The FASB and IASB (the “boards”) reached decisions at their December meeting on allocating the transaction price to separate performance obligations, applying the proposed model to bundled arrangements, constraining the cumulative amount of revenue recognized on licenses, and accounting for contract acquisition costs. The boards’ decisions are tentative and subject to change. Other key issues still to be redeliberated include scope, disclosures, transition and certain industry specific matters.
Allocating the transaction price — use of the residual approach
The boards decided to retain the proposals in the 2011 exposure draft relating to the use of a residual approach to estimate the standalone selling price of a performance obligation. They clarified that this approach can also be used when two or more performance obligations in a contract have standalone selling prices that are highly variable or uncertain. The boards also clarified that when two or more performance obligations have standalone selling prices that are highly variable or uncertain, the transaction price should first be allocated to the performance obligations for which standalone selling prices are determinable. The remaining (residual) transaction price should be allocated between the other performance obligations using another method of estimation.
The 2011 exposure draft includes guidance on when discounts and variable consideration in an arrangement should be allocated to specific performance obligations. The boards clarified that discounts or variable consideration should first be allocated to one or more specific performance obligations using that guidance. The entity would then use a residual approach to estimate the standalone selling price of any other performance obligations.
The boards retained the proposed guidance in the 2011 exposure draft for allocating the transaction price to distinct performance obligations. They confirmed that the proposed guidance can be applied to a portfolio of contracts or to performance obligations with similar characteristics, if the entity expects that doing so would not result in materially different outcomes from applying the guidance to an individual contract or performance obligation.
The boards decided not to provide an exception or practical expedient in response to the concerns expressed by the telecommunication industry on the practical challenges of applying the proposed revenue recognition model to a large portfolio of contracts with multiple deliverables. The boards were concerned that doing so would be inconsistent with the objectives of the overall revenue recognition model.
Constraining the cumulative amount of revenue recognized — licenses
The boards decided to remove the specific exception in the 2011 exposure draft that constrained revenue from licenses of intellectual property where payments vary based on the customer’s subsequent sales (for example, a sales-based royalty). They agreed that when consideration is highly susceptible to factors outside the entity's influence, the entity's experience for determining the transaction price might not be predictive. Highly susceptible factors could include actions of third parties, such as sales by an entity's customers. The boards will enhance the guidance to clarify this point, and that the underlying principle applies to all contracts with customers.
Contract acquisition costs
The boards decided to retain the guidance in the 2011 exposure draft requiring capitalization of contract acquisition costs if they are incremental and the entity expects to recover the costs. An entity may elect, as a practical expedient, to record these costs as an expense when incurred if the amortization period of the asset is one year or less.
The boards considered alternatives, including expensing all contract acquisition costs or allowing a policy choice to expense or recognize contract acquisition costs as an asset. They concluded that the guidance in the 2011 exposure draft is consistent with the decisions reached to date for the leasing, insurance and financial instruments projects, and the practical expedient would minimize implementation issues.
Convergence is expected for revenue recognition, as the same principles will be applied to similar transactions under both U.S. GAAP and IFRS. Differences might continue to exist to the extent that the guidance requires management to refer to other standards before applying the guidance in the revenue standard.
The proposal will affect most entities that apply U.S. GAAP or IFRS. Entities that currently follow industry-specific guidance should expect the greatest impact.
We anticipate the final standard to have an effective date no earlier than 2015.
The boards' timeline indicates issuance of a final standard in the first half of 2013. They are expected to finalize their redeliberations over the next few months and perform targeted outreach on some of the more significant changes.
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