FASB Proceeds with Post-Implementation Review of ASC 606, Revenue from Contracts with Customers

With the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) is now firmly in the rearview mirror; the Financial Accounting Standards Board (Board) is performing a post-implementation review (PIR) process by soliciting feedback from various stakeholders.

For the purposes of this publication, we will summarize the results of three areas assessed by the Board as part of the PIR of Topic 606: 1) Benefits, 2) Costs and 3) Implementation Challenges.

Benefits

The Board expected Topic 606 to provide the following benefits:

(a) Comprehensive framework:

1. Removed inconsistencies and weaknesses in revenue requirements.
2. More robust framework for addressing revenue issues:
   1. Provided a basis that should be more easily and timely applied to complex and evolving transactions
   2. Greater consistency in the accounting for economically similar transactions
   3. Providing guidance for revenue transactions that had not previously been addressed comprehensively, e.g., revenue from services and licenses of intellectual property (IP)
3. Better depiction of entities’ performance
4. Simplified the preparation of financial statements by reducing requirements requiring reference

1. Improved comparability of revenue recognition practices and reporting across entities, industries, jurisdictions and capital markets:
   1. Converged with IFRS Accounting Standards
   2. Eliminated industry-specific guidance.

1. Comprehensive disclosure requirements to improve information about revenue reported in the financial statements and improved understanding of entities’ contracts and revenue-generating activities.

Based on the results of the Board’s outreach, investors generally agree that Topic 606 provides more useful and transparent information, especially through improved disclosures, and improves the timing of revenue recognition and better reflects the underlying economics. Some investors observed increased comparability among entities in different markets because of the converged guidance under GAAP and IFRS Accounting Standards. Some preparers noted that the implementation of Topic 606 helped them better understand their revenue contracts and improved internal controls over contracts.

Costs

Regarding stakeholders’ views on the costs of applying the revenue guidance, investors and preparers both noted they incurred most of the additional cost, sometimes in excess of budgeted amounts, during the transition period. However, most of those costs were one-time costs. These costs were also dependent on the applicable industry; for example, companies in the software industry experienced higher costs of implementation, while the financial statements of others were not materially affected. Some preparers also noted that documenting internal control processes was costly and time consuming and that implementation costs were more burdensome for preparers with fewer resources, such as private companies. Some preparers noted that certain costs persisted beyond the transition period, such as the cost to develop estimates of variable consideration.

Implementation Challenges

Throughout the PIR process, the Board was made aware of areas that have been challenging to apply. As we know, auditors and regulators highly scrutinize revenue recognition due to the importance of the top-line results.

To date, the following areas have resulted in implementation challenges:

(a) Licensing
Stakeholders indicated it could be difficult to determine whether a license is distinct from other services in a contract, as well as allocate the transaction price in contracts with multiple performance obligations that include a license.

(b) Identification of performance obligations
The challenges identified center around difficulties in assessing the nature of a promise and whether goods or services are distinct, likely because the term performance obligation was not previously used or defined in legacy revenue recognition guidance.

(c) Standalone selling price
In this area, stakeholders have had challenges determining and estimating the standalone selling price, particularly when distinct performance obligations do not have a history of standalone sales. 

(d) Constraint on variable consideration
Stakeholders noted it can be challenging to conclude that variable consideration should be fully constrained. Investors also observed challenges in understanding how management has developed and maintained their estimates of variable consideration.

(e) Sales-based or usage-based royalties
This challenge applies when a contract includes two performance obligations, and one of those performance obligations is a license of IP subject to the sales-based or usage-based royalty exception. In that case, an entity must still perform an estimation of future consideration to determine how the transaction price should be allocated to the non-license component in the contract and, therefore, cannot rely on the royalty exception.

(f) Principal versus agent
Stakeholders noted the principal versus agent guidance is complex, challenging to apply and requires significant judgment. Given the complex nature of the guidance, auditors and regulators observed that this area remains a frequent area of consultation. Investors also find it difficult to understand the judgments applied in this regard.

(g) Consideration payable to a customer
Stakeholders noted it can be difficult to determine whether the consideration payable to a customer guidance should be applied to payments made to a customer’s customer or whether such payments should be accounted for as marketing expense.

(h) Incremental costs of obtaining a contract
Stakeholders find it challenging to identify which costs should be capitalized and to determine the appropriate amortization period for those capitalized costs.

(i) Short-cycle manufacturing
For short-cycle manufacturing entities, determining whether a performance obligation is satisfied over time or at a point in time can be challenging to apply because it results in a pattern of revenue recognition that is different from legacy guidance and how these stakeholders view the transactions.

(j) Disclosures
While no specific challenges were noted, some investors suggested that additional disclosures, including disclosures that provide further details around disaggregated revenue metrics, may be beneficial.

Next Steps

If you have any feedback to share regarding your experience with applying Topic 606 or are experiencing any challenges when recognizing revenue or assessing new revenue contracts, do not hesitate to connect with us.