Tentative Board Decisions
Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.
Revenue Recognition—Identifying Performance Obligations and Licenses. The Board met and redeliberated its May 2015 proposed Accounting Standards Update, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.
The Board affirmed most of the amendments in the proposed Update. The Board also made additional decisions within the scope of the following topics:
- Identifying performance obligations
The Board reached decisions about (1) identifying promised goods or services that would be subject to the separation guidance, (2) application of the distinct guidance, (3) accounting for shipping and handling activities, (4) the series provision, and (5) disclosure of the transaction price allocated to remaining performance obligations.
Promised Goods or Services
The Board affirmed its proposal that an entity is not required to identify goods or services promised to the customer that are immaterial in the context of the contract with a customer. Optional goods or services will continue to be accounted for in accordance with paragraphs 606-10-55-41 through 55-45. An entity will not be required to accumulate goods or services assessed as immaterial in the context of the contract and assess their significance at the financial statement level.
In addition, the Board decided that if, as a result of not identifying promised goods or services that are immaterial in the context of the contract, revenue is recognized before all of the good or services promised in the contract are transferred to the customer, the related costs to transfer those goods or services should be accrued.
Separately Identifiable (or “Distinct within the Context of the Contract”)
The Board affirmed its previous decisions to:
- Improve upon the articulation of the separately identifiable principle in paragraph 606-10-25-19(b) by clarifying in paragraph 606-10-25-21 that the objective when assessing whether an entity’s promises to transfer goods or services to the customer are separately identifiable is to determine whether the nature of the entity’s overall promise in the contract is to transfer each of those goods or services or whether the promise is to transfer a combined item or items to which the promised goods or services are inputs.
- Revise the factors in paragraph 606-10-25-21 to align those factors to the re-articulated separately identifiable principle.
- Revise the existing illustrative examples and provide additional illustrative examples to clarify how the Board intends the guidance on identifying performance obligations to be applied.
The Board affirmed its decision to amend the guidance in Topic 606 as it applies to shipping and handling activities. The amendments to Topic 606 will clarify that shipping and handling activities that occur before the customer obtains control of the related good are fulfillment activities. In addition, the amendments would permit an entity, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfillment activities.
The Board also decided that the guidance in Topic 606 should specify that, if revenue is recognized before contractually-agreed shipping and handling activities occur, the related costs of those shipping and handling activities should be accrued.
The Board decided not to make optional the guidance in paragraphs 606-10-25-14(b) through 25-15 that requires an entity to account for a series of distinct goods or services as a single performance obligation if (1) each distinct good or service would be a performance obligation satisfied over time and (2) the same method would be used to measure the entity’s progress towards complete satisfaction of each distinct good or service (collectively, the “series provision”). Consequently, the series provision remains a requirement of Topic 606.
Disclosure of the Transaction Price Allocated to Remaining Performance Obligations
The Board decided not to amend the disclosure requirements in paragraphs 606-10-50-13 through 50-14. Rather, the Board directed the staff to perform additional research about the effect of introducing an additional disclosure practical expedient that would permit entities to not provide the disclosures about transaction price required by paragraph 606-10-50-13 if doing so would require the entity to accumulate information solely for disclosure purposes when those amounts are not needed to recognize and measure revenue. The Board asked the staff to report the results of the research separate from this Identifying Performance Obligations and Licensing project.
The Board reached decisions about (1) determining the nature of the entity’s promise in granting a license, (2) when an entity should determine the nature of its promise in granting a license, (3) sales-based and usage-based royalties, and (4) contractual restrictions in licensing arrangements.
Determining the Nature of the Entity’s Promise in Granting a License
The Board affirmed that an entity’s promise to transfer a license to functional intellectual property (that is, intellectual property that has significant standalone functionality—for example, the ability to process a transaction, perform a function or task, or be played or aired) that is a separate performance obligation is satisfied at the point in time the license is granted unless both of the following criteria are met:
- The functionality of the intellectual property to which the customer has rights is expected to substantively change during the license period as a result of activities of the entity that do not transfer a promised good or service to the customer.
- The customer is contractually or practically required to use the updated intellectual property resulting from criterion (1).
The Board decided not to enact a provision that would recognize licenses of symbolic intellectual property at the point in time the license is granted if it is reasonably certain the entity will not undertake any activities to support or maintain the intellectual property during the license period.
When an Entity Should Determine the Nature of Its Promise in Granting a License
The Board affirmed its decision to clarify that, in some cases, an entity would need to determine the nature of its promise in granting a license that is not a separate performance obligation in order to appropriately apply the general guidance on whether a performance obligation is satisfied over time or at a point in time and/or to determine the appropriate measure of progress for a combined performance obligation that includes a license.
Sales-Based and Usage-Based Royalties
The Board affirmed its decision to clarify the scope and applicability of the implementation guidance on sales-based or usage-based royalties promised in exchange for a license of intellectual property as follows:
- An entity should not split a single royalty into a portion subject to the sales-based and usage-based royalties recognition exception and a portion that is not subject to the exception (and, therefore, would be subject to the general guidance on variable consideration, including the constraint on variable consideration).
- The sales-based and usage-based royalties exception should apply whenever the predominant item to which the royalty relates is a license of intellectual property.
- To clarify application of the sales-based and usage-based royalties exception to performance obligations satisfied over time through revisions to the relevant examples and the basis for conclusions of the final Accounting Standards Update
- Not to expand the scope of the royalties exception to include sales of intellectual property
- An entity should not attempt to discern whether a license to intellectual property is an “in-substance sale” of that intellectual property in deciding whether or not the royalties exception applies.
The Board decided to affirm its decision to clarify in Topic 606 that contractual restrictions of the nature described in paragraph 606-10-55-64 are attributes of a license and, consequently, do not define whether the entity satisfies its performance obligation at a point in time or over time or change the number of promises in the contract. The Board also affirmed its view that differentiating attributes of a promised license from other promises to the customer in the contract often will require judgment.
The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot.
Accounting for Income Taxes—Intra-entity Asset Transfers and Balance Sheet Classification of Deferred Taxes. The Board discussed the comments received on the two January 22, 2015 proposed Accounting Standards Updates: Income Taxes (Topic 740): I. Intra-Entity Asset Transfers and II. Balance Sheet Classification of Deferred Taxes, and made the following decisions.
Intra-Entity Asset Transfers
The Board directed the staff to perform additional research and outreach on issues raised by stakeholders.
Balance Sheet Classification of Deferred Taxes
The Board affirmed the proposal to require that all deferred income tax assets and liabilities be presented as noncurrent in a classified statement of financial position.
The Board decided that entities should have a choice of applying the amendments either prospectively or retrospectively to all periods presented.
If an entity applies the amendments prospectively, the entity should disclose in the first interim and annual period of change (1) the nature of and reason for the change in accounting principle and (2) a statement that prior periods were not adjusted. If an entity applies the amendments retrospectively, the entity should disclose in the first interim and annual period of change (1) the nature of and reason for the change in accounting principle and (2) quantitative information about the effects of the accounting change to prior periods.
Effective Date and Early Adoption
The Board affirmed the proposal that public business entities would be required to apply the amendments in annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual reporting periods.
The Board affirmed the proposal that entities other than public business entities would be required to apply the amendments in annual reporting periods beginning after December 15, 2017, and interim reporting periods within annual reporting periods beginning after December 15, 2018.
The Board decided to allow earlier adoption for all entities as of the beginning of any interim or annual reporting period.
Permission to Ballot
The Board decided that it has received sufficient information and analysis on the proposed amendments to make an informed decision on the issues presented and that the expected benefits of those amendments justify the perceived cost of change. The Board directed the staff to draft a final Accounting Standards Update for vote by written ballot.