Perspectives

Heads Up — FASB clarifies guidance on licensing and identifying performance obligations

This issue discusses the FASB’s recently issued Accounting Standards Update (ASU) No. 2016-10, Identifying Performance Obligations and Licensing, which amends certain aspects of the Board's new revenue standard, ASU 2014-09, Revenue From Contracts With Customers. The amendments in the ASU reflect feedback received by the FASB-IASB joint revenue recognition transition resource group (TRG), which was formed to address potential issues associated with the implementation of the new revenue standard, as well as comments received from stakeholders on the FASB’s proposed guidance.

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Introduction

On April 14, 2016, the FASB issued ASU 2016-10, which amends certain aspects of the Board’s new revenue standard, specifically the standard’s guidance on identifying performance obligations and the implementation guidance on licensing. The amendments in the ASU reflect feedback received by the FASB-IASB joint revenue recognition transition resource group, which was formed to address potential issues associated with the implementation of the new revenue standard, as well as comments received from stakeholders on the FASB’s proposed guidance.

ASU 2016-10 amends the guidance on the following:

  • Identifying performance obligations:
    • Immaterial promised goods or services — Entities may disregard goods or services promised to a customer that are immaterial in the context of the contract.
    • Shipping and handling activities — Entities can elect to account for shipping or handling activities occurring after control has passed to the customer as a fulfillment cost rather than as a revenue element (i.e., a promised service in the contract).
    • Identifying when promises represent performance obligations — The new guidance refines the separation criteria for assessing whether promised goods and services are distinct, specifically the “separately identifiable” principle (the “distinct within the context of the contract” criterion) and supporting factors.
  • Licensing implementation guidance:
    • Determining the nature of an entity’s promise in granting a license — Intellectual property (IP) is classified as either functional or symbolic, and such classification should generally dictate whether, for a license granted to that IP, revenue must be recognized at a point in time or over time, respectively.
    • Sales-based and usage-based royalties — The sales-based and usage-based royalty exception applies whenever the royalty is predominantly related to a license of IP. The ASU therefore indicates that an “entity should not split a sales-based or usage-based royalty into a portion subject to the recognition guidance on sales-based and usage-based royalties and a portion that is not subject to that guidance.”
    • Restrictions of time, geographical location, and use — The ASU’s examples illustrate the distinction between restrictions that represent attributes of a license and provisions that specify that additional licenses have been provided.
    • Renewals of licenses that provide a right to use IP — Revenue should not be recognized for renewals or extensions of licenses to use IP until the renewal period begins.

This Heads Up provides background on the ASU and summarizes its key provisions.

Editor’s Note: On April 12, 2016, the IASB issued clarifications to IFRS 15 that address (1) identifying performance obligations, (2) principal-versus-agent considerations, and (3) licensing. They also provide some transition relief for modified contracts and completed contracts. See the appendix of this Heads Up for a comparison of the IASB’s and FASB’s guidance. For more information about the IASB’s clarifications to IFRS 15, see the IASB’s Web site.

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Volume 23, Issue 11 | April 15, 2016

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Heads Up newsletters, published as warranted, analyze important accounting developments, such as new FASB and IASB pronouncements or exposure drafts. Concise examples and answers to frequently asked questions assist readers in understanding and implementing the critical guidance.

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