Guidance on when to recognize revenue on a net or gross basis is expected to be highly consistent across U.S. and international rules when the Financial Accounting Standards Board and the International Accounting Standards Board issue their final amendments.
FASB and IASB met via videoconference recently to discuss amendments they each proposed to clarify guidance in the new revenue recognition standard meant to help companies sort out when to recognize revenue as the principal party to a contract with a customer and when to regard themselves instead as an agent of someone else in a transaction. That would determine whether they would recognize revenue on a gross or net basis.
“The boards agreed that maintaining converged amendments was important,” wrote EY on in a recent alert on the boards’ recent decisions. The final decisions are consistent with their proposed amendments, EY said.
The boards affirmed the principle in the new standard that says an entity’s promise to provide a specific good or service to a customer is based on control. An entity is an agent when it does not control the specified good or service being delivered to the customer, the boards said.
FASB and IASB agreed their proposals will clarify that a specified good or service is a distinct good or service to be provided to the customer, and depending on the circumstances, a specified good or service may be a right to an underlying good or service to be provided by another party.
The boards also affirmed their proposals to clarify the role of the indicators of control in their respective original standards. They will clarify, for example, that the indicators assist in the evaluation of control rather than override or replace the control evaluation, how each indicator relates to the control principle, and that one or more indicators may be more or less relevant to the control evaluation in different contracts.
FASB and IASB agreed they will reframe the indicators to say when an entity is a principle rather than when an entity is an agent, and they will eliminate exposure to credit risk as an indicator of when an entity has control over a good or service before it is transferred to the customer.
“These amendments, including adding and amending examples in the guidance, should help to address many of the implementation issues raised about the principal versus agent guidance in the new standards,” EY says. “Entities would still need to exercise significant judgment to evaluate whether a gross or net presentation is appropriate, as they do today.”
FASB Technical Director Sue Cosper said recently at a national accounting conference that FASB is well aware that companies are awaiting final guidance on amendments to the revenue recognition standard, and the board is working to expedite those amendments as early in 2016 as possible.