Have you begun implementing the new revenue recognition standards? What is the impact to your organization? Can your systems, processes and controls handle the new requirements? What is the cost of transition and how long will it take? Who should be involved in the implementation efforts? Transitioning from ASC 605 or IAS 18 to the new standards is no small task. Luckily, the IASB and FASB understood that implementation was going to be tough and, as a result, established the Revenue Recognition Transition Resource Group (TRG) when ASC The Boards issued Topic 606 and IFRS 15 to assist companies with the transition.

Much like the Derivatives Implementation Group (DIG) when FAS 133 was issued, the purpose of the TRG is:

• To solicit, analyze and discuss stakeholder issues arising from implementation of the new guidance
• To inform the FASB and IASB about those implementation issues, which will help the Boards determine what, if any, action will be needed to address those issues
• To provide a forum for stakeholders to learn about the new guidance from others involved with implementation

The TRG consists of 19 different members representing audit firms, public and private companies, and financial statement users from various industries across the world. The meetings also include observers from the IASB, FASB, PCAOB, SEC, AICPA and IOSCO.

The group meets on a periodic basis and met two times in 2014 and will meet four more times by the end of 2015 (They have already held three meetings.). Anyone can attend these meetings and any stakeholder can submit questions or issues to the TRG. While the information discussed and thoughts shared are not authoritative, they do provide information that can help address issues in applying the new standard to specific transactions. Plus, the information they discuss aids the Boards in determining whether they need to issue additional guidance or amendments to the standards.

So what implementation issues have been discussed?

Well, while that’s not something I can cover in one blog, since the five TRG meetings to date have brought up a rather significant number of issues, some questions raised by stakeholders have involved:

• Identifying distinct performance obligations
• Evaluating collectability
• Applying the contract cost guidance in the new standards
• Addressing financial statement presentation issues
• Accounting for upfront fees
• Accounting for contract modifications
• Accounting for customer options for additional goods and services
• Measuring progress toward satisfaction of a performance obligation

In addition to these items, there are a few implementation issues that have led to proposed or actual amendments to the new standard. Let’s briefly discuss a few of these items.

Licensing Arrangements

When issuing the new revenue recognition standards, the Boards provided guidance on identifying whether licensing arrangements should be recognized as revenue over time (e.g., if the transaction provides a right to access a company’s intellectual property over a period of time) or at a point in time (e.g., if a transaction provides a right to use a company’s intellectual property at a point in time). The guidance also provided an exception to the general license guidance for sales- or usage-based royalty arrangements.

When reviewing this guidance, stakeholders began to identify a variety of concerns related to determining:

• The nature of the company’s promise in granting a license of intellectual property
• The scope and applicability of the sales- and usage-based royalties exception
• The effect of certain contractual restrictions in a license on identifying the performance obligations in the contract
• When the guidance on determining the nature of the company’s promise in granting a license applies

To address these worries, the FASB issued proposed changes to the new standard to help clarify the guidance pertaining to license situations. In its proposal, the FASB:

• Provided additional guidance to help companies determine whether a performance obligation is satisfied over time or at a point in time and provided additional guidance to determine the appropriate measure of progress for a combined performance obligation that includes a license. Among other things, this guidance clarifies that a license pertaining to a performance obligation that is satisfied over time requires a company to undertake activities that will significantly affect the utility of the license to a customer.
• Clarified the scope and applicability of the guidance pertaining to sales- or usage-based royalty arrangements, including the clarification that a single royalty arrangement should not be split into a part subject to the royalties exception and a part not subject to such guidance (therefore subject to the general “Step 3” guidance, i.e., determine the transaction price).
• Included additional guidance pertaining to the consideration of contractual restrictions in license arrangements. The additional guidance clarifies that, generally, such restrictions are attributes of the license itself and would not affect the identified of promised goods or services in a contract.

The IASB also considered similar changes but ultimately decided the extent of the FASB’s proposed changes was not necessary under IFRS based on the guidance in IFRS 15. Instead, the IASB decided to just provide additional guidance related to determining the nature of a company’s promise in granting a license (i.e., Is it a license for the right to access or the right to use intellectual property?) and for sales- and usage-based royalties.

Determining Principal Versus Agent

The TRG also discussed situations when multiple companies are involved in providing a good or service to a customer and how to properly determine which company functions as the principal and which company is the agent in such arrangements. This determination is based on whether the company controls the good or the service before it is transferred to the customer. The standard includes indicators to aid in this determination.

Based on concerns raised by constituents, both the IASB and FASB decided to propose amendments to the standard in order to assist organizations in evaluating principal versus agent arrangements. These amendments:

• Clarify that a company that is a principal obtains control of:
  • A good or another asset from the other party that it then transfers to the customer,
  • A right to a service that another party will perform, which gives the company the ability to direct that party to provide the service to the customer on the company’s behalf, or
  • A good or service from the other party that it combines with other goods or services to provide the specified good or service to the customer.
• Further explain that the unit of account to consider in principal versus agent determinations is a distinct performance obligation or a series of distinct performance obligations.
• Provide additional guidance as it pertains to the control indicators in principal versus agent considerations.
• Amend the previous illustrative examples pertaining to principal versus agent arrangements and adds additional examples to assist in the evaluation of such contracts.

Check out this post for a discussion of the final amendments related to principal vs. agent guidance with ASC 606.

Effective Date Deferral

When ASC Topic 606 and IFRS 15 were issued in May 2014, the original effective date of the new standards was 2017 (2018 for U.S. private companies). However, based on concerns raised by companies and organizations worldwide, both the IASB and FASB decided to defer the effective date for a year. While this is a huge benefit (and relief) for organizations, be careful! This extra year was not meant to allow companies to put off their implementation efforts for a year. It was clear in the Boards’ deferral decision that companies needed this additional time to properly adopt the changes brought about by the new standard even when beginning implementation efforts all the way back in 2014.

These three topics are just a few of the issues discussed by the TRG in their meetings, and I would recommend visiting the FASB’s and IASB’s websites to review those issues that might specifically impact you or your organization. The TRG logs each item discussed at its meetings in an issue paper, and these documents provide detailed background information on the issues as well as the TRG’s thoughts when deliberating the proper conclusion to those issues.

Overall, keep in mind that implementing the new standard is expected to be a time-consuming and somewhat challenging project. However, in addition to the work of the TRG, there are a variety of other industry groups (such as different task forces created by the AICPA) that can assist your organization in this process. Also, we’re here to help! GAAP Dynamics has published a series of posts walking you through each step of the new 5-step model. And if you’re curious about how the new revenue recognition standards impact more than just revenue, check this blog post!