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By Denise Lugo
March 30 — Companies must use judgment under new revenue rules when deciding whether a contract with a customer includes a significant financing component, discussions by the Financial Accounting Standards Board members of the Joint Transition Resource Group indicated.
Financing components will be a new area some companies must consider when applying the new Revenue From Contracts With Customers standard. It is a change in U.S. generally accepted accounting principles (GAAP).
The financing-component issue is expected to heighten the potential for diversity in practice, particularly related to advanced payments, according to some comments made during the March 30 discussions of the group formed in conjunction with the International Accounting Standards Board.
“We're looking for areas where there's going to be diversity—this is an area,” said Mark Crowley, National Office Director, Accounting Standards and Communication Deloitte & Touche LLP. “And I think what this says is that we're going to accept that diversity,” he said.
The comments related to the question of how broadly should the list of factors in the new standard be applied in determining when the difference between promised consideration and cash selling price isn't related to a significant financing component.
Also discussed was whether a financing component exists if the promised consideration is equal to the cash selling price.
The standard says not to assume the purpose of a feature, figure out why it's there and account for it appropriately, said Scott Taub, managing director at Financial Reporting Advisors, LLC.
“It doesn't seem we can do much more unless we draw a line, and we concluded throughout multiple exposure drafts that drawing that line was not going to give us good results—in a lot of instances we'll have to let judgment be applied and see what happens,” said Taub.
“It may turn out down the road we don't think judgment is being applied in a professional and reasonable matter then we'd have to do something about that,” he said.
Under step 3 of the new revenue model, an entity determines the transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transfer in a promised goods or services in the contract of the customer.
In determining the transaction price, an entity is required to consider the effects of various items, including the existence of significant financing components. The new revenue standard includes guidance about how to determine when a significant financing component exists and how to account for significant financing components.
The guidance represents a change from existing GAAP and general practice under international financial reporting standards (IFRS). Existing U.S. GAAP and IFRS includes guidance about accounting for the time value of money in a revenue transaction. However, the new revenue standard includes more guidance on the topic than existing standards, in particular because it applies to advanced payments as well as payments and arears.
On other financing components issues raised, TRG members agreed with staff accountants. Furthermore, TRG views were similar to or didn't vary much from staff accountants' viewpoints on the following topics including the staff handouts:
• consideration payable to a customer: some concerns were raised by TRG members;
• allocation of the transaction price for discounts and variable consideration;
• accounting for a customer's exercise of material right;
• partial satisfaction of performance obligations prior to identifying the contract;
• whether contributions are included or excluded from the scope;
• series of distinct goods or services.
Because of technical difficulties, FASB and IASB didn't hold joint discussions on the topics. The boards will compare notes of their respective views and determine how to move ahead at a future meeting, the discussions indicated.
No topics were especially earmarked by FASB's TRG for standard-setting.
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For a copy of TRG meeting handouts go to http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176164066683
For a discussion of fundamental principles of revenue recognition, see 5100-2nd, Revenue Recognition: Fundamental Principles, at 5100.
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