer.
The FASB also proposed a new criterion to paragraph 606-10-25-7 to clarify when revenue would be recognized for a contract that fails to meet the criteria in Step 1. Under the proposal, a company would recognize nonrefundable consideration received as revenue if it has transferred control of the goods or services, it has stopped transferring additional goods or services and has no obligation to transfer additional goods or services.
The proposed amendments specify that the measurement date for noncash consideration is contract inception when determining the transaction price. Any subsequent changes in the fair value of the noncash consideration due to its form are not included in the transaction price and would be recorded, if required, as a gain or loss in accordance with other accounting guidance and not as revenue.
The proposal would also clarify that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration.
Contract Modifications at Transition
The FASB proposed adding a practical expedient to provide some relief when accounting for contracts that were modified prior to adoption under both the full and modified retrospective transition approaches. This would be especially helpful for entities that have multi-year contracts that have been modified many times.
That practical expedient would permit 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 new guidance in Topic 606.
Completed Contracts at Transition
In order to provide clarity on when a contract should be considered “completed” for purposes of applying the revenue recognition model, the FASB proposed clarifying that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application.
Accounting for elements of a contract that do not affect revenue under legacy GAAP would be irrelevant to the assessment of whether a contract is complete. These clarifications are important because companies that use the modified retrospective transition approach need to apply the standard only to contracts that are not complete as of the date of initial application, and entities that use the full retrospective approach may apply certain practical expedients to completed contracts.
In addition, the amendments in this proposal would permit an entity to apply the modified retrospective transition approach either to all contracts or to completed contracts only.
Presentation of Sales and Other Similar Taxes
The amendments in the Exposure Draft would permit an entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price. If an accounting policy is elected, companies would not need to evaluate taxes they collect in all jurisdictions in which they operate to determine whether a tax is levied on the entity or the customer.
Comments on the Exposure Draft are due by November 16, 2015. The full text of the Exposure Draft is available by clicking here.
Readers should not act upon information presented without individual professional consultation.