Several Small Updates Made to the Revenue Recognition Standard

In late December 2016, the Financial Accounting Standards Board released technical corrections to ASC Topic 606, Revenue from Contracts with Customers (Topic 606). The small scope updates in Accounting Standards Update (ASU) 2016-20 clarify elements of loan guarantee fees, impairment testing for contract costs and provisions for losses, among other areas identified by FASB stakeholders, the Transition Resource Group for Revenue Recognition and online feedback. Technical updates in ASU 2016-20 will be effective at the same time as the guidance in Topic 606.

Loan Guarantee Fees

Under the new revenue recognition standard, fees for guarantees, other than product or service warranties, are scoped out of Topic 606. How to account for fees related to these guarantees was not clear. The technical update clarifies that guarantee fees should be accounted for in light of ASC Topic 460, Guarantees, or ASC Topic 815, Derivatives and Hedging.

Contract Costs

Previous guidance includes information on impairment testing for capitalized costs recognized under ASC Subtopic 340, Other Assets and Deferred Costs. Amendments establish a protocol for impairment testing where entities consider expected contract renewals and extensions and include both the amount of consideration they have already received but not recognized and the amount they expect to receive in the future.

The guidance does not replace the guidance in ASC Topic 340, nor does it supersede guidance in ASC Topic 350, Intangibles—Goodwill and Other or ASC Topic 360, Property, Plant, and Equipment. Entities should apply the impairment testing guidance on assets not subject to ASC 340, 350 or 360 and then consider the assets that are in scope of ASC Topic 360 or ASC Topic 350.

Losses on Construction-Type and Production-Type Contracts

The technical updates provide some relief for companies with loss contracts. Topic 606 requires contacts to be tested for loss at the performance obligation level. ASU 2016-20 will allow entities to elect to measure for loss at the contract level, though measurement at the performance obligation level is still permitted. This should minimize the risk that entities are performing the loss assessment at a lower level than in current practice.

Insurance Contracts and ASC Topic 606

To clear up the confusion surrounding the scope exception for insurance contracts, the update removes the word “insurance” from the guidance. Topic 606 will now read that all contracts within the scope of ASC Topic 944, Financial Services—Insurance are excluded from the new revenue recognition standard, not just insurance contracts in scope of ASC Topic 944.

Disclosure of Remaining Performance Obligations

Generally, entities must disclose information about its unsatisfied performance obligations, including the aggregate amount of the transaction price allocated to the unsatisfied performance obligation. There are some exemptions from the disclosure, such as contracts that are less than a year in duration. The update provides an optional exemption from the requirement to disclose remaining performance obligations for situations in which an entity is not using variable consideration to recognize revenue. The technical update in 2016-20 also requires entities electing an exemption to provide additional information in their disclosures.

Disclosure of Prior Period Performance Obligations

Changes in the technical update clarify that the requirement to disclose performance obligations satisfied or partially satisfied in earlier periods applies to all performance obligations, not just those in corresponding contract balances.

Modifications to Examples

Small updates were made to the Contract Modifications Example 7 (contract modifications) and Example 38, Case B (contract asset versus receivable) to better align them with the Topic 606 guidance. Example 40 (refund liability) was updated to remove the term “contract liability” from the journal entry.

Advertising Costs

Much of the guidance in ASC Subtopic 340-20 is superseded when an entity adopts Topic 606. The rule does not take into account certain liabilities that were subject to ASC Subtopic 340-20, including advertising costs. This guidance was reinstanted and moved to ASC Topic 720, Other Expenses.

Fixed-Odds Wagering Contracts in the Casino Industry

Industry-specific guidance on recognizing fixed-odds wagering as gaming revenue was eliminated with Topic 606. The technical update creates a new Subtopic 924-815, Entertainment—Casinos that includes a scope exception from the derivatives guidance for fixed-odds wagering contracts issued by casino entities.

Cost Capitalization for Advisors to Private Funds and Public Funds

Updates to Topic 606 could have produced inconsistent practice for accounting for offering costs for advisors to public and private funds. The technical update in 2016-20 aligns the cost-capitalization guidance with ASC Topic 946, Financial Services—Investment Companies.

For More Information

For more information, please contact Brad Hale or Mark Winiarski of MHM's Professional Standards Group.