The FASB and IASB (the "boards") have reached agreement on several additional areas of the revenue recognition project. The decisions by the boards are tentative and subject to change. The boards expect to issue a final revenue standard later this year.
The boards, in light of constituent concerns, revisited proposed guidance surrounding the constraint on variable consideration. The boards confirmed that the amount of revenue recognized from variable consideration will be constrained to those amounts that management is confident will not be subject to significant reversal. Management will assess its experience with similar types of performance obligations and determine whether, based on that experience, the amount of revenue will be constrained.
The transaction price will include any minimum amount of variable consideration expected to be received (and subsequent changes to that amount) if management has predictive experience of the outcome of the arrangement and is confident that the amount will not be subject to significant reversal. Such minimum amount will be included in the transaction price even if the entire amount of variable consideration cannot be estimated with confidence at inception. The same principle will be applied to all arrangements involving variable consideration whether related to sales of goods or services or licenses of intellectual property.
Constituents have continued to request clarity related to the distinction between impairment losses on accounts receivable and price concessions, particularly concessions driven by a customer’s credit risk. The boards confirmed that management will need to consider all relevant facts and circumstances to make this determination, and agreed to clarify the distinction between impairment and a price concession in the final standard.
Management will need to determine whether credit risk creates the likelihood or expectation of a price concession at the inception of a contract. The transaction price will be reduced to reflect the expected concession, and any adjustments to that estimate will be recognized as an adjustment to revenue. Impairments of receivables, however, will be presented as an expense in a separate line item in the statement of comprehensive income.
The boards decided that the revenue standard will not provide guidance related to asset derecognition or cost recognition for arrangements that are not in the scope of the revenue standard. Rather, existing U.S. GAAP and IFRS standards, as amended to conform to the new revenue guidance, will address these issues. Arrangements that are not within the scope of another standard, and do not meet the definition of a contract with a customer, will be accounted for as follows:
Convergence is expected in the final revenue standard, except for disclosures in interim financial statements, disclosures required for non-public entities, and the ability to adopt the standard early. 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, with no early adoption permitted. 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 allow early adoption.
A 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).