FASB Proposes Revenue Rule Clarification; More to Come

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By Steve Burkholder

Aug. 31 — The Financial Accounting Standards Board proposed guidance on a key gross-versus-net revenue reporting issue on the same day it advanced toward releasing more draft guidance on revenue by early October.

In the Aug. 31 proposal, FASB aims to head off diversity in application of prescriptions in assessing whether an entity is a principal or an agent in providing a contracted good or service.

The answer in that evaluation drives whether a company reports gross or net amounts of revenue. 

FASB requests that comments on the proposed accounting standards update on principal-versus-agent considerations be sent by Oct. 15.

Application Clarifications Coming

The posting of the proposal related to gross-versus-net presentation occurred when FASB also voted to issue more planned implementation guidance on revenue reporting. Five of the seven-members supported that action.

That proposal would cover several revenue reporting issues as public companies prepare for the Jan. 1, 2018 delayed advent of far-reaching revenue standards. Those standards were issued in May 2014 as Accounting Standards Update No. 2014-09; Accounting Standards Codification 606.

The issues to be addressed in the forthcoming proposal are:

• collectability of revenue, including amendments to guidance on that topic in the 2014 accounting standard;

• sales taxes;

• noncash consideration;

• contract modifications at the time of transition to the new standard; and

• completed contracts at transition.


FASB and its international counterpart, which jointly issued the far-reaching revenue reporting rules, have been working with their Joint Transition Resource Group for Revenue Recognition in trying to ease the shift to the new revenue rules.

Trying to Avoid Big Changes

In carving out implementation guidance, the U.S. board and the International Accounting Standards Board have shied away from making big changes to the similarly-worded standards.

The U.S. board also has sought to avoid divergence from the international standard on revenue.

FASB voted Aug. 31 to include guidance on contracts deemed completed at the time of the shift to the new revenue reporting standards.

The board weighed when a contract is considered completed for purposes of applying the guidance on transition to the 2014 rules.

The board voted unanimously to clarify that a completed contract is one for which all, or substantially all, of the revenue was recognized under “legacy GAAP,” which is generally accepted accounting principles that are extant until the 2018 effective date for public companies.

A divided FASB voted to allow entities to apply the standard's modified retrospective transition approach to all contracts.

Retrospective Application to All Contracts

In a related tentative decision, a divided FASB—four out of seven members—voted to allow entities to apply the standard's modified retrospective transition approach to all contracts. The alternative would have been to apply that transition method to only those contracts that aren't completed.

In other action Aug. 31, FASB considered another issue pertaining to collectability. The board essentially reaffirmed earlier decisions, despite negative feedback received in its due process.

It elected to hew to a view that remains essentially converged with IASB on the topic.

A four-member majority of FASB voted for a position stating that collectability remains a consideration in determining whether a customer contract exists—“that is, whether step 1 of the new revenue model is completed,” according to a meeting handout.

Under the model in the 2014 standards, step 1 of the five-step revenue reporting blueprint is to identify the contract with a customer.

FASB also supported clarifying the existing guidance based on proposals in the recent external review the board conducted on drafts of the proposed guidance.

Collectability Alternative Rejected

A majority of the board declined to adopt a markedly different position on collectability. That stance—the one not taken by FASB—reflects a view that “collectability affects the amount of revenue recognized under the contract, rather than the determination of whether a contract with a customer exists,” according to a meeting handout written by FASB's staff.

At least four members of the board seemed to balk at the prospect of changing, in the wake of negative feedback, from the current course laid out in the final, converged standard.

FASB member Daryl Buck essentially acknowledged that the stance on the collectability front reflects a compromise with IASB in order to align on the topic. At least two other FASB members agreed that the boards had not reached the best answer on collectability.

Buck cautioned against “changing horses in mid-stream.” A critical mass of FASB agreed with him.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at sburkholder@bna.com

To contact the editor responsible for this story: Steven Marcy at mailto:%20smarcy@bna.com

The draft ASU on principal-versus-agent considerations in revenue reporting is available at http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176166355948. An Aug. 31 board meeting handout on the collectability and completed contract topics is posted at http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176166355304. FASB plans to post soon a summary of board decisions made Aug. 31 http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220079432.

For a discussion of fundamental principles of revenue recognition, see 5100-2nd, Revenue Recognition: Fundamental Principles.

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