FASB memos shed light on private company revenue recognition issues

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November 13, 2018

FASB memos shed light on private company revenue recognition issues Two FASB staff memos issued last month provide insight to private company financial statement preparers on how to overcome implementation challenges that some have encountered with the new revenue recognition standard. the memos address concerns raised in a letter sent to FASB in January by […]

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FASB memos sh light on private company revenue recognition issues

Two FASB staff memos issu last month provide in to private company financial statement preparers on how to overcome implementation challenges that some have encounter with the new revenue recognition standard.

The memos address concerns rais in a letter sent to FASB in January by the AI Technical Issues Committee (TIC). In the letter, TIC request private company exceptions to certain elements of Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (Topic 606).

FASB’s memos address some of the issues rais in the TIC letter. The memos address TIC’s statements that:

Other issues from the TIC letter are not address in the memos. These include a request to reconsider the effective date of the revenue recognition standard for not-for-profit conduit debt obligors, and a request to permit private companies to continue to use accounting policy election to apply the incremental cost method for customer options for additional goods and seices that are a material right.

The memos are excerpt from a paper that was prepar for discussion by the Private Company Council (PCC), which advocates with FASB on private company accounting issues. The memos not purport to represent the views of any individual members of FASB or the staff, nor the memos claim to establish accept application of .

Nonetheless, the memos provide in into the thinking of FASB’s staff relat to some issues rais by TIC.

The first memo, dat June 15, exs that many public companies have avoid the ne to estimate out-of-pocket reimbursements using existing guidance in the revenue recognition standard. The principal-versus-agent analysis narrows the population of contracts affect by the out-of-pocket issue, according to the memo, as several PCC members said during an April meeting that “passthrough expenses” should not have to be estimat and should not have any effect on profit margins.

FASB staff outreach shows that when a company is requir to estimate the reimbursement, most companies retain current practice by asserting that the change is immaterial. When the reimbursements are material, the memo says companies have handl implementation in one of three ways:

FASB’s staff plans to develop an ucation plan on this topic.

The second memo, dat June 19, states that in some cases it may not be clear whether a contract exists, so additional work may be requir (which may or may not require assistance) to determine whether enforce rights and obligations to payment exist.

But the memo states that such additional work would be requir in a minority of contracts, and that the new rules are “not dissimilar from today’s requirements.” The memo states that in most cases, it will be obvious if the contract meets the Step 1 requirement of the new revenue recognition model to identify a contract with a customer.

With regard to short-cycle manufacturing, FASB’s staff s that preparers have had questions about how to handle contracts when the entity creates a good with no alternative use and the contract with its customer es not specify by its written terms the entity’s right to payment upon contract termination. Preparers have wonder if FASB intend for companies to analyze every in every jurisdiction to determine whether there is recoverability.

The memo states that FASB’s staff believes it’s reason to interpret from the revenue recognition guidance that when a contract’s written terms not specify the entity’s right to payment upon contract termination, an enforce right to payment is presum not to exist.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA itorial director.


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