The FASB post implementation review (“PIR”) of ASC 606 is a process that evaluates the effectiveness of the revenue recognition standard that was issued in 2014 and became effective for most entities between 2018 and 2020. The PIR aims to assess whether the standard meets its objectives of providing useful information about the nature, amount, timing, and uncertainty of revenue from contracts with customers, and whether it improves comparability across entities and industries. The PIR also considers the costs and benefits of applying the standard, and whether there are any unintended consequences or areas of difficulty in implementation.
The FASB staff presented preliminary feedback to the Board. The feedback was generally positive, indicating that the standard has improved the quality and transparency of revenue reporting, and that the implementation challenges have been manageable. According to the feedback, ASC 606 has increased comparability between IFRS and GAAP, allowed for better understanding of contract terms and revenue recognition policies, and improved disclosures. However, implementation challenges were noted by stakeholders as well, and include the following common areas:
- Licensing
- Difficulty in determining whether a license is distinct from other services in a contract and what an appropriate standalone selling price for licenses would be.
- Identification of performance obligations
- Difficulty in assessing the nature of a promise and whether goods and services in a contract are distinct.
- Stand-alone selling price
- Difficulty in understanding how the standalone selling price is determined, especially if there is little to no cost basis or if competitors are not selling similar goods or services. The Board observed that there are a variety of estimation methods, especially in the software industry.
- Constraint of variable consideration
- Investors had difficulty understanding how management developed their estimates of variable consideration and understanding adjustments to those estimates in subsequent periods.
- Principal vs. agent
- Stakeholders told the FASB that the principal vs agent guidance is complex, challenging to apply, and requires significant judgement. Auditors and regulators observed that this area remains a frequent area of consultation. Investors also noted that seemingly similar entities made different judgements regarding principal vs. agent conclusions. The most difficult areas of assessment were noted to be emerging business models and transactions.
- Consideration payable to a customer
- Difficulty in determining whether consideration payable to a customer should be accounted for as a marketing expense when no contractual linkage between the customer and entity exists. The FASB noted that the trend is to include implied promises to a customers’ customers as a reduction of revenue.
- Incremental costs of obtaining a contract
- Stakeholders observed that the guidance in incremental costs to obtaining a contract under ASC 340-40 and related amortization is challenging. They noted that it is difficult to identify which costs should be capitalized and what the appropriate amortization period should be.
- Short-cycle manufacturing
- Stakeholders noted that applying the guidance on short-cycle manufacturing results in a pattern of revenue recognition that is different from how management views its transactions. Entities usually making these kinds of products generally conclude under ASC 606 that there is no alternative use for the product and recognize revenue over time, but in practice believe that economically their transactions should be recognized at a point in time.
In light of the recent FASB findings, companies may wish to perform an internal review of their ASC 606 policies and practices to help ensure the guidance is clear and that its application to contracts is appropriate under the circumstances. A post-implementation review may also help to identify opportunities to enhance the existing process for reviewing, assessing, and documenting the proper revenue recognition treatment on new contracts. Chess Consulting has significant experience helping government contractors and private entities navigate the complexities of ASC 606 and can assist with post-implementation reviews to ensure technical compliance and to identify best practices to operationalize the standard in an efficient and effective manner. If you have any questions, please contact our professionals at chessconsultingllc.com or at (703) 796-2850.