TRG Snapshot Joint Meeting on Revenue

Transcription

1 Nvember 2015 TRG Snapsht Jint Meeting n Revenue by Kristin Bauer, Je DiLe, Frank Kresch, Elise Lambert, Taylr Paul, and Andrew Warren, Delitte & Tuche LLP In This Issue Tpic 1 Custmer Optins fr Additinal Gds and Services Tpic 2 Preprductin Activities Tpic 3 Specific Applicatin Issues Related t License Restrictins and Renewals Tpic 4 Whether Fixed- Odds Wagering Cntracts Are Revenue r Derivative Transactins This TRG Snapsht summarizes the Nvember 9, 2015, meeting f the jint revenue transitin resurce grup (TRG) created by the FASB and IASB. The purpse f the TRG is nt t issue guidance but instead t seek and prvide feedback n ptential issues related t implementatin f ASC and IFRS 15 2 (cllectively, the new revenue standard ). By analyzing and discussing ptential implementatin issues, the TRG helps the bards determine whether they need t take additinal actin, such as prviding clarificatin r issuing ther guidance. The TRG cmprises financial statement preparers, auditrs, and users frm a wide spectrum f industries, gegraphical lcatins and public and private rganizatins, and bard members f the FASB and IASB attend the TRG s meetings. In additin, representatives frm the SEC, PCAOB, IOSCO, 3 and AICPA are invited t bserve the meetings. Highlights f the discussin at the TRG s Nvember 9, 2015, meeting include the fllwing: Custmer ptins: An entity must evaluate the nature f its prmises in a cntract with a custmer t determine whether the enfrceable rights and bligatins in its present cntract either (1) exclude future ptinal purchases (unless there is a material right) r (2) create measurement uncertainty in the transactin price because f the variability f fees that are payable n the basis f future actins r events. A substantive terminatin penalty prvides evidence f enfrceable rights and bligatins; hwever, an entity must use judgment t determine whether a penalty is substantive. Only the legally enfrceable rights shuld be accunted fr in a cntract; therefre, future events attributable t ecnmic cmpulsin r the entity s exclusive right are nt reflected in the cntract r the estimated transactin price. Preprductin activities: Entities must use judgment t determine whether a preprductin activity transfers cntrl f a gd r service t the custmer. Once the new revenue standard becmes effective, preprductin activities currently within the scpe f ASC shuld be accunted fr in accrdance with ASC Questins remain regarding the applicatin f, and the need t retain, ASC nce the new revenue standard becmes effective. License restrictins and renewals: The TRG requested additinal clarificatins n multiple issues related t this tpic. 1 Fr titles f FASB Accunting Standards Cdificatin (ASC r the Cdificatin ) references, see Delitte s Titles f Tpics and Subtpics in the FASB Accunting Standards Cdificatin. 2 IFRS 15, Revenue Frm Cntracts With Custmers. 3 Internatinal Organizatin f Securities Cmmissins.

2 The evaluatin f a whether a license renewal gives rise t a new license depends n whether the renewal has granted the custmer additinal rights; hwever, questins remain regarding the distinctin between time-related rights and ther varius rights (e.g., new gegraphical lcatins). Mdificatins f a license arrangement shuld be treated n differently frm the mdificatin f a cntract fr gds r services. Fixed-dds wagering cntracts: The new revenue standard will eliminate industry-specific guidance (ASC ), under which settled wagers are currently recgnized as revenue transactins (as ppsed t being accunted fr as derivative cntracts, as IFRS guidance suggests). The FASB staff prpsed that entities reprting under U.S. GAAP shuld cntinue t accunt fr fixed-dds wagering cntracts as revenue transactins after the guidance in ASC 606 becmes effective; hwever, TRG members requested clarificatin. Editr s Nte: Currently, there are n TRG meetings scheduled fr 2016 r thereafter; hwever, we understand that the FASB remains cmmitted t addressing issues raised by stakehlders regarding the implementatin f the new revenue standard. In additin, the SEC s chief accuntant and deputy chief accuntant have expressed supprt fr the TRG in speeches highlighting the need fr preparers and auditrs t cntinue t identify and raise issues that warrant discussin at future TRG meetings. 4 We cntinue t believe that the TRG is a critical frum fr discussing matters and educating cnstituents during the implementatin phase f the standard s adptin, and we supprt the cntinuatin f effrts by the FASB and IASB t address relevant issues thrugh future TRG meetings. Tpic 1 Custmer Optins fr Additinal Gds and Services Backgrund: Under the new revenue standard, an entity must determine its cntractual rights and bligatins, including whether ptins fr future gds r services give rise t perfrmance bligatins under a current cntract with a custmer. When ptins represent material rights, the entity must allcate a prtin f the current cntract s transactin price t the material right. That is, if an ptin prvides the custmer with a material right, the custmer is effectively paying fr future gds r services in advance by purchasing gds r services under the cntract. 5 As a result, cnsideratin received fr the current cntract will be recgnized when the future gds r services are transferred t the custmer. In cnsidering hw t apply the guidance n ptinal purchases under which an entity des nt identify a material right, stakehlders have questined whether and, if s, when custmer ptins t acquire additinal gds r services wuld be cnsidered (1) a separate cntract that arises when the ptin is exercised r (2) variable cnsideratin fr which an entity wuld be required t estimate the amunt f cnsideratin t include in the riginal cntract s transactin price (subject t the standard s cnstraint n variable cnsideratin). Specifically, the fllwing three issues have been raised: Issue 1: What ptinal purchases are, and why ptinal purchases are different frm variable cnsideratin T address this issue, the FASB and IASB staffs analyzed examples related t IT utsurcing, transactin prcessing, and supply agreements. The staffs prefaced their views by stating that an entity will need t use judgment t determine whether a cntract cntains an ptin t purchase additinal gds r services r variable cnsideratin. In additin, the staffs nted that a critical first step wuld be fr an entity t identify (1) the nature f its prmises and (2) the rights r bligatins f each party t the cntract. 4 Fr mre infrmatin, see Delitte s September 25, 2015, jurnal entry. 5 ASC and ASC ; paragraphs 26 and B40 f IFRS 15. 2

3 Further, the staffs nted differences between ptinal gds r services and variable cnsideratin. As indicated in TRG Agenda Paper 48, they bserved: A cntract prviding fr ptinal gds r services (1) gives the custmer f an entity a present right t chse the amunt f additinal gds r services that can be purchased (i.e., a chice cnstituting a purchasing decisin separate frm the current cntract) but (2) des nt impse n the entity a present bligatin t deliver thse gds r services. Cnversely, under a cntract prviding fr variable cnsideratin, the entity (1) has a present bligatin t transfer gds r services t the custmer but (2) is nt bligated by the custmer s actins t prvide additinal distinct gds r services (r change the gds r services t be transferred). Issue 2: Assessing the effects f terminatin rights and penalties when nly the custmer has the right t terminate the cntract 6 The staffs discussed this issue within the cntext f tw examples: (1) a fur-year service cntract giving the custmer the right t cancel at the end f each year ( Cntract 1 ) and (2) a cntract giving the custmer an ptin t purchase parts alng with equipment ( Cntract 2 ). The staffs analyzed the terminatin penalties in Cntract 1 (an additinal payment that decreases annually thrughut the cntract term) and Cntract 2 (repayment f all r part f an up-frnt discunt n the equipment) and cncluded that the penalties in each cntract were substantive. Accrdingly, the staffs viewed the penalties as evidence f enfrceable rights and bligatins. On the basis f this evidence, they cncluded that (1) the duratin f Cntract 1 was fur years and (2) sme f the transactin price in Cntract 2 shuld be allcated t the parts because the cntract s penalty effectively created a minimum purchase bligatin fr the custmer. That is, the staffs believed that the substantive penalties in each cntract cnstituted evidence f enfrceable rights and bligatins regardless f whether bth parties r nly the custmer had the ability t cancel the cntract. Further, the staffs rejected an alternative view that the terminatin penalties represent ptins that create material rights. Issue 3: When ptinal purchases wuld be cnsidered separate perfrmance bligatins As indicated in TRG Agenda Paper 48, the staffs nted tw views (Views A and B). Prpnents f View A maintain that ptins fr gds r services, like ther cntractual rights and bligatins, must be legally enfrceable (i.e., enfrceable as a matter f law, as discussed in ASC (paragraph 10 f IFRS 15)). Prpnents f View B believe that [j]udgment is required t determine if the legal ptins represent in substance prmised gds r services in the cntract. Under View B, an entity wuld cnsider ecnmic cmpulsin, exclusivity f the arrangement (i.e., whether the custmer can btain the gds r services frm ther suppliers), and ther circumstances when assessing whether ptinal purchases shuld be reflected in the transactin price f the current cntract. The staffs believed that View A is cnsistent with the new revenue standard given that the standard des nt require an entity t estimate the transactin price f future cntracts that it will enter int with its custmers (unless there are legal enfrceable rights r ptins fr future gds and services that are material rights). See TRG Agenda Paper 48 fr additinal infrmatin. Summary: TRG members discussed the issue f whether and, if s, when an entity wuld be required t estimate future purchases in a current cntract with a custmer. They reiterated the staffs view that the new revenue standard des nt require an entity t estimate the transactin 6 At its Octber 2014 meeting, the TRG discussed a similar issue. Hwever, the discussin fcused n situatins in which bth parties had the unilateral and enfrceable right t terminate the cntract but the terminating party wuld be required t cmpensate the ther party fr the terminatin. See Delitte s Octber 2014 TRG Snapsht fr details. 3

4 price f future cntracts int which it will enter with a custmer. In additin, they generally agreed with the framewrk utlined in TRG Agenda Paper 48, under which an entity wuld perfrm an evaluatin f the nature f its prmises in a cntract with a custmer, including a careful evaluatin f the enfrceable rights and bligatins in the present cntract (nt future cntracts). That is, there is a distinctin between (1) custmer ptins and (2) uncertainty that is accunted fr as variable cnsideratin. Custmer ptins are predicated n a separate custmer actin (namely, the custmer s decisin t exercise the ptin), which wuld nt be embdied in the present cntract; unless an ptin is a material right, such ptins wuld nt factr int the accunting fr the present cntract. Uncertainty is accunted fr as variable cnsideratin when the entity has enfrceable rights and bligatins under a present cntract t prvide gds r services withut an additinal custmer decisin. The TRG als generally agreed with the staffs view n Issue 3 that enfrceable rights and bligatins in a cntract are nly thse fr which the entity has legal rights and bligatins under the cntract and wuld nt take ecnmic r ther penalties int accunt (e.g., (1) ecnmic cmpulsin r (2) exclusivity because the entity is the sle prvider f the gds r services, which may make the future deliverables highly prbable f ccurring). Further, the TRG generally agreed with the staffs view n Issue 2 that a substantive terminatin penalty wuld prvide evidence f enfrceable rights and bligatins thrughut the cntract term (e.g., define the duratin f the cntract). 7 Hwever, there was substantial debate abut what wuld cnstitute a substantive penalty, especially because sme TRG members culd nt cnclude that the penalties described in the staffs examples were substantive. Rather than trying t define substantive, the TRG agreed that an entity wuld need t use significant judgment when cnstruing the term. Accrdingly, TRG members suggested that an entity s judgment culd be infrmed by data such as hw frequently a custmer pts t incur a penalty. Fr example, a high incidence f custmers wh chse t pay a penalty t cancel a cntract wuld mst likely indicate that the penalty is nt substantive. In additin, there was discussin that cmpared the threshlds fr identifying a material right and a substantive penalty. Sme TRG and bard members bserved that in general, the threshld fr identifying a substantive penalty shuld be higher than the threshld fr identifying a material right. Tpic 2 Preprductin Activities Backgrund: ASU (IFRS 15) creates new guidance n fulfillment csts that are utside the scpe f ther Cdificatin tpics, including csts related t an entity s preprductin activities. The new revenue standard s Basis fr Cnclusins indicates that in develping such cst guidance, the bards did nt intend t hlistically recnsider cst accunting. Rather, they aimed t: Fill gaps resulting frm the absence f superseded guidance n revenue (and certain cntract csts). Imprve cnsistency in the applicatin f certain cst guidance. Prmte cnvergence between U.S. GAAP and IFRSs. Hwever, stakehlders in varius industries have raised questins abut hw an entity shuld apply the new cst guidance when assessing preprductin activities, including questins related t the scpe f the guidance (i.e., the csts t which such guidance wuld apply). In particular, stakehlders have asked the fllwing: Questin 1: Hw shuld an entity assess whether preprductin activities are a prmised gd r service? Sme stakehlders have questined whether certain preprductin activities represent prmised gds r services in a cntract with a custmer because such a determinatin culd affect the timing f revenue recgnitin. In a manner cnsistent with 7 A FASB staff member reminded TRG members that Issue 2 f TRG Agenda Paper 48 shuld be read in cnjunctin with TRG Agenda Paper FASB Accunting Standards Update N , Revenue Frm Cntracts With Custmers. 4

5 the requirements f the new revenue standard and prir TRG meeting discussins, 9 the FASB and IASB staffs stated that an entity shuld first evaluate the nature f its prmise t the custmer and, in ding s, cnsider whether a preprductin activity is a prmised gd r service r a fulfillment activity. While acknwledging that it may be difficult t determine whether a preprductin activity is a prmised gd r service, the staffs nted that an entity shuld assess whether the preprductin activity transfers cntrl f a gd r service t the custmer. Further, the staffs suggested that the criteria fr determining whether an entity transfers cntrl f a gd r service ver time 10 may be helpful in this assessment. Fr example, if an entity determines that a preprductin activity transfers cntrl f a gd r service t a custmer ver time, it shuld include the preprductin activity in its measure f prgress tward cmplete satisfactin f its perfrmance bligatin(s). Questin 2: Hw shuld an entity reprting under U.S. GAAP accunt fr preprductin csts currently accunted fr in accrdance with guidance in ASC ? Sme stakehlders reprting under U.S. GAAP engage in lng-term supply arrangements and have expressed cncerns that the cst guidance in ASU changes the assessment f whether preprductin csts currently accunted fr under ASC shuld be capitalized r expensed. The FASB staff nted that the analysis fr determining whether t capitalize r expense csts incurred fr preprductin activities is separate frm the assessment f whether preprductin activities represent prmised gds r services in a cntract (i.e., separate frm the analysis discussed in Questin 1 abve). Accrdingly, since the new revenue standard des nt amend the guidance in ASC , the FASB staff thinks that entities that currently accunt fr preprductin csts in accrdance with ASC shuld cntinue t d s after the new revenue standard becmes effective. Questin 3: Are preprductin csts fr cntracts previusly within the scpe f ASC cnsidered t be within the scpe f ASC r ASC ? Sme stakehlders reprting under U.S. GAAP have questined the accunting fr preprductin csts incurred t deliver cntracts currently accunted fr under ASC rather than ASC The FASB staff nted that after the new revenue standard becmes effective, preprductin activities related t cntracts currently within the scpe f ASC shuld be accunted fr in accrdance with ASC because (1) the new revenue standard will supersede ASC (and its related cst guidance) and (2) ASC des nt currently prvide guidance n csts related t such cntracts. See TRG Agenda Paper 46 fr additinal infrmatin. Summary: Fr each issue discussed, TRG members generally agreed with the staffs analyses and acknwledged that in certain situatins, it will be challenging fr an entity t determine whether a preprductin activity transfers cntrl f a gd r service t the custmer. As a result, an entity will need t use judgment t make thse determinatins, and sme diversity in practice may result. In additin, TRG members in the United States nted that implementatin questins related t whether and, if s, hw t apply ASC may be reslved if that guidance is either (1) deleted r (2) clarified t enable entities t understand hw t apply it in a manner cnsistent with the cntrl principle in the new revenue standard. 9 See TRG Agenda Paper 12, which was discussed at the January 2015 TRG meeting. 10 Discussed in ASC (paragraph 35 f IFRS 15). 5

6 Tpic 3 Specific Applicatin Issues Related t License Restrictins and Renewals Backgrund: The new revenue standard includes guidance n assessing whether a license f intellectual prperty (IP) is a right t use the IP (which results in the recgnitin f revenue at a pint in time) r a right t access the IP (which results in the recgnitin f revenue ver time). In additin, the FASB has prpsed clarificatins t the guidance in ASU , 11 and the IASB has prpsed changes t the Basis fr Cnclusins n IFRS 15. Ntwithstanding the prpsed amendments (which are intended t clarify, rather than change, the guidance), stakehlders have raised the fllwing issues related t pint-in-time licenses: Issue 1: Renewals f time-based right-t-use (pint-in-time) licenses In their discussin f this issue, the FASB and IASB staffs nted an example in which a custmer renews a threeyear pint-in-time license six mnths befre its expiratin. Stakehlders have questined what cnstitutes the apprpriate recgnitin pint fr the extensin specifically, which f the fllwing views is crrect: View A, under which revenue frm the renewal license wuld be recgnized when the renewal perid begins (i.e., after the riginal three-year license ends specifically, at the start f the renewal perid in Year 4). 12 View B, under which such revenue wuld be recgnized upn agreement f the renewal license (i.e., six mnths befre the riginal license expires). Fr the arrangement discussed in the example, the staffs believed that revenue shuld be recgnized in accrdance with View B because the custmer (1) did nt receive any additinal rights and (2) previusly btained cntrl f the license. That is, the term extensin represents a change in an attribute f the license that had already been transferred t the custmer. Issue 2: Distinct rights in a cntract In examining this issue, the staffs nted tw examples f multiyear pint-in-time licenses cntaining restrictins n the use f the underlying IP (gegraphical restrictins in the first example and prduct-class restrictins in the secnd). In each example, the custmer was permitted t expand the use f the underlying IP nly after a defined perid within the license s term; the staffs referred t release f these restrictins as staggered rights. Sme stakehlders believe that there is a single license in bth examples because the entity nly has the respnsibility t make the underlying IP available at the beginning f the license perid and the restrictins cited in the examples are attributes that shuld nt be cnsidered under the new revenue standard (View A). Other stakehlders believe that in each f the tw examples, there are tw distinct licenses primarily because additinal rights are subsequently cnveyed t the custmer (View B). The staffs agreed with View B (i.e., the cnclusin that the custmer in each example was granted multiple licenses because the rights that accrue subsequently... are distinct... frm the rights that accrue t [the custmer] initially ). They nted that the guidance cited t supprt View A (ASC ; paragraph B62 f IFRS 15) was nt intended t circumvent the guidance supprting View B (ASC ; paragraph B61 f IFRS 15). Issue 3: Distinct rights added thrugh a mdificatin The staffs began their analysis f Issue 3 by referring t amended versins f the examples used in their discussin f Issue 2. In the amended examples, the expansin f the custmer s use f IP was nt part f the riginal license agreements but resulted frm mdificatins t the riginal cntracts. Further, the mdificatins did nt meet the requirements f the cntract cmbinatin guidance in the new revenue standard. 11 Fr additinal infrmatin, see Delitte s Octber 8, 2015, jurnal entry and May 13, 2015, Heads Up. 12 This view is rted in ASC (paragraph B61 f IFRS 15), which states that revenue cannt be recgnized fr a license that prvides a right t use the entity s intellectual prperty befre the beginning f the perid during which the custmer is able t use and benefit frm the license. 6

7 The staffs nted three views n hw an entity wuld accunt fr the mdificatins in the amended examples (Views A, B, and C). Prpnents f View A believe that the mdificatins are t the single, riginal license and that revenue wuld accrdingly be recgnized n the date the mdificatin is made if (1) the mdificatins t add rights take place after the custmer has begun t benefit frm the rights in the riginal cntract and (2) the entity is nt required t prvide additinal IP t the custmer. Their basis fr this cnclusin is that the [l]icensr has n further perfrmance bligatin. In cntrast, prpnents f View B believe that the mdificatins create a new agreement r perfrmance bligatin and that the licensr wuld therefre recgnize revenue fr the additinal rights nly when the custmer benefits frm them. Under View C, which is the view that the staffs believed t be the mst cnsistent with the new revenue standard, the entity wuld assess and accunt fr the cntract mdificatins in the manner applicable t any ther cntract mdificatin. Accrdingly, as stated in TRG Agenda Paper 45, if the incremental, distinct rights are priced at their standalne selling price, then the entity applies the new cntract mdificatin guidance in [ASC] [paragraph 20 f IFRS 15]. [Cnversely, if] the incremental, distinct rights are nt priced cmmensurate with their standalne selling price, then the entity applies the mdificatin guidance in [ASC] (a) [paragraph 21(a) f IFRS 15]. Issue 4: Accunting fr a custmer s ptin t purchase r use additinal cpies f sftware In discussing this issue, the staffs referred t three examples f pint-in-time license arrangements in which a custmer paid a flat fee fr (1) sftware rights fr a specified number f emplyees and (2) ptins t add additinal emplyees at a later date n the basis f a per-user fee. The staffs nted three prevailing views n hw t accunt fr the additinal users (Views A, B, and C): Under View A, an entity wuld treat the ptins t acquire the additinal sftware rights in a manner similar t hw it wuld treat ptins t purchase additinal gds because they are right-t-use (r pint-in-time) licenses. Accrdingly, the entity wuld assess whether the ptins grant the custmer a material right; if they d, the entity wuld allcate a prtin f the transactin price t the ptins and recgnize the related revenue when the ptins are exercised r expire. Under View B, the additinal rights wuld be cnsidered incremental usage f the sftware because rather than changing the characteristics r functinality f the sftware, they affect nly the amunt f usage already cntrlled by the custmer. Accrdingly, prpnents f View B wuld accunt fr the additinal usage in accrdance with the new revenue standard s guidance n usage- r sales-based ryalties (i.e., as variable cnsideratin). Supprters f View C wuld emply an apprach that applies View A t ne f the examples and View B t the ther tw. Fr the examples discussed, the staffs supprted View A because they believed that there is n basis in the new revenue standard fr dispensing with an assessment f whether ptins in a cntract represent a material right. The staffs rejected View C because it is incnsistent with the new revenue standard. They als rejected View B but acknwledged that sme sftware entities reprting under U.S. GAAP may prefer it since it wuld nt require them t perfrm additinal assessments that might therwise be required under the new revenue standard (because the new standard supersedes guidance under U.S. GAAP that currently permits sftware entities t frg assessing whether additinal rights t previusly delivered sftware cnstitute a discunt that is mre than insignificant). See TRG Agenda Paper 45 fr additinal infrmatin. 7

8 Summary: Because incnsistencies have been identified in bth the guidance f the new revenue standard and the bards prpsed amendments t the standard, TRG members nted that sme stakehlders have questined when characteristics f a license shuld be treated as a right that wuld define whether a license is distinct (i.e., a separate license) frm an attribute f a single license. TRG members generally agreed with the staffs view that the evaluatin f whether an entity has prvided a single license f IP r multiple licenses t a custmer (either in a single cntract r thrugh cntract mdificatins) wuld depend n whether it has granted the custmer additinal rights (i.e., new r expanded rights). Hwever, the TRG generally did nt supprt r culd nt understand the basis fr why the time-based restrictin in Issue 1 wuld be treated differently frm the gegraphical r prduct restrictin in Issue 2. That is, many TRG members viewed the extensin f time (i.e., thrugh the cntract renewal) as granting a custmer an additinal right rather than the cntinued use f the same rights under a license that the entity already delivered t the custmer and frm which the custmer is currently benefiting. One TRG member nted that ne reasn why time may be viewed differently is the new revenue standard s requirement t assess whether a license grants the custmer a right t use r a right t access the underlying IP. In effect, time is cnsidered in the initial assessment, and nce an entity cncludes that the license is a right-t-use (i.e., pint-in-time) license, time wuld nt be cnsidered subsequently (i.e., it wuld be an attribute rather than a right that defines the cntract subsequently). In additin, the SEC bserver expressed cncern that the staffs view regarding the time restrictin in Issue 1 wuld lead t an incnsistent utcme fr a similar cntract with different cunterparties. That is, under the staffs view in Issue 1, the entity wuld recgnize revenue n the date the cntract is renewed with a current custmer (i.e., June 30, 20X3). Hwever, had the entity entered int a cntract with the same terms as the renewed cntract but with a new custmer, it wuld have been precluded frm recgnizing revenue until the new cntract became effective (i.e., January 1, 20X4). TRG members generally agreed with the staffs view n Issue 3 that the mdificatin f a license arrangement shuld be treated n differently frm the mdificatin f a cntract fr gds r services. Therefre, an entity shuld fllw the cntract mdificatin guidance in the new revenue standard. On Issue 4, there were mixed views abut whether additinal cpies f sftware wuld be accunted fr as a custmer ptin r as a usage-based ryalty; hwever, in a manner cnsistent with that f the staffs, the TRG rejected View C. Because there was n general agreement amng TRG members n multiple issues related t this tpic, the TRG asked fr additinal clarificatins. Tpic 4 Whether Fixed-Odds Wagering Cntracts Are Revenue r Derivative Transactins Backgrund: Fixed-dds wagers are wagers placed by bettrs (i.e., custmers) wh typically knw the dds f winning in gaming activities 13 at the time the bets are placed with gaming industry entities. Under current U.S. GAAP, industry-specific guidance in ASC indicates that such transactins are generally recgnized as revenue when the wager is settled. Hwever, when the new revenue standard becmes effective, that standard will eliminate the guidance in ASC and will nt apply t cntracts accunted fr as derivatives under ASC 815. In additin, stakehlders have referred t an issue discussed by the Internatinal Financial Reprting Interpretatins Cmmittee (IFRIC) in 2007, regarding which the IFRIC cncluded that fixed-dds wagering cntracts shuld be accunted fr as derivatives under IAS (r IFRS 9, 15 if an entity is required t adpt it). Partly because f the upcming eliminatin f ASC and partly because f the 2007 IFRIC interpretatin, stakehlders 13 Cmmn gaming activities include table games, slt machines, ken, bing, and sprts and race betting. 14 IAS 39, Financial Instruments: Recgnitin and Measurement. 15 IFRS 9, Financial Instruments. 8

9 reprting under U.S. GAAP have questined whether fixed-dds wagering cntracts shuld be accunted fr as revenue transactins (i.e., when r as cntrl is transferred in accrdance with the new revenue standard) r as derivatives (i.e., adjusted t fair value thrugh net incme each reprting perid). The FASB staff nted its belief that the FASB did nt intend t change hw entities reprting under U.S. GAAP wuld accunt fr fixed-dds wagers upn adptin f the new revenue standard. That is, the FASB staff believes that the Bard intends fr entities reprting under U.S. GAAP t cntinue accunting fr fixed-dds wagering cntracts as revenue transactins. On the ther hand, the FASB staff further indicated in TRG Agenda Paper 47 that if fixed dds wagering cntracts were excluded frm the scpe f the new revenue standard, then thse arrangements likely wuld be accunted fr as derivatives. 16 See TRG Agenda Paper 47 fr additinal infrmatin. Summary: Many TRG members in the United States did nt bject t the FASB staff s view that entities shuld cntinue t accunt fr fixed-dds wagering cntracts as revenue transactins after the new revenue standard becmes effective. Hwever, TRG members expressed cncern that the current wrding in the new revenue standard des nt supprt the staff s view. Accrdingly, TRG members recmmended that the Bard either (1) clarify its intent thrugh a technical crrectin t include such cntracts within the scpe f ASC 606 (by excluding them frm the scpe f ASC 815) r (2) evaluate further whether its bjective was t require entities t accunt fr these cntracts under ASC 815. In additin, sme TRG members questined whether fixed-dds wagering cntracts meet the definitin f a derivative under ASC 815 (and therefre shuld be accunted fr under ASC 815). TRG members urged the Bard t publicly expse this tpic and perfrm utreach with affected entities if the FASB pursues the path f deliberating whether fixed-dds wagering cntracts are derivatives. 16 As summarized in TRG Agenda Paper 47, the IASB staff cntinues t believe that fr entities reprting under IFRSs, fixed-dds wagering cntracts wuld nt be within the scpe f the new revenue standard if they meet the definitin f a financial instrument under IFRS 9 r IAS 39. 9

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