Heads Up—FASB issues proposed revenue ASU on licensing and identifying performance obligations
On May 12, 2015, the FASB issued a proposed ASU that would amend certain aspects of the Board’s May 2014 revenue standard (ASU 2014-09), specifically the guidance on identifying performance obligations and the implementation guidance on licensing. The amendments are being made in response to 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 ASU 2014-09.
The proposed amendments include 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—A practical expedient would be added to allow shipping or handling activities occurring after control has passed to the customer to be treated 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 proposal would refine the separation criteria for assessing whether promised goods and services are distinct, specifically the “separately identifiable” principle (the “distinct in 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) would be classified as either functional or symbolic, and such classification would 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 would apply whenever the royalty is predominantly related to a license of IP. The proposed ASU therefore indicates that “[a]n entity would not split a sales-based or usage-based royalty into a portion subject to the guidance on sales-based and usage-based royalties and a portion that is not subject to that guidance.”
This Heads Up provides background on the proposed ASU and summarizes its key provisions. Appendix A lists the proposed ASU’s questions for respondents. Appendix B contains a table comparing the proposed ASU’s provisions with the IASB’s tentative decisions to date.
Comments on the proposed ASU are due by June 30, 2015.
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