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FASB Makes Slight Changes to Collectibility Test

A key part of the Financial Accounting Standards Board’s (“FASB”) revenue recognition standard received some minor adjustments at the standard setter’s February 10th meeting. After considering feedback that asked for simpler guidance in regard to Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, the FASB agreed to clarify some aspects of the collectibility threshold. However, the FASB decided not to make any significant changes to the test for determining the likelihood of collecting customer payments. Rather, the board confirmed that it must be “probable” for customers to meet their payments before a company tallies its revenue.

With the landmark revenue standard’s implementation date two years away, companies have warned the FASB that several contract agreements with customers with bad credit would not pass the collectibility test as written. In response, the FASB issued Proposed ASU No. 2015-320, Revenue from Contracts with Customers (Topic 606) Narrow-Scope Improvements and Practical Expedients, to clarify that the first step of the collectibility criterion is to establish the contract’s validity and if it is a genuine transaction based on the customer’s intention to pay. The update is expect to be published later this year.

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