FASB Clarifies Revenue Performance Obligations, License Rules

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April 14— The Financial Accounting Standards Board amended its revenue recognition standard to clarify narrow provisions to items such as shipping and handling, and the licensing of intellectual property.

The April 14 clarifications amend narrow aspects of the revenue recognition standard—Revenue from Contracts with Customers (Topic 606).

Reduced Complexity Is the Goal

The amendments are expected to reduce cost and complexity in the standard. FASB said they will provide clarity about implementing licenses of intellectual property such as films, TV shows, music, brands and team names. The guidance also seeks to bring focus to rules for identifying performance obligations, including immaterial items, FASB said.

The revenue recognition standard goes into effect in 2018. The clarifications have the same 2018 effective date—and transition requirements—as the revenue standard, FASB said.

Clarifications to Step Two of the Model

FASB jointly issued the revenue standard with the International Accounting Standards Board in 2014 (10 APPR 525, 6/6/14). For U.S. companies it will replace dozens of the industry-specific revenue rules that they currently use and will have sweeping impact across industries.

The jointly issued FASB-IASB revenue recognition standard has a five-step process to recognize revenue. The April 14 amendments clarify aspects of the second step of the five-step revenue model—the step that requires a company to identify the performance obligations in the contract. Performance obligations are the promise to transfer a good or service to a customer.

The amendments clarify that a company won't have to assess whether goods or services promised to a customer are performance obligations if they are immaterial in the context of the contract with the customer.

The rules also allow shipping and handling activities occurring after control has passed to the customer to be treated as fulfillment costs rather than as a revenue element.

Furthermore, the guidance improves the separation criteria for assessing whether promised goods or services are distinct—specifically the criteria that “promises are separately identifiable.”

Licensing Implementation Issues

The amendments to licensing implementation guidance clarify aspects for determining whether a company's promise to grant a license provides a customer with either a right to use its intellectual property, which is satisfied at a point in time, or a right to assess the company's intellectual property, which is satisfied over time.

Under the amendments, intellectual property is categorized as either functional or symbolic, and must be recognized by either classification, according to the main provisions of the clarifications. Functional intellectual property falls under the “at a point in time” requirement, and symbolic intellectual property would be recognized over time.

Functional intellectual property includes software, biological compounds or drug formulas and completed media content like films, television shows or music.

Symbolic intellectual property includes brands, teams or trade names, logos and franchise rights.

Also clarified is the scope—meaning what gets included or excluded—and applicability of when to recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property.

The guidance also stipulates that a company shouldn't split a sales-based or usage-based royalty into portions subject to revenue versus that not subject to it, because it doesn't affect allocation of the transaction price to performance obligations.

Moreover, the amendments clarify that types of contractual provisions should be distinguished.

FASB Dissenters

Two FASB members, Thomas Linsmeier and Marc Siegel, dissented on the issuance of the guidance over their concerns that the amendments would set a precedent and would introduce disparate rules.

On clarifications to licensing, they said the amendments had the potential to override the principle of the rules, and diverge from international financial reporting standards.

To contact the reporter on this story: Denise Lugo in Norwalk, Conn., at dlugo@bna.com

To contact the editor responsible for this story: Ali Sartipzadeh at asartipzadeh@bna.com

For a copy of the amendments go to:http://src.bna.com/d8j

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