You May Have More Time to Comply with the New Revenue Recognition Standards
The FASB and IASB have identified areas requiring additional research and discussion
As it stands today, the new revenue recognition standard is effective for annual and interim reporting periods beginning Jan. 1, 2017 for public companies and Jan. 1, 2018 for private companies. However, due to multiple requests received by the Boards to delay the implementation date of the new standard, the FASB is now reconsidering the effective date and will perform additional outreach and address the issue before the end of Q2 2015. James Kroeker, FASB vice chairman, emphasized that entities are expected to have begun the implementation process, and the FASB will likely be less sympathetic to entities’ concerns if they have not. The next meeting is scheduled for Jan. 26, 2015. The FASB and IASB established the Transition Resource Group (TRG) to seek feedback on potential implementation issues. At its Oct. 31, 2014 meeting, the TRG identified two areas requiring additional research and discussion by the Boards. These areas are:
Accounting for licenses of intellectual property (IP)
Issue 1 – A license to IP that is expected to be significantly affected by the licensor’s ongoing activities or non-performance thereof is satisfied over time, resulting in recognition of the license fees as revenue over the license period (except for sales or usage based royalties). Among the issues raised was whether activities performed by a licensor have to change the form and/or functionality of the IP or merely affect the value of the IP to be considered as significantly affecting the IP.
Issue 2 – A license of IP may, or may not, be a separate performance obligation in the contract and therefore be required to be bundled with other goods or services. It is unclear whether the general guidance or IP specific guidance should be followed in these circumstances.
Issue 3 – A concern was raised regarding restrictions, such as requiring a customer to use the vendor’s implementation consultants in a license agreement. Should such restrictions affect the identification of performance obligations or the recognition of revenue when applying Step 2 (identifying performance obligations)? It was also noted that recognizing revenue when a license with restrictions is transferred to the customer might be inconsistent with the specific guidance that prohibits revenue recognition before the beginning of the period during which the customer is able to use and benefit from the license.
Distinct in the context of the contract
ASC 606-10-25-14-22 requires entities to identify as a performance obligation goods and services that are “distinct.” Distinct goods and services must be (1) capable of being distinct and (2) separately identifiable from other promises in the contract (distinct in the context of the contract). Different views about whether a contractual restriction and customers’ motivation should affect the identification of performance obligations were raised.
We continue to believe it makes sense for your company to study the effects of the new standard on your business; however, it appears that the Boards may allow more time for implementation. We advise you to monitor the decision by the Boards in Q2 of 2015 and potentially adjust your adoption plan.