The FASB and IASB (the “boards”) met in May to discuss certain issues related to their revenue recognition project. The boards jointly discussed the accounting for credit card reward programs and decided not to provide specific guidance on the accounting for such arrangements.
Separately, the FASB made a decision on the accounting for transfers of non-financial assets that are not an output of an entity's ordinary activities, especially those related to sales of real estate. The IASB made decisions regarding transition for first-time adopters of IFRS.
The decisions by both boards are tentative and subject to change. Any remaining “sweep” issues will be discussed at future meetings. The boards expect to issue a final revenue standard later this year.
Credit card companies that provide reward programs have expressed concerns related to whether and how the revenue model will apply to these programs. The boards decided not to provide specific guidance for applying the revenue model to credit card reward programs. They agreed that accounting for these transactions requires judgment given the various types of programs that exist.
An entity will need to apply the principles in the new revenue model to determine the appropriate accounting. This includes determining whether the reward program is an arrangement with a customer (and therefore in the scope of the guidance), and whether the program creates separate performance obligations or involves a distributor relationship. Such programs might also involve non-cash consideration or consideration payable to a customer. The timing and amount of revenue recognized might be different depending on the terms of the arrangement.
The FASB confirmed its January 2013 decision that guidance in the revenue standard related to the existence of a contract, transfer of control, and measurement (including the constraint on the amount of variable consideration that can be included in revenue) should apply to transfers of non-financial assets that are not an output of an entity's ordinary activities. This includes, for example, a sale of property, plant, equipment or other assets.
The FASB clarified that the revenue standard will apply to (i) transfers to a customer of a non-financial asset that is either a business or an asset and (ii) transfers of a non-financial asset that is not a business and not an output of an entity's ordinary activities. This decision was made in response to concerns raised regarding sales of real estate, but could have broader implications. Only transfers of a business to a “non-customer” will be outside the scope of the revenue guidance. The FASB decided that an entity should apply existing deconsolidation guidance in that case. The derecognition or timing of income recognition might differ depending on the guidance applied.
The IASB decided that first-time adopters of IFRS will not be permitted to use the simplified approach for transition to the revenue standard. They will instead be required to adopt the revenue standard retrospectively. However, they will not be required to restate contracts completed under legacy revenue requirements if they were completed before the earliest date presented.
The IASB also agreed that first-time adopters that apply the retrospective transition method will not need to disclose the effect of adopting the standard on the financial statements in the year of initial adoption. This is an exemption from existing disclosure requirements in IFRS when a new standard affects the current period.
Convergence is expected in the final revenue standard, except for disclosures in interim financial statements, disclosures required for non-public entities, and the effective date, including early adoption. Other differences might exist if the guidance requires management to refer to other standards (e.g., impairments and onerous contract losses) when 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.
The FASB decided the final standard will be effective for annual reporting periods beginning after December 15, 2016 for public entities and after December 15, 2017 for non-public entities. The IASB decided the final standard will be effective for the first interim period within annual reporting periods beginning on or after January 1, 2017, and will also allow early adoption.
The boards’ timeline indicates the final standard is expected later this year.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact members of the Revenue team in the National Professional Services Group (1-973-236-4377).