Implementation Guidance Related to Performance Obligations and Licensing

AAFCPAs would like to make clients aware of a recent accounting standards update (ASU) issued by the Financial Accounting Standards Board (FASB) which clarifies the implementation guidance related to identifying performance obligations and licensing.  ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, does not change the core principle of the guidance in the new revenue recognition standards (Topic 606).  It does clarify the following:
Identifying Performance Obligations

  • An entity will not be required to assess whether promised goods or services are performance obligations if they are deemed immaterial (consider both quantitative and qualitative factors) in the context of the contract with the customer.  The entity is required to accrue the costs related to the immaterial goods or services when the revenue is recognized before those immaterial goods and services are transferred to the customer.
  • An entity is allowed to make an election in its accounting policy to account for shipping and handling as fulfillment actives (i.e. not a promised good or service) if they are performed after a customer obtains control of the promised goods (i.e. FOB shipping point). As a result, the shipping and handling costs shall be accrued when the revenue is recognized before the shipping and handling activities occur.
  • In determining whether each promise to transfer a good or service is distinct, the following two criteria should be met:
    • The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer.
    • The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

ASU 2016-10 clarifies the objective of considering whether a promised good or service is distinct within the context of the contract, revises the related factors used to determine whether a promised good or service is distinct, and also provides additional illustrative examples.
Licensing Implementation Guidance

  • Additional guidance is included on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (IP) or a right to access the entity’s IP.   The nature of the promise should be evaluated, when satisfied, to determine the revenue is recognized at a point in time (right to use IP which has significant standalone functionality) or over time (right to access IP which does not have significant standalone functionality).
  • Sales-based or usage-based royalty exception is applied when the sole or predominant item to which the royalty relates is a license of IP. An entity should either apply all or none of the sales-based and usage-based royalty exception for a single royalty.

ASU 2016-10 also added new illustrative examples to clarify how the implementation guidance is applied.
Effective Date and Transition Requirements
This ASU’s effective date and transition requirements are the same as those of the new revenue standard.  That is, the ASU is effective for nonpublic entities for annual reporting periods beginning after December 15, 2018.
This ASU is one of the projects that the FASB added to its technical agenda, based on the feedback from the FASB-IASB Joint Transition Resource Group (TRG), to address various implementation issues in the new revenue standard.   The proposed ASU: Narrow Scope Improvements and Practical Expedients is expected to be finalized in the first half of 2016.
AAFCPAs will continue to follow the Board’s deliberations closely.  As always, we will keep you informed and provide further updates as they become available.
If you have any question, please contact your AAFCPA partner, or Jeffrey Mead, CPA, CGMA at 774.512.4131,

About the Author

Jeff Mead, Audit Partner
Jeffrey is a Partner and leader of AAFCPAs’ Commercial Practice, providing proactive audit/assurance, tax, and advisory solutions for closely-held and privately-owned businesses. His diverse commercial client base includes: professional service firms, technology companies, publishers, and manufacturers/distributors.

Leave a Reply