Straight away Special edition In transition The latest on revenue recognition implementation 23 July 2015 Transition Resource Group debates revenue recognition implementation issues TRG discusses variable consideration, transition, the series guidance, scope, and more At a glance At its July 13 meeting, the Transition Resource Group (TRG) discussed several implementation issues related to the new revenue standard. We expect further discussion of the accounting for the constraint on variable consideration and transition to the new standard. TRG members generally agreed with the FASB and IASB staff views on other matters, including questions about applying the series guidance and the scope of the revenue standard. The next TRG meeting is scheduled for November 9, 2015. The staff indicated that, beyond 2015, TRG meetings will be scheduled if and when a sufficient number of implementation issues are submitted for discussion. Highlights of Transition Resource Group discussion 1. The FASB and IASB staff began the July TRG meeting by providing a brief update on the issues previously identified by the TRG as warranting further discussion by the boards. The appendix to this publication includes a summary of all topics discussed by the TRG to date and the anticipated next steps. The staff also confirmed that the IASB plans to discuss the potential deferral of the revenue standard later this month. Refer to In brief US2015-24 for discussion of the FASB s recent decision to defer the effective date by one year. 2. TRG members discussed nine issues related to the new revenue standard: Portfolio practical expedient and application of variable consideration constraint determining whether an entity is applying the portfolio practical expedient when it considers evidence from other, similar contracts to account for variable consideration Completed contracts at transition how to apply the transition guidance to contracts that are considered completed at the date of initial application Consideration payable to a customer various issues related to applying the guidance on consideration payable to customers Application of the series provision and allocation of variable consideration how to apply the series guidance to various arrangements, including those that include variable fees
Practical expedient for measuring progress toward complete satisfaction of a performance obligation how to apply the practical expedient for recognizing revenue equal to the amount an entity has a right to invoice its customers Measuring progress when multiple goods or services are included in a single performance obligation how to recognize revenue when a single performance obligation contains multiple goods or services Determining when control of a commodity transfers considerations for determining whether control of commodity (for example, electricity, natural gas, oil) transfers to a customer at a point in time or over time Credit card fees determining whether credit card fees charged to a cardholder and cardholder reward programs are in the scope of the new revenue standard Accounting for restocking fees and related costs recognition of restocking fees and related costs for products expected to be returned Additional background on these issues can be found on the FASB or IASB website. 3. The discussion below includes our observations from the meeting. We expect the FASB and IASB to provide a summary of the July meeting prior to the next TRG meeting on November 9, 2015. Topics that may require further consideration Portfolio practical expedient and application of variable consideration constraint 4. The new revenue standard provides an optional practical expedient that allows entities to apply the guidance to a portfolio of contracts with similar characteristics, instead of to individual contracts. TRG members generally agreed with the staff s view that even though an entity might be required to estimate the transaction price using evidence from other, similar contracts (by using a portfolio of data ), this is not the same as applying the portfolio practical expedient. 5. The TRG also discussed application of the variable consideration constraint, which limits revenue recognition to the amount for which it is probable (U.S. GAAP) or highly probable (IFRS) that there will not be a significant reversal of cumulative revenue recognized. TRG members discussed how to apply the constraint in the context of accounting for both a single transaction and for multiple, concurrent transactions. TRG members also discussed whether the standard requires entities to apply the constraint to a portfolio of contracts when a portfolio of data was used to estimate variable consideration or whether entities can apply the constraint at the individual contract level. 6. To illustrate the issue, TRG members discussed arrangements to sell products with a highly predictable, but relatively high return rate (for example, 30%). Applying the constraint to a portfolio of contracts would result in recognizing 70% of the contract price (that is, the amount probable (highly probable) of not reversing). In contrast, applying the constraint at the individual contract level would initially result in no revenue because it is not probable (highly probable) that there will not be a significant reversal of revenue on that contract. Several TRG members observed that applying the constraint to a portfolio of contracts better reflects the economics of these transactions in the financial statements and is consistent with the approach used to estimate the transaction price. However, TRG members also noted that the standard is not clear that applying the constraint in this manner is required, as it could be viewed as an election of the portfolio practical expedient. 7. The staff agreed to draft a summary of the TRG s discussion, including examples of a reasonable application of the guidance, and might revisit the topic at a future TRG meeting.
Completed contracts at transition 8. Under the modified retrospective transition method, the new revenue standard will only be applied to contracts that are not completed as of the adoption date. The standard defines a completed contract as a contract for which the entity has transferred all of the goods or services to the customer identified in accordance with revenue guidance in effect before the application of the new standard. The IASB also plans to propose a similar expedient for entities electing the full retrospective transition method, such that entities could choose to only apply the new standard to contracts that are not complete as of the beginning of the earliest period presented in the financial statements. 9. TRG members discussed both how to determine whether a contract is complete for transition purposes, and how to account for completed contracts at and after adoption of the new standard. A contract may appear to be complete based on the definition in the standard, but there may be remaining accruals or unrecognized revenue related to the contract. These instances include: Warranty accruals related to product sales Accrued costs for loyalty programs for entities that apply the incremental cost method under current U.S. GAAP Unrecognized revenue either as a result of an assessment that amounts are not probable of collection or because payments are tied to a contingency that has not yet been resolved Previously transferred license of intellectual property with an ongoing royalty 10. TRG members had different views regarding how the entity should account for these contracts after the adoption date. One view is that, after adoption of the new standard, entities should continue to account for completed contracts under legacy revenue guidance because they are not within the scope of the new revenue standard. TRG members observed, however, that this approach will result in a period of mixed GAAP after adoption of the new standard. Another view expressed was that no further accounting for completed contracts should occur after adoption of the new standard, and any balance sheet accounts (as well as future cash collections) should be written-off as part of the cumulative effect adjustment. Others suggested that any remaining revenue should be recognized in accordance with the new revenue standard, because it will be the only revenue guidance in effect. 11. As a result, the staff agreed to provide more examples for circulation among the TRG members. We expect more discussion of this topic prior to or at the next TRG meeting. Entities that are considering the modified retrospective transition method (and IFRS reporters considering the practical expedient for full retrospective transition) should monitor the discussion of this issue, as it will have a significant impact on the accounting at transition and after adoption of the new standard. Other topics for which further discussion is not expected Consideration payable to a customer 12. TRG members revisited various issues related to the guidance on accounting for consideration payable to a customer that were first discussed at its March 30 meeting. TRG members generally agreed with the staff s summary of the previous TRG discussion of how broadly to apply the guidance. The staff s summary emphasizes that a vendor must first identify its customer in order to determine whether payments represent consideration payable to a customer. For example, a travel agent that sells tickets to end
consumers on behalf of airlines might identify the airline as its customer, or both the airline and the end consumer as customers. This determination will impact whether a payment to the end consumer (for example, a coupon) represents a payment to a customer under the revenue standard. 13. TRG members further discussed the timing of recognition of payments to a customer. The guidance requires an entity to reduce revenue at the later of when revenue is recognized and when the entity pays or promises to pay the consideration (which could be implied based on past business practices). Some TRG members observed that even if an entity intends to pay consideration (for example, a coupon, rebate, or price concession), this guidance requires an entity to wait until it has promised to make the payment, which could occur after revenue is recognized. TRG members noted that this guidance appears to conflict with the principle that an entity should recognize revenue for the amount to which it expects to be entitled. It could also be viewed as conflicting with guidance on variable consideration, which considers the entity s intent when accounting for expected concessions. 14. Some TRG members observed that despite the potential inconsistency in guidance, they do not expect large numbers of transactions to be affected. TRG members also observed that entities will have to apply judgment to determine whether there is an implied promise to pay consideration that would require earlier recognition of the payment. Application of the series provision and allocation of variable consideration 15. The revenue standard requires entities to account for a series of distinct goods or services as a single performance obligation if the goods or services are substantially the same and have the same pattern of transfer to a customer. Because a similar concept does not exist in current revenue guidance, various questions have arisen regarding the application of the series guidance. The staff paper illustrates application of the guidance to multiple fact patterns; in particular, the examples focus on situations where a contract includes variable quantities and variable fees. 16. Most TRG members acknowledged that the staff paper is helpful and provides a useful framework for applying the series guidance. TRG members observed that entities will have to apply judgment to identify the promise to the customer and assess whether the series guidance is applicable. The series guidance allows entities to allocate variable fees to individual goods or services within the series, as long as the variability relates to delivering those goods or services and the result is consistent with the standard s allocation objective. Some TRG members noted that assessing whether the allocation objective is met will require judgment. For example, arrangements with declining fees might include a future discount for which revenue should be deferred. The series guidance could simplify the accounting for certain types of arrangements. However, the guidance has also generated multiple implementation questions. Some TRG members previously expressed their views that the series guidance should be optional in order to avoid unintended complexities. The FASB asked for feedback on whether the series guidance should be optional in its recent proposal of amendments to the revenue standard. Practical expedient for measuring progress toward complete satisfaction of a performance obligation 17. The revenue standard provides an optional practical expedient that allows an entity to recognize revenue based on the amount it has a right to invoice the customer if the invoice amount corresponds directly with the value to the customer of the entity s performance to date. TRG members generally agreed with the staff s view that the market or standalone selling prices, or another means, could be used to demonstrate value to the customer. TRG members also generally agreed that some contracts that
do not have a fixed price per unit for the contract duration could qualify for the expedient. TRG members emphasized that this assessment will require judgment. 18. Some TRG members inquired whether the existence of an upfront payment in an arrangement (or a back-end rebate) would preclude an entity from applying the practical expedient. Members of the FASB remarked that the mere existence of an upfront payment would not automatically preclude application of the expedient. However, the entity would have to consider the nature of the payment and its size relative to the total arrangement. 19. The SEC Observer noted that if entities with variable pricing elect the expedient they will need to have strong evidence that the amounts billed represent value to the customer. Measuring progress when multiple goods or services are included in a single performance obligation 20. A performance obligation may contain multiple goods or services, but the guidance requires that entities apply a single method to measure progress toward satisfying that obligation. TRG members acknowledged that the standard is clear regarding this requirement, but discussed instances where it may be difficult to identify a single attribution method that best reflects the entity s performance. 21. TRG members observed that if applying a single attribution method provides an uneconomical result, this may be an indication that an entity has not properly identified the separate performance obligations in the contract. However, TRG members cautioned that difficulty in identifying a single attribution model does not necessarily mean there are unidentified performance obligations. Most TRG members agreed with the analysis in the staff paper and emphasized that determining attribution methods will require judgment. It may be challenging to apply a single method to measure progress to many types of contracts, especially those that include upfront payments. Entities will generally have to recognize upfront payments using the same attribution method as the rest of the contract. In other words, entities might not be permitted to recognize the upfront payment on a straightline basis if another measure, such as costs incurred, labor hours, or units produced, best reflects the transfer of the goods or services in the contract. This approach could be a change in practice for entities that apply a straight-line attribution method for upfront payments today. It may also be a challenge when payment streams in a contract don t align with performance. For example, many service arrangements include both a fixed fee and direct reimbursement for out-of-pocket expenses. The new standard would appear to require that both the fixed fee and the out-of-pocket amounts be recognized using the same attribution method. Determining when control of a commodity transfers 22. Entities in certain industries routinely enter into supply contracts with customers to provide commodity-based goods, such as heating oil, natural gas, and electricity. Some stakeholders raised questions about whether it is appropriate to recognize revenue from these contracts over time. Under the new standard, an entity should recognize revenue over time if the customer simultaneously receives and consumes the good or service as the entity performs. This assessment is important in order to determine whether the contract is a series of distinct goods or services that should be accounted for as a single performance obligation. 23. TRG members generally agreed with the staff s view that entities should consider all relevant facts and circumstances regarding these arrangements (for which the entity is aware) and look beyond the inherent characteristics of the underlying commodity. Specifically, an entity might consider the contract terms, customer infrastructure, and
delivery mechanisms in order to evaluate whether the customer will immediately receive and consume the commodity after delivery. Credit card fees 24. Some stakeholders raised questions about the scope of the new revenue standard as it relates to arrangements between financial institutions and credit cardholders. U.S. GAAP includes specific guidance on credit card fees (in ASC 310, Receivables); however, credit card arrangements can include ancillary services, such as concierge services or access to airport lounges. Credit card arrangements also often include reward programs. 25. Most TRG members agreed with the staff s view that under U.S. GAAP, these arrangements are outside the scope of the new revenue standard unless the overall nature of the arrangement is not a credit card lending arrangement. If the credit card arrangement is determined to be outside the scope, the related reward program is also outside the scope of the revenue standard. This conclusion is based primarily on the existence of specific U.S. GAAP guidance on credit card fees that was not amended by the new revenue standard. Some TRG members observed that preparers may come to different conclusions under U.S. GAAP and IFRS because IFRS does not have specific guidance on credit card fees. 26. Both the FASB staff and the SEC Observer noted, and TRG members agreed, that entities will need to evaluate the nature of their credit card programs to ensure they are truly that of a credit card lending arrangement in the scope of ASC 310 and continue to evaluate new programs as they evolve. Various industry groups have recently raised questions regarding whether arrangements are in the scope (or partially in the scope) of the new revenue standard. The staff has emphasized that there are no industries that are completely excluded from the scope of the new revenue standard. To the extent that other guidance applies to an arrangement, that guidance should be considered first. Because the other guidance for specific types of arrangements may differ, entities may come to different conclusions depending on whether they are applying U.S. GAAP or IFRS. Accounting for restocking fees and related costs 27. Entities sometimes charge customers a restocking fee when they return products to both discourage returns and to compensate the entity for various costs associated with the return, such as shipping and repackaging. Most TRG members agreed with the staff s view that these restocking fees and the related costs should be recorded at the time control of the product transfers to the customer. The staff believes a product sale with a restocking fee is no different than a partial return right and therefore, should be accounted for similarly. What s next 28. Any topics that the boards believe require further consideration are expected to be discussed at a future board or TRG meeting. The staff is also expected to issue a summary of this meeting and next steps prior to the November 9, 2015 TRG meeting. The staff announced that future TRG meetings (that is, beyond 2015) will be scheduled if and when a sufficient number of implementation issues are submitted for discussion.
For more information on this publication please contact: Margot Le Bars Partner 03 8603 5371 margot.le.bars@au.pwc.com Sean Rugers Partner 02 8266 0309 sean.rugers@au.pwc.com Erin Craike Partner 02 8266 2845 erin.craike@au.pwc.com Edmund Chow Senior Manager 03 8603 0792 edmund.chow@au.pwc.com This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 2015 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.