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Joint Panel to Explore Revenue Recognition Issues

Tammy Whitehouse | July 15, 2014

The first meeting of a group troubleshooting adoption of the massive new revenue recognition standard will focus on gross vs. net revenue, royalties, and capitalized contract costs at its inaugural meeting.

The Transition Resource Group, a joint body of the Financial Accounting Standards Board and the International Accounting Standards Board, will hold its first meeting on July 18 to begin working through implementation concerns arising as companies dig into the new standard governing how all companies will recognize revenue in financial statements. The agenda for the initial meeting says the group will discuss gross vs. net revenue and issues around amounts billed to customers, royalties in contracts that combine licenses with other goods or services, and impairment testing of capitalized contract costs.

FASB and IASB are not publishing letters sent to the group, but are providing staff-written papers explaining the issues that the joint TRG will review. The TRG doesn't have any authority to issue guidance or amend the standard, but it will determine what issues to recommend FASB and IASB consider for possible action.

With respect to gross vs. net revenue, FASB and IASB staff indicate that companies might end up with different interpretations of the standard when applying it to certain intangible or virtual arrangements, such as social networking sites, mobile applications, and hosted application software, like online games. The new standard may lead to some different answers regarding whether a particular entity is a principal seller or an agent of the principal, as well as how to record revenue on a gross basis when the gross number may not even be known to principal sellers under such arrangements.

The staff also says companies have questions about how to allocate the transaction price if the company is a principal for some performance obligations within an arrangement, but an agent for others. In addition, companies have questions about how to treat certain costs that are passed on to customers, like shipping, handling, reimbursement of out-of-pocket expenses, etc.

With respect to royalties, the staff paper says the group is hearing questions about sales-based and usage-based royalties promised in exchange for licenses of intellectual property when a contract includes a promise to deliver both one or more licenses of intellectual property and one or more goods or services other than licenses. The complexities of applying the guidance to such arrangement have led to questions about the exact meaning of the language and how to apply it. As for impairment testing of capitalized contract costs, the staff says companies are arriving at different interpretations about what costs to include in the impairment test depending on which of two paragraphs in the guidance they are reading.