Alert: FASB Accounting Standards Update No. 2016-12 - Revenue from Contracts with Customers: Narrow-scope Improvements and Practical Expedients

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2016-12 - Revenue from Contracts with Customers: Narrow-scope Improvements and Practical Expedients

On May 9, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-scope Improvements and Practical Expedients. The core revenue recognition principle in Topic 606 is unchanged. The ASU seeks to clarify guidance in response to implementation issues identified by the FASB-IASB Joint Transition Resource Group for Revenue Recognition (TRG). Specifically, the amendments relate to:

  • Assessing the collectability criterion and accounting for contracts that do not meet the criteria for Step 1 – The ASU clarifies that the objective of the collectability criterion in Step 1 of the new revenue model is to determine whether the contract is valid and represents a substantive transaction on the basis of whether the customer has the ability and intention to pay. In addition, the amendments include the addition of a new criterion for the determination of when revenue is recognized for a contract that fails to meet the criteria in Step 1 of the new revenue model.
  • Presentation of sales taxes and other similar taxes collected from customers – The amendments add a policy election that permits an entity to exclude all sales (and other similar) taxes from the measurement of the transaction price.
  • Non-cash consideration – The ASU specifies that non-cash consideration should be measured at contract inception. Furthermore, the amendments clarify that the guidance in Topic 606 related to variable consideration applies only to variability resulting from reasons other than the form of the consideration.
  • Contract modifications at transition – A practical expedient has been added to allow entities to present the aggregate effect of all modifications that occur prior to the beginning of the earliest period presented when allocating the transaction price to all satisfied and unsatisfied performance obligations.
  • Completed contracts at transition – The definition of a completed contract for the purposes of transition has been amended. A completed contract is a contract for which all (or substantially all) of the revenue has been recognized under the old revenue recognition standard before the date of initial application of Topic 606. A choice has also been added to permit an entity to apply the modified retrospective transition method either to all contracts or only those that are not completed contracts.
  • Retrospective application – The amendments include the clarification that an entity is not required to disclose the effect of the accounting change for the period of adoption when it has retrospectively applied Topic 606 to each prior period. However, disclosure of the effect of the changes on any prior periods retrospectively adjusted is still required.

FASB expects that these amendments will continue to maintain the convergence between Topic 606 and IFRS 15 Revenue from Contracts with Customers by reducing the potential for diversity in practice. Minor differences in financial reporting between US GAAP and IFRS could result from the following four principal areas:

  • The policy election related to the exclusion of all sales (and other similar) taxes does not exist under IFRS 15.
  • IFRS 15 does not prescribe the measurement date for non-cash consideration.
  • The practical expedient related to the contract modifications at transition must be applied as of the beginning of the earliest period presented under Topic 606. Conversely, IFRS 15 allows an entity to choose to apply the expedient at the beginning of the earliest period presented or the date of initial application of IFRS 15.
  • The IFRS 15 definition for a completed contract differs from that under the amendments. Also, IFRS 15 provides a practical expedient that permits an entity electing the full retrospective method to apply IFRS 15 retrospectively only to contracts that are not completed contracts as of the beginning of the earliest period presented. Topic 606 does not have a similar expedient.

The amendments are effective as at the deferred effective date of Topic 606 noted in ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. Public business entities, certain not-for-profit entities and certain employee benefit plans should apply amended Topic 606 for fiscal years beginning after December 15, 2017, including interim periods therein. Earlier application is permitted only as of fiscal years beginning after December 15, 2016, including interim periods therein. All other entities are required to apply amended Topic 606 for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted as of fiscal years beginning after December 15, 2016, including interim periods therein or for interim periods within fiscal years beginning one year after the fiscal year in which the entity first applies Topic 606.

To access the full script of ASU No. 2016-12 click here.

This communication contains a general overview of the topic and is current as of May 9, 2016. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2016. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.