The Financial Accounting Standards Board has issued an accounting standards update amending its revenue recognition standard to provide further guidance on performance obligations and licensing.
FASB and the International Accounting Standards Board issued a mostly converged revenue recognition standard in 2014 after a decade of work on harmonizing U.S. GAAP with International Financial Reporting Standards. However, the two standard-setting boards also set up a joint Transition Resource Group to evaluate issues that might emerge for companies trying to implement the new standard. Those issues include performance obligations and licensing, which they then referred to FASB and the IASB for further standard-setting.
FASB issued amendments last week, which are mostly in line with changes that the IASB recently made to the standard, although they are not identical. The two boards also agreed last year to defer the effective date of the standard for another year after receiving input from the Transition Resource Group. It will not take effect until annual reporting periods beginning after Dec. 15, 2017 for public companies and Dec. 15, 2018 for private companies.
In the new accounting standards update, FASB said the core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity should apply the following steps:
1. Identify the contracts with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when, or as, the entity satisfies a performance obligation.
In terms of the licensing implementation guidance, the amendments clarify a number of matters, including:
1. An entity’s promise to grant a customer a license to 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) does not include supporting or maintaining that intellectual property during the license period. Rather, the nature of the entity’s promise is to provide a right to use the entity’s intellectual property as that intellectual property exists at the point in time the license is granted unless the entity is expected to undertake activities (that do not transfer a promised good or service to the customer) that will change the functionality of the intellectual property to which the customer has rights.
2. An entity’s promise to provide a customer with a right to use the entity’s intellectual property is satisfied at the point in time the customer is able to use and benefit from the license, because the entity’s promise in granting the license is solely to make the underlying intellectual property available for the customer’s use and benefit. Functional intellectual property includes software, biological compounds or drug formulas, and completed media content (for example, films, television shows, or music).
3. An entity’s promise to grant a customer a license to symbolic intellectual property (that is, intellectual property that does not have significant standalone functionality) includes supporting or maintaining that intellectual property during the license period. Therefore, the nature of the entity’s promise to the customer is both to (a) grant the customer rights to use and benefit from the entity’s intellectual property and make that underlying intellectual property available for the customer’s use and benefit and (b) support or maintain the intellectual property during the license period (or over the remaining economic life of the intellectual property, if shorter). Consequently, a license to symbolic intellectual property is satisfied over time. Symbolic intellectual property includes brands, team or trade names, logos and franchise rights.
Separately, FASB issued another accounting standards update Thursday with technical corrections and improvements for various other parts of the U.S. GAAP codification.
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