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Revenue Recognition Guidance Remains in a “State of Flux”

August 04, 2015

It’s official — the Financial Accounting Standards Board (FASB) has agreed to give companies an extra year to comply with its landmark revenue recognition standard.

It’s official — the Financial Accounting Standards Board (FASB) has agreed to give companies an extra year to comply with its landmark revenue recognition standard. Accounting Standard Update (ASU) No. 2014-09, Revenue from Contracts with Customers, now will be effective for public companies with fiscal years that start after December 15, 2017. But companies will also have an option of adopting it as of the original 2017 effective date.

Responding to Negative Feedback

The deferral is the result of negative feedback the FASB received from companies about the limited timeframe they were given to implement the sweeping changes. To meet the original deadline, companies would have needed to change their financial reporting systems as of January 1, 2015, if they wanted to present two previous years of revenue figures using the new standard for comparison purposes. The FASB calls this “retrospective application.”

Even with the deferral approved, significant confusion remains about how the principles-based guidance applies to companies in certain industries — including healthcare, technology, utilities’, and telecommunications’ providers — that enter into complex long-term contracts. In response, the FASB has proposed several standards to clarify such issues as identification of performance obligations, sales tax reporting, noncash consideration, change orders and collectability.

Clarifying IP Licenses

One of the most substantial clarifications to date is proposed ASU No. 2015-250, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The proposal helps companies differentiate between revenue from intellectual property licenses that represent promises to deliver a good or service over time from promises that are satisfied at a point in time.

Licenses of “symbolic intellectual property” require continued support over the course of the contract. Revenue from these types of licenses, therefore, should be recognized over the life of the licensing contract. Examples include brands, trade names, logos and franchise rights.

But licensees with “significant standalone functionality” would be recognized at a point in time, because they don’t require support or maintenance from their owners. Examples include software, biological compounds, drug formulas, movies, television shows and music.

Work in Progress

The FASB’s Transition Resource Group plans to meet later in July to discuss additional implementation issues. FASB member Daryl Buck aptly commented during a recent board meeting, “The guidance is still in somewhat [of] a state of flux.”

As the FASB continues to address concerns and work through issues, companies will have to stay focused on the big picture and move forward. A one-year deferral provides companies much-needed breathing room. But those that plan to apply the standard retrospectively will need to update their internal accounting policies and systems — and possibly the terms of their long-term contracts — by January 1, 2016, to meet the 2018 deadline. Private companies have an additional year to prepare for their 2019 deadline.

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