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Thursday, December 15, 2016

Revenue Recognition: FASB Relaxes Disclosure Requirements for Certain Industries


The Financial Accounting Standards Board (FASB) has agreed to finalize a slate of technical corrections to its wide-ranging revenue recognition standard, which goes into effect for public companies in 2018. One change will allow some technology, entertainment and payment card processing companies to avoid disclosing how much work they have left on certain types of customer contracts before they can be paid. This “practical expedient” is being implemented despite objections from investors who say the information helps them understand a company’s financial performance.

Exceptions to the Disclosure Rules
Under the sweeping revenue recognition standard, published in May 2014 as Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, businesses must disclose information about promises to customers that are incomplete or partially complete. The disclosures include the amount of money allocated to the unsatisfied performance obligations and either a numerical or narrative explanation about when the revenue can be recorded from the unfinished tasks.

The standard provides a break from these disclosures if the promises are part of a contract of a year or less or if the business has the right to payments from customers in an amount that “corresponds directly with the value to the customer.” After the standard’s publication, businesses and auditors told the FASB that the disclosures may be difficult in some circumstances with so-called “variable consideration”—essentially, uncertainty about payments from customers, such as when pricing is tied to a market index.

In May, the FASB issued Proposed Accounting Standards Update (ASU) No. 2016-240, Technical Corrections and Improvements to Update 2014-09; Revenue from Contracts with Customers (Topic 606). This proposal offered an additional break, or “practical expedient,” to industries that voiced the loudest complaints, including some technology, entertainment, and payment card processing companies.

The break would allow certain companies to skip requirements to disclose the remaining performance obligations in a contract with a customer for transactions in which a business doesn’t have to estimate what is called variable consideration to record revenue. The break would apply only to sales-based or usage-based royalties for licenses of intellectual property and variable consideration allocated to a series of distinct goods or services.

If a business uses the disclosure exemption, it will still have to include qualitative or descriptive information about the nature of the performance obligation, the length of time left in the contract, and the money excluded from the numerical disclosure of the transaction price allocated to the remaining obligation.

Thumbs Up or Down?
FASB Vice Chairman James Kroeker said that, overall, the revenue recognition standard will usher in many new, enhanced disclosures that will lend better insight into how companies calculate one of the most important figures in their financial statements. Kroeker also said he viewed the disclosure exemption as a technical correction to make the disclosures consistent with the recognition guidance in the standard.

FASB member Lawrence Smith said he agreed with the disclosure exemption and urged the board to move forward. “We issued the standard over two years ago,” Smith said. “There comes a point in time where you’ve got to put the pencils down.” 

However, former SEC Chief Accountant Lynn Turner is surprised that a majority of FASB members backed the disclosure break. One of the aims of the revenue recognition standard was to improve the disclosure rules for recognizing revenue under U.S. Generally Accepted Accounting Principles (GAAP). The information about remaining performance obligations is important because it lends insight into when revenue can be recorded. Revenue can’t be recorded until all the obligations are settled.

“Let’s say you hire someone to paint your house, and they’ve got all the basic house painted but haven’t painted any of the trim around the windows, and you agree to pay them provided they painted the whole house, trim and everything,” Turner said. “It’s a legitimate concern that if they haven’t painted all the trim around the house that they’re not entitled to that money yet. That’s exactly what you’re talking about here.”

Three FASB members dissented to the May proposal. They argued that the exemption chips away at information that investors and analysts find essential to understanding a business’s revenue stream. It also would force analysts to look at non-GAAP measures about “backlog,” which give information about a business’s remaining performance obligations.

Coming Soon
Despite these criticisms, the FASB plans to publish the update to the revenue recognition standard by the end of the year. With these concerns resolved, the FASB expects companies to move forward with plans to implement the new revenue recognition guidance. Contact your local Armanino expert for help preparing for this new standard before it goes live in 2018 for public companies and 2019 for private ones.

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