The FASB and IASB (the "boards") met to finalize the outstanding issues related to their joint revenue recognition project. The decisions by the boards are tentative and subject to change, but the boards do not intend to jointly discuss revenue again and expect to issue a final revenue standard in late 2013 or early 2014.
Constraint on variable consideration including sales- or usage-based royalties
The boards confirmed that an estimate of variable consideration is included in the transaction price if it is “probable” (U.S. GAAP) or “highly probable” (IFRS) that the amount would not result in a significant revenue reversal. The estimate recorded will be a portion of the total variable consideration (i.e., a minimum amount) when only that portion is probable of not being reversed. Companies must reassess this each reporting period.
The boards reversed an earlier decision by reintroducing an exception for revenue from sales- or usage-based royalties on licenses of intellectual property. Royalties from licenses of intellectual property (IP) are not included in the transaction price until they are no longer variable (that is, when customer’s subsequent sales or usages occur). The exception does not apply to other sales- or usage-based royalty arrangements.
The boards decided on a model that distinguishes between two types of licenses - one that provides a right to use IP and one that provides access to IP. The type of license largely depends upon whether the nature of the underlying IP is “dynamic” or “static.” A license of static IP is considered a right to use IP and results in revenue recognition when control has transferred to the licensee and the license period has begun. A license that allows the customer to access an entity’s IP as it exists at the time of access results in revenue recognition over time because the underlying IP is dynamic.
Licenses that meet the following criteria are dynamic:
The boards emphasized that an entity should apply the five step model to determine whether the license is “distinct” from other goods or services in the arrangement. The boards intend to provide additional implementation guidance for license transactions in the final standard.
The boards introduced a collectibility threshold. An entity only applies the revenue guidance to contracts when it is “probable” the entity will collect the consideration it will be entitled to in exchange for the goods or services it transfers to the customer. This assessment is based on both the customer’s ability and intent to pay as amounts become due.
The introduction of the threshold could result in differences between entities reporting under U.S. GAAP and those reporting under IFRS, as “probable” is defined differently under U.S. GAAP and IFRS.
Convergence is expected in the final revenue standard, except for disclosures in interim financial statements, disclosures required for non-public entities, the collectibility threshold (discussed above), 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 in late 2013 or early 2014.
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 (1-973-236-7804).