Companies working to implement the new revenue recognition standard have a little more guidance to consider after transition experts have vetted a few more lingering uncertainties.
The Transition Resource Group of the Financial Accounting Standards Board met recently to take up four more questions entities have raised around some detailed technical requirements in the new revenue recognition rules. Public companies have spent the better part of this year assessing how they will be affected and determining how they will transition to the new rules, which take effect for them in 2018.
The TRG, a broad-based panel of revenue recognition experts seated by both FASB and the International Accounting Standards Board to field questions on the new requirements, has met several times since the standard was issued to work through a number of uncertainties. Most recently, the TRG met to consider questions involving capitalization and amortization of incremental costs associated with obtaining a contract, payments to customers, recognizing revenue over time vs. at a point in time for certain types of contracts, and how to reflect minimum guarantees associated with royalties that are based on sales or usage.
According to an EY alert summarizing the most recent TRG discussions, TRG members generally agreed that commissions paid to all employees, regardless of how directly involved they were in obtaining a contract, should be considered incremental costs in obtaining the contract. That will be important in the determination of the asset the company will recognize as they follow the new method of recognizing revenue that is generated under sales commissions.
“Entities that expense commissions under legacy GAAP will have to record an asset for payments they expect to recover,” EY says. “And entities that capitalize commissions under legacy GAAP will have to capitalize all incremental costs of obtaining a contract, regardless of whether the employee is directly involved in obtaining the contract.”
With respect to payments to customers, where the new standard says companies should record payments as reductions of revenue, the TRG discussed a couple of possible approaches involving reducing revenue as goods or services are transferred to the customer or reducing revenue from the current contract by the amount of the payment. Ultimately, the TRG determined companies will have to pick the one that best fits their particular facts and circumstances.
The EY alert also provides detail on how the TRG reasoned its way through the questions on recognizing revenue over time and reflecting minimum guarantees. FASB Vice-Chairman Jim Kroeker, who chairs the TRG, says the group has no more scheduled meetings, but will meet again if further questions warrant TRG deliberation.