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Revenue from Contracts with Customers-Navigating the guidance in ASC 606 and ASC 340-40Navigating the guidance in ASC 606 and ASC 340-40
This publication was created for general information purposes, and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. Grant Thornton LLP (Grant Thornton) shall not be responsible for any loss sustained by any person or entity that relies on the information contained in this publication. This publication is not a substitute for human judgment and analysis, and it should not be relied upon to provide specific answers. The conclusions reached on the examples included in this publication are based on the specific facts and circumstances outlined. Entities with slightly different facts and circumstances may reach different conclusions, based on considering all of the available information. The content in this publication is based on information available as of December 31, 2018. We may update this publication for evolving views as we continue to monitor the implementation process. For the latest version, please visit grant.thornton.com. Portions of FASB Accounting Standards Codification® material included in this work are copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and are reproduced with permission.
Contents 3
2. Scope................................................................................................................................12 2.1 Sales of nonfinancial assets ...................................................................................... 14 2.2 Interaction with other guidance................................................................................... 14 2.2.1 Collaborative arrangements................................................................................15 2.2.2 Contributions received .......................................................................................15
4. Identify the performance obligations in the contract ..................................................................39 4.1 Identifying promises ................................................................................................. 39 4.1.1 Immaterial promises ..........................................................................................41 4.1.2 Shipping and handling .......................................................................................44 4.1.3 Preproduction activities ......................................................................................45 4.1.4 Stand-ready promises........................................................................................45 4.2 Identifying performance obligations............................................................................. 47 4.2.1 Capable of being distinct ....................................................................................49 4.2.2 Distinct within the context of the contract ..............................................................49 4.3 Series of distinct goods or services ............................................................................. 55 4.4 Customer options for additional goods or services......................................................... 60 4.4.1 The exercise of a material right ...........................................................................70 4.5 Nonrefundable upfront fees ....................................................................................... 71 4.6 Warranties .............................................................................................................. 75
Contents 4
6. Allocate the transaction price to the performance obligations ................................................... 120 6.1 Determining stand-alone selling price........................................................................ 121 6.1.1 Adjusted market assessment approach .............................................................. 124 6.1.2 Expected cost-plus-a-margin approach .............................................................. 124 6.1.3 Residual approach .......................................................................................... 124 6.1.4 Using a combination of approaches ................................................................... 126 6.2 Allocating the transaction price to the performance obligations...................................... 126 6.2.1 Allocating based on a range of estimated stand-alone selling prices ....................... 128 6.3 Estimating the stand-alone selling price of an option ....................................................... 130 6.3.1 Practical alternative to estimating the stand-alone selling price of an option ............. 132 6.4 Allocating a discount .............................................................................................. 135 6.5 Allocating variable consideration .............................................................................. 140 6.5.1 Allocating variable consideration to a series ........................................................ 143 6.6 Interaction between allocating discounts and allocating variable consideration ................ 146 6.7 Changes in transaction price.................................................................................... 146 6.8 Allocating a significant financing component .............................................................. 149
7. Recognize revenue when or as performance obligations are satisfied ....................................... 151 7.1 Control transferred over time ................................................................................... 153 7.1.1 Criteria to recognize revenue over time .............................................................. 154 7.1.2 Methods to measure progress........................................................................... 173 7.1.3 Right to invoice practical expedient .................................................................... 177 7.1.4 Selecting a single measure of progress .............................................................. 183 7.1.5 Ability to reasonably measure progress .............................................................. 184 7.1.6 Updates to measuring progress......................................................................... 185 7.1.7 Pre-contract activities ...................................................................................... 185 7.1.8 Stand-ready obligations ................................................................................... 186 7.2 Control transferred at a point in time ......................................................................... 187 7.2.1 Customer acceptance provisions ....................................................................... 191 7.3 Trial periods .......................................................................................................... 193 7.4 Repurchase agreements ......................................................................................... 193 7.4.1 Forwards or calls ............................................................................................ 194 7.4.2 Put options .................................................................................................... 196 7.5 Bill-and-hold arrangements...................................................................................... 198 7.6 Consignment arrangements..................................................................................... 201 7.7 Customer’s unexercised rights ................................................................................. 202
8. Intellectual property licenses ............................................................................................... 204 8.1 Scope .................................................................................................................. 204 8.2 Applying Step 2 to license arrangements ................................................................... 206 8.3 Determining the nature of the entity’s promise in granting a license ............................... 211 8.3.1 Functional intellectual property.......................................................................... 211 8.3.2 Symbolic intellectual property ........................................................................... 215 8.4 Transferring control of the license............................................................................. 221 8.4.1 Renewals ...................................................................................................... 222 8.5 Sales-based and usage-based royalties .................................................................... 223
Contents 5
8.5.1 Scope of the exception .................................................................................... 224 8.5.2 Contracts with minimum royalty guarantees ........................................................ 226
9. Principal versus agent........................................................................................................ 230 9.1 Identifying the specified goods or services promised to the customer ............................. 232 9.2 Evaluating control .................................................................................................. 235 9.3 Indicators of control ................................................................................................ 237 9.4 Examples of the principal versus agent assessment .................................................... 240 9.5 Reimbursement of out-of-pocket expenses ................................................................ 244
10. Modifications .................................................................................................................... 246 10.1 Identifying a modification......................................................................................... 246 10.1.1 Unpriced change orders and claims ................................................................... 247 10.2 Accounting for the modification ................................................................................ 249 10.2.1 Modifications that constitute separate contracts ................................................... 250 10.2.2 Modifications that do not constitute separate contracts ......................................... 252
11. Contract costs .................................................................................................................. 260 11.1 Costs to obtain a contract........................................................................................ 261 11.1.1 Commissions ................................................................................................. 265 11.2 Costs to fulfill a contract .......................................................................................... 267 11.3 Preproduction activities ........................................................................................... 272 11.3.1 Preproduction costs......................................................................................... 272 11.3.2 Determining the nature of preproduction activities ............................................... 273 11.3.3 Preproduction arrangements............................................................................. 274 11.4 Amortization of contract costs .................................................................................. 275 11.5 Impairment of contract costs .................................................................................... 279 11.5.1 Loss contracts ................................................................................................ 282
12. Presentation ..................................................................................................................... 283 12.1 Contract assets and receivables............................................................................... 284 12.2 Contract liabilities................................................................................................... 286 12.3 Unit of account ...................................................................................................... 288 12.4 Offsetting .............................................................................................................. 289 12.5 Interaction of ASC 606 with SEC Regulation S-X, Rule 5-03(b) .................................... 290
13. Disclosure ........................................................................................................................ 291 13.1 Public business entities........................................................................................... 292 13.1.1 Disaggregation of revenue ............................................................................... 293 13.1.2 Contract balances ........................................................................................... 297 13.1.3 Performance obligations .................................................................................. 298 13.1.4 Significant judgments ...................................................................................... 304 13.1.5 Assets recognized from costs to obtain or fulfill a contract ..................................... 305 13.1.6 Practical expedients for measurement under ASC 606 and ASC 340-40 ................. 306 13.1.7 Interim disclosure requirements......................................................................... 306 13.2 Nonpublic entity disclosures .................................................................................... 307 13.2.1 Disaggregation of revenue ............................................................................... 307 13.2.2 Contract balances ........................................................................................... 309 13.2.3 Performance obligations .................................................................................. 310 13.2.4 Significant judgments ...................................................................................... 310
14. Effective date and transition ................................................................................................ 312 14.1 Effective date ........................................................................................................ 312 14.2 Transition ............................................................................................................. 314 14.2.1 Full retrospective method ................................................................................. 316 14.2.2 Modified retrospective method .......................................................................... 318
Contents 6
1. Overview
In May 2014 the FASB and IASB published their largely converged standards on revenue recognition.
The FASB issued ASU 2014-09, Revenue from Contracts with Customers, and the IASB issued IFRS 15
with the same title. The standards supersede and replace virtually all existing U.S. GAAP and IFRS
revenue recognition guidance, including industry-specific guidance, and affect almost every revenue-
generating entity.
This edition of this publication has been updated to include additional illustrative examples and Grant
Thornton Insights as well as technical updates related to accounting guidance issued after July 2017.
ASC 606-10-10-1
The objective of the guidance in this Topic is to establish the principles that an entity shall apply to
report useful information to users of financial statements about the nature, amount, timing, and
uncertainty of revenue and cash flows arising from a contract with a customer.
The FASB codified the guidance in ASU 2014-09 in a new Topic—Topic 606, Revenue from Contracts
with Customers. Unlike the voluminous and often industry-specific revenue recognition rules it is
replacing, ASC 606 is a single, principle-based model for recognizing revenue. The core principle
requires an entity to recognize revenue in a manner that depicts the transfer of goods and/or services to a
customer in an amount that reflects the consideration to which it expects to be entitled in exchange for
those goods and/or services.
ASC 606-10-05-3
The core principle of this Topic is that an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services.
Figure 1.1: The five-step model
An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services.
Step 1: Identify the
price
Ov erview 8
To achieve the core principle, an entity should apply the following five-step model:
Step 1: Identify the contract with the customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies its performance obligations.
In addition to the five-step model, the standard provides implementation guidance on warranties,
customer options, licensing, and other topics discussed in ASC 606-10-55-3.
ASC 606-10-55-3
a. Assessing collectability (paragraphs 606-10-55-3A through 55-3C)
aa. Performance obligations satisfied over time (paragraphs 606-10-55-4 through 55-15)
b. Methods for measuring progress toward complete satisfaction of a performance obligation
(paragraphs 606-10-55-16 through 55-21)
c. Sale with a right of return (paragraphs 606-10-55-22 through 55-29)
d. Warranties (paragraphs 606-10-55-30 through 55-35)
e. Principal versus agent considerations (paragraphs 606-10-55-36 through 55-40)
f. Customer options for additional goods or services (paragraphs 606-10-55-41 through 55-45)
g. Customers’ unexercised rights (paragraphs 606-10-55-46 through 55-49)
h. Nonrefundable upfront fees (and some related costs) (paragraphs 606-10-55-50 through
55-53)
j. Repurchase agreements (paragraphs 606-10-55-66 through 55-78)
k. Consignment arrangements (paragraphs 606-10-55-79 through 55-80)
l. Bill-and-hold arrangements (paragraphs 606-10-55-81 through 55-84)
m. Customer acceptance (paragraphs 606-10-55-85 through 55-88)
n. Disclosure of disaggregated revenue (paragraphs 606-10-55-89 through 55-91)
The remainder of this guide
Summarizes the revenue guidance and examples, including subsequent ASUs that amend the
guidance included in ASU 2014-09
Ov erview 9
Revenue Recognition (TRG) meetings alongside the applicable guidance
Includes GT insights on various topics
Provides practical insights on how the guidance may differ from legacy GAAP
Includes illustrative examples to demonstrate how to apply the guidance
At the crossroads: Principle-based model versus rules-based model
The shift in the U.S. GAAP revenue landscape from guidance that tends to be prescriptive to guidance
that is based on a single core principle requires entities to use more judgment and places an emphasis
on the underlying core principle of the guidance. Under the new guidance, an entity will need to apply
judgment, keeping in mind the underlying core principal of the guidance, to align the accounting with
the core principle. While this change in approach may be less of an adjustment for those that apply
IFRS, this will be a shift in mindset for those accustomed to U.S. GAAP’s prescriptive rules.
Further, some entities will be required to make more estimates to reflect the amount of consideration to
which an entity “expects to be entitled,” for example, when transactions have variable consideration.
In addition, the increase in estimates and judgments is accompanied by an increase in disclosures to
describe the estimation methods, inputs, and assumptions.
1.1 Joint Transition Resource Group for Revenue Recognition
Shortly after the standard was issued in 2014, the FASB and IASB formed the TRG to help entities
implement the new revenue guidance. The purpose of the group is to
Solicit and discuss stakeholder questions arising from implementing the new revenue guidance
Inform the Boards about implementation issues and recommend action as needed
Provide a forum for stakeholders to learn about the new guidance
The TRG does not issue authoritative guidance, but the meeting papers (hereinafter referred to as “TRG
Paper XX, Title”) and meeting summaries provide stakeholders with additional insight as to how the new
revenue guidance should be applied, especially for those areas where TRG members reach general
agreement.
Then Deputy Chief Accountant for the U.S. Securities and Exchange Commission (SEC) (and now SEC
Chief Accountant) Wesley R. Bricker has advised1 SEC registrants to follow the TRG discussions, even
though they are not authoritative. In other words, when an entity has a fact pattern similar to one that is
included in a FASB or IASB staff paper or discussed at a TRG meeting, the entity is advised to consult
with the SEC staff if it reaches a different conclusion on applying the guidance than the conclusion
reached by the TRG.
1 Remarks before the 2016 Baruch College Financial Reporting Conference, May 5, 2016.
Ov erview 10
All TRG meeting papers prepared by the FASB and/or IASB staff, inclusive of examples and staff views,
as well as archived meetings and meeting summaries, can be found on the TRG homepage on the FASB
website.
The AICPA formed 16 industry task forces to address industry-specific implementation questions and to
help develop a new accounting and auditing guide on revenue recognition. The industries involved with
this project included aerospace and defense, airlines, asset management, broker-dealers, construction
contractors, depository institutions, gaming, health care, hospitality, insurance, not-for-profit, oil and gas,
power and utility, software, telecommunications, and timeshare.
The AICPA’s Audit and Accounting Guide: Revenue Recognition contains accounting and auditing
overviews as well as industry-specific considerations for the 16 industries. While the guide contains
interpretive guidance, it does not create new GAAP and is not authoritative.
1.3 Private Company Council
The Private Company Council (PCC) is the primary advisory body to the FASB on private company
accounting issues. The PCC requested the FASB staff to prepare certain educational memos to assist
with private companies’ implementation of ASC 606. These memos, which are not authoritative, can be
found on the Implementation Issues Memos page of the TRG section on the FASB website.
1.4 Implementation best practices
Adoption of the new guidance will be a significant undertaking for many entities. Even if entities do not
expect the new guidance to have a material impact on revenue, management should allocate sufficient
time and resources for their implementation efforts. The new standard requires entities to evaluate
contracts with customers using a new five-step model and introduces extensive new disclosure
requirements. Management’s implementation plan should encompass many activities, such as scoping,
accounting assessment, solutions development, and other activities.
We have found that many entities are surprised by the amount of time required to complete the scoping
and accounting assessment activities. Proper execution of these steps is essential to a successful
implementation of the new standard.
Grant Thornton insights: Implementation best practices
The accounting assessment phase is critical to the overall adoption of new accounting standards
because it sets the foundation for implementation. In our experience, the two key steps in implementing
the new revenue standard are the development of a scoping plan and the subsequent review of
contracts for accounting assessment.
Rather than reviewing each revenue contract individually, many entities will undertake a scoping
exercise to aggregate contracts into revenue streams comprised of contracts with the same transaction
attributes. Once the revenue streams are identified, entities will select a representative sample of
contracts to review to assess the appropriate accounting treatment under the new revenue standard.
The contract review process should confirm contract features identified during the scoping phase and
identify any additional contract features that may require special consideration under ASC 606, for
instance, the existence of a material right that was not previously accounted for under ASC 605. The
contract review also establishes a basis for developing accounting policies and determining
retrospective adjustments required by either the full retrospective or modified retrospective adoption
method.
If the contract review validates the expectations developed during the scoping phase, management
may be able to conclude that those identified features are appropriate and can be used to develop
accounting policies. However, if the contract review reveals inconsistencies between the expected
contract features identified during scoping and the actual contract features identified during the contract
review, and those differences have a significant accounting impact, management should redefine its
scoping expectations and perform additional sampling procedures to validate those refined
expectations.
When entities do not sufficiently disaggregate contracts into revenue streams comprised of contracts
with the same attributes, they may experience difficulty when executing subsequent implementation
activities or after adopting the new standard. For example, if a discrete revenue stream is not properly
disaggregated during the scoping phase, contracts from this population may not be reviewed for
accounting assessment, and the entity’s revenue recognition policy at adoption may be either
incomplete or inaccurate with respect to the overlooked revenue stream. For similar reasons, entities
should ensure that the sample of contracts reviewed for accounting assessment is sufficient and
representative of the population of contracts included in that revenue stream.
2. Scope
ASC 606 applies to all contracts with customers to provide goods or services that are outputs of the
entity’s ordinary course of business in exchange for consideration, unless specifically excluded from the
scope of the new guidance, as described below.
An entity should apply the guidance in ASC 606 to all contracts with customers, except the following:
Lease contracts within the scope of ASC 840 or ASC 842, Leases
Contracts within the scope of ASC 944, Financial Services – Insurance
Guarantees (other than product or service warranties) within the scope of ASC 460, Guarantees
Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers
or potential customers
Financial instruments and other contractual rights and obligations within the scope of
ASC 310, Receivables; ASC 320, Investments – Debt and Equity Securities; ASC 323, Investments –
Equity Method and Joint Ventures; ASC 325, Investments – Other; ASC 405, Liabilities; ASC 470,
Debt; ASC 815, Derivatives and Hedging; ASC 825, Financial Instruments; and ASC 860, Transfers
and Servicing
The new revenue guidance creates a new Subtopic 924-815, Entertainment—Casinos: Derivatives and
Hedging, which excludes fixed-odds wagering contracts from the derivatives guidance. As a result, fixed-
odds wagering contracts should be accounted for in accordance with the guidance in ASC 606.
TRG area of general agreement: In or out of scope?
The TRG discussed the following types of arrangements and reached general agreement on the
applicability of the scope of ASC 606 as follows:
Credit card fees: At its July 2015 meeting,2 the TRG reached general agreement that credit card
fees accounted for under ASC 310 are not within the scope of ASC 606. In other words, TRG
members expect the conclusion under both legacy guidance and ASC 606 to be the same when
evaluating various revenue streams from credit card programs. An SEC observer to the meeting
cautioned, however, that entities should not assume that any fee connected to a credit card or any
arrangement labeled as a credit card lending arrangement would automatically fall within the scope
of ASC 310. In other words, the entity must assess whether the nature of the overall arrangement
2 TRG Paper 36, Scope: Credit Cards.
A customer is a party that has contracted with an entity to obtain goods or services that are an output
of the entity’s ordinary activities in exchange for consideration.
Scope 13
is a credit card lending arrangement and, if not, the entity should not presume that the
arrangement is entirely within the scope of ASC 310.
Credit card reward programs: At its July 2015 meeting,3 the TRG also generally agreed that an
entity must apply judgment and consider all facts and circumstances of the specific credit
cardholder award program in question to determine whether the reward program is within the
scope of ASC 606. If an entity determines that all fees related to the program, including the credit
card fees, are within the scope of ASC 310, the program would not be within the scope of
ASC 606.
Servicing and sub-servicing fees: At its April 2016 meeting,4 the TRG generally agreed that
servicing and sub-servicing fees are in the scope of ASC 860 and therefore are excluded from the
scope of ASC 606.
Deposit-related fees: At its April 2016 meeting,5 the TRG generally agreed that deposit-related
fees are within the scope of ASC 606. While the deposit-related liability is within the scope of
ASC 405 and is excluded from the scope of ASC 606, ASC 405 lacks accounting guidance for
deposit-related fees. Therefore, it is appropriate to apply the guidance in ASC 606 to deposit-
related fees.…