The Financial Accounting Standards Board has issued its proposed revisions to the revenue recognition standard intended to head off the potential for varied interpretation of the standard and to simplify and reduce the cost of compliance in some areas.
FASB’s proposed accounting standards update focuses on identifying performance obligations and accounting for revenue arising from a licensing agreement, issues that arose in FASB’s and the International Accounting Standards Board’s Joint Transition Resource Group as potentially problematic areas of implementation. The FASB and the IASB have already proposed a delay in the effective date of the revenue recognition standard, giving public companies an extra year to meet the new reporting standards.
With respect to performance obligations, FASB’s proposal says entities would not be required to identify goods or services promised in a contract with a customer that are immaterial within the context of the contract. The proposal also says entities would be permitted to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rater than as an additional promised services. In addition, the proposal would enhance the existing guidance around the criteria for assessing whether promises to transfer goods or services are distinct.
As for guidance around licensing arrangements, the FASB proposal includes new language meant to help sort out when revenue associated with a particular arrangement must be recognized over time or at a point in time. The new language addresses when an entity’s promise to grant access to intellectual property has significant standalone value and when the value is more symbolic in nature. It also addresses the entity’s need to consider the nature of its promise to grant access is not a separate performance obligation.
FASB’s propose poses a number of questions for stakeholders to consider, and asks for comments by June 30. FASB has said its goal is to approve any revisions to the standard as soon as possible so as not to further delay implementation efforts that are under way at many companies.