Revenue Recognition Narrow-Scope Amendments and Practical Expedients Issued
The Financial Accounting Standards Board has issued Accounting Standards Update (“ASU”) No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU No. 2016-12 clarifies guidance in certain areas and adds practical expedients. The updated guidance and practical expedients in the amendments include the following:
- Assessing the Collectibility Criterion in Paragraph 606-10-25-1(e) and Accounting for Contracts That Do Not Meet the Criteria for Step 1 (Applying Paragraph 606-10-25-7). ASU No. 2016-12 clarifies the collectibility criterion in Step 1, and adds a new criterion to paragraph 606-10-25-7 which clarifies when revenue is recognized for a contract that does not meet the criteria in Step 1. Therefore, an entity is allowed to recognize revenue in the amount of consideration it received when:
- the control of the goods or services has been transferred;
- goods or services are no longer transferred (if applicable) and there is no contractual obligation to transfer other goods or services; and
- the consideration received from the customer is nonrefundable.
- Presentation of Sales Taxes and Other Similar Taxes Collected from Customers. An entity is allowed to exclude sales and other similar taxes collected from customers.
- Noncash Consideration. The measurement date for noncash consideration is contract inception. In addition, the variable consideration guidance is only applicable to variability stemming from reasons except the form of the consideration.
- Contract Modifications at Transition. ASU No. 2016-12 introduces a practical expedient that allows an entity to indicate the aggregate effect of all changes that occur prior to the earliest period presented when:
- recognizing the satisfied and unsatisfied performance obligations;
- determining the transaction price; and
- distributing the transaction price to the satisfied and unsatisfied performance obligations.
- Completed Contracts at Transition. A completed contract for transition purposes is a contract in which all, or substantially all, of the revenue was recognized under legacy generally accepted accounting principles (“GAAP”) prior to the date of initial application. Further, accounting for elements of a contract that do not impact revenue under legacy GAAP are inconsequential with respect to whether a contract is complete. An entity can apply the modified retrospective transition method to either all contracts or just incomplete contracts.
- Technical Correction. An entity that retrospectively applies the guidance in Topic 606 does not have to disclose the impact of the accounting change for the adoption period. However, an entity must still disclose the impact of the changes on any periods that are retrospectively adjusted.
Like Topic 606, the amendments in ASU No. 2016-12 are effective for public entities for annual periods, including interim periods within, starting after December 15, 2017. Nonpublic entities must apply Topic 606 one year later.