The FASB and IASB (the “boards”) decided at their January meeting to clarify the scope of the revenue standard, and they confirmed the accounting for repurchase agreements and performance fees by asset managers. They also confirmed that the accounting for transfers of non-financial assets that are not an output of an entity's ordinary activities should follow the guidance in the revenue recognition standard.
The boards’ decisions are tentative and subject to change. Disclosure and transition requirements are the key outstanding issues expected to be redeliberated at the February meeting.
The boards confirmed that the revenue recognition standard will apply to all contracts with customers, including transactions with collaborators or partners if they are in substance a customer in the transaction.
The boards retained the proposed guidance in their 2011 exposure draft on when to apply the revenue standard, as opposed to other guidance, when a contract includes multiple deliverables. An entity will apply guidance in other applicable standards first, and apply the guidance in the revenue standard only if other applicable guidance does not exist.
An entity may enter into a variety of arrangements where it agrees to repurchase sold goods (for example, call options, put options, or forward sales). These transactions might be treated as a lease, a financing, or a sale with a right of return. The boards confirmed the guidance in their 2011 exposure draft, which requires lease accounting for transactions where a seller agrees to repurchase an asset sold (a buyer's put option) if the buyer has a significant economic incentive to exercise the put. The boards also agreed that a residual value guarantee provided by the seller would not preclude revenue recognition unless the seller has an explicit or implicit obligation to repurchase the asset. The entity would account for such an obligation as a put option. The boards also confirmed that control has not transferred if the seller has a call option, presuming that option is substantive.
An entity might sell a good to an intermediary and then repurchase that good in order to lease it to a third party. The boards discussed the application of the proposed guidance to these transactions and decided no changes were needed. A sale may therefore be recognized for the sale to the intermediary, if control transfers.
The boards clarified the proposed guidance for sale-leaseback transactions where the customer has a put option at a price below the original sales price when there is a significant economic incentive to exercise the put. The boards decided these contracts should be treated as financing arrangements, consistent with their tentative decision in the leasing project.
Effect of the proposed revenue recognition model on asset managers
The boards confirmed that performance-based incentive fees for asset managers will be subject to the same constraint on recognizing revenue from variable consideration as other industries. That is, revenue is only recognized up to the amount that is not subject to a significant reversal in the future. Many performance-based fees might not be recognized until they become fixed as a result.
Transfers of assets that are not an output of an entity's ordinary activities
The boards confirmed that guidance in the revenue recognition standard related to the existence of a contract, transfer of control, and measurement (including the constraint on revenue recognition) should apply to transfers of non-financial assets that are not an output of an entity's ordinary activities. This would include, for example, a sale of property, plant and equipment.
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 final standard 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 are expected to finalize their redeliberations in the first quarter of 2013, with an aim to issue the final standard in the second quarter of 2013.
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