New discussions on how to implement the new revenue recognition standard raise new questions about whether there may be some lingering issues that might require yet more standard-setting attention from the Financial Accounting Standards Board.
FASB’s Transition Resource Group met recently to discuss five separate issues that have been raised as companies continue to prepare to adopt the new revenue recognition standard in 2018. The group demonstrated some consensus on how companies might move forward in addressing fees earned by financial institutions, measuring transfer of control over time, and accounting for contract assets in connection with a contract modification.
Consensus was more elusive, however, in discussions around how the “class of customer” concept should be applied to assess whether a contract contains a material right and around whether carried-interest arrangements in the asset management sector are covered by the new standard, according to an EY alert. “The FASB will need to consider whether any further action is needed for the issues on which the members of the FASB TRG did not reach general agreement,” wrote EY.
FASB is in the final stages of making small tweaks to the massive new requirements on revenue recognition to address questions on licensing, performance obligations, gross versus net recognition of revenue, and other technical corrections. The standard takes effect for public companies in 2018, requiring companies to present three years worth of financial statement data reflecting the new approach to recognizing revenue.
The recent TRG discussion that left preparers with no conclusive answers surrounded issues that will be important especially in the financial services and entertainment sectors. The class-of-customer question surrounds how an entity should determine whether a customer option to acquire additional goods or services represents a material right. As examples, EY wrote, think of future sales incentives, customer loyalty programs, renewal options and the like, all common in travel and entertainment offerings.
The new revenue standard says such options should be treated as a separate performance obligation, which would mean revenue would be allocated at the inception of a contract if the right is material. “TRG members expressed diverse views on several aspects of this determination,” EY wrote, indicating significant judgment may be required. FASB staff indicated they will consider whether to convene a separate meeting with stakeholder groups to continue the discussion.
TRG members also debated whether certain incentive-based fees received by asset managers are within the scope of the new standard. FASB staff members said they intended for the fees in question to be in scope, but some TRG members said they believed an alternative view was possible in which such fees would be accounted for under investment guidance. FASB members said they would consider whether a technical correction is warranted. “The new revenue standard could result in different financial reporting outcomes compared to current practice,” wrote PwC in an alert.
The TRG is scheduled to meet again in July. The group's "submission tracker," which catalogs all the implementation questions that have been vetted by the TRG, shows 94 questions that have been raised and only a few remaining that migth yet be discussed at a future meeting.