Six elements the Joint Transition Resource Group for Revenue Recognition earmarked for change became part of the final standard recently. Accounting Standards Update (ASU) 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow Scope Improvements and Practical Expedients, updates guidance related to collectibility, presentation of sales and use taxes, noncash consideration, contract modifications and completed contracts at transition.

The bulk of the changes remain the same as outlined in the exposure draft released last fall. The ASU also includes a technical correction.

Determining Whether a Customer Has the Ability and Intention to Pay

To determine whether a contract with a customer exists under Topic 606, the reporting entity has to evaluate collectibility, that is, whether a customer has the ability and intention to pay promised consideration in exchange for goods and services that will be transferred. Arrangements that are not deemed collectible at the beginning of the contract require continual reassessment of whether the consideration is deemed collectible in the future.

Prior to meeting the collectibility requirement in Step 1 of the standard's five-step revenue recognition model, entities may still recognize revenue if certain other criteria are met. The update adds a new criterion that allows an entity to recognize revenue in the amount of consideration received when the entity has transferred control of the goods or services, the entity has stopped transferring good or services and has no obligation under the contract to transfer additional goods or services and has received nonrefundable consideration from the customer. This alleviates concerns from practitioners about the ability to recognize revenue on a cash basis once the intended obligations have been fulfilled (which may not be every original obligation under the contract).

Sales Taxes Accounting Election

Some sales taxes are collected on behalf of third parties, and this can create complication when applying Step 3 of the new revenue recognition model, determining the transaction price. The initial guidance for revenue recognition required the reporting entity to evaluate the amount of consideration it expected to receive less the amounts owed to third parties. This would have required the entity to perform a gross versus net analysis on all of its sales and use tax obligations, which vary among federal, state and local jurisdictions.

Under the narrow scope improvements, entities can make an accounting election to exclude all sales and similar taxes from the calculation of the transaction price (universal application of the net method).

Noncash Considerations

The accounting standards update clarifies that entities are to measure noncash consideration at fair value as of the date of the contract's inception. It also states that noncash consideration does not automatically constitute variable consideration; entities should apply variable consideration guidance only when variability results from facts and circumstances other than the form of the consideration.

Transition Guidance

Two elements of the transition guidance also received an update in the latest round of changes. ASU 2016-12 creates a practical expedient for contract modifications that occurred before the earliest financial periods presented in the financial statement. The practical expedient allows entities to reflect the total effect of all the modifications that occurred before the earliest period presented when evaluating the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to satisfied and unsatisfied performance obligations.

The accounting standards update also clarified that a completed contract is considered a contract where substantially all of the consideration has been recognized under legacy generally accepted accounting principles (GAAP). Entities will not have to consider the accounting elements that were previously not considered revenue when determining whether a contract is complete.

Entities evaluate whether their contract is complete when adopting the revenue recognition standard under the modified retrospective method. Organizations can either apply the modified retrospective method to all contracts or only those that are not complete. Previously, the guidance defined "complete" as contracts where the customer had control of substantially all of the goods or services according to legacy GAAP before the date the reporting entity applied the revenue recognition standard. Feedback to the FASB indicated this would be costly and complex to evaluate. By redefining “complete,” ASU 2016-12 seeks to make the evaluation of contracts more straightforward.

Technical Correction

The update clarifies that an entity that retrospectively applies the new revenue recognition standard is not required to disclose the effect of the accounting change for the period of adoption. Entities will still be required to disclose the effect of the changes on any periods that were retrospectively adjusted, however.

For More Information

If you have specific comments, questions or concerns about the revenue recognition guidance, please see our revenue recognition resources or contact James Comito, Brad Hale or Mark Winiarski of MHM's Professional Standards Group. James can be reached at or 858.795.2029. Brad can be reached at or 727.572.1400. Mark can be reached at or 816.945.5614.

Published on May 16, 2016