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intellectual property, which is satisfied at a point in time;

• when the guidance on sales-based or use-based royalties for licenses of intellectual property applies; and

• how time, geographical, and use restrictions on licenses of intellectual property affect how entities identify performance obligations.

The FASB proposed several amendments as potential solutions to these concerns. The proposed accounting standards update would apply to transactions subject to aSU 2014-09.

Identifying Performance Obligations

Entities evaluate promised goods and services in the contract before they identify their performance obligations in ASU 2014-09’s revenue recognition process. The FASB proposes that an entity would not have to identify promised goods or services that are immaterial to the contract being considered. Furthermore, an entity would be able to account for shipping and handling as an activity to fulfill the promise of the contract, not as an additional promised service within the contract.

After an entity pinpoints its promised goods and services, it identifies whether they are distinct. Distinct goods and services must meet two criteria:

• the customer can benefit from the good or service on its own or together with other resources, and

Changes keep coming to revenue recognition accounting. The financial accounting Standards Board (FASB) recently proposed amendments to ASU 2014-09 Revenue from Contracts with Customers (Topic 606) that would clarify how to identify performance obligations and account for licenses for intellectual property in the new standard.

ASU 2014-09 requires entities to use a five-step approach to recognize revenue: identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when or as the entity satisfies the performance obligation. Stakeholders raised concerns about implementing the five-step approach including:

• the need to identify immaterial promised goods or services,

• how to evaluate shipping and handling activities,

• distinguishing distinct promised goods and services,

• determining whether a license promises access to an intellectual property, which is satisfied over a period of time or whether it promises use of

May 2015

Proposed Changes Will Clarify New Revenue Recognition Guidance

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• the entity’s promise to transfer the good or the service to the customer is distinct from other promises in the contract.

The proposal expounds upon the distinct and identifiable qualification. Entities would examine whether the promise is to transfer a specific good or service or if the promise is to transfer the goods or services as part of a group of goods or services. The amendments would adjust related factors and examples for this criterion in ASU 2014-09 to reflect the change.

Other elements of identifying performance obligations under the new revenue recognition guidance are still being considered. as part of the proposed accounting standards update, the faSB is asking for input on whether the series provision in ASU 2014-09 should be optional. The provision allows for goods or services that are distinct to be recognized as a single performance obligation in certain instances. The FASB and International accounting Standards Board’s Joint Transition Resources Group for Revenue Recognition could not reach a consensus on the subject prior to issuing these proposed amendments.

Licensing Implementation Guidance

The amendments clarify when entities recognize intellectual property licenses at a point in time rather than over a period of time. An entity recognizes intellectual property licenses at a point in time if the intellectual property being licensed has significant standalone functionality. Examples of intellectual property with standalone functionality include software, biological compounds and films, music and televisions shows. So long as the licensed intellectual property meets the criteria, the entity’s promise to provide the intellectual property does not include support or maintenance

of the intellectual property during the period of the license, therefore, the promise is recognized at the time the license is granted. An exception exists if an entity makes changes to the intellectual property that would affect the property’s functionality. In that scenario, the promise is recognized at the point the customer can benefit from the use of the license.

If the license grants access to symbolic intellectual property that does not have standalone functionality, the entity recognizes the promise over a period of time. The promise includes the supporting or maintaining of the intellectual property during the license period. Examples of symbolic intellectual property include brands, trade names, logos and franchise rights.

Stakeholders asked for additional guidance for how to recognize revenue for sales-based or usage-based royalties for licenses of intellectual property. The amendments clarify that entities would not split royalties that contain either sales-based or usage-based elements into portions applicable to license revenue and non-license revenue. Entities would select which guidance to use based on predominant good or service that is related to the royalty. For example, if an entity received royalties based for a contract providing advisory services and a brand name, the entity would apply usage-based guidance to recognize the royalties if the brand name was the predominant good or service associated with the royalty payment.

The amendments also stipulate that contractual restrictions, for instance, a restriction for when a television show maybe aired, do not affect the entity’s identification of promised goods or services within a contract.

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report.

Effective Dates

The amendments, if approved, would become effective at the same time as ASU 2014-09. The public comment period for the amendments closes June 30, 2015. Information about how to comment can be found on the FASB’s website. (For more information about the changes to revenue recognition, please see our Revenue Recognition Resources.)

For More Information

If you have any specific questions, comments or concerns, please share them with James Comito of MHM’s Professional Standards Group or your MHM service professional. You can reach James at jcomito@cbiz.com or 858.795.2029.