Last week, the American Institute of Certified Public Accountants’ Financial Reporting Executive Committee (“FinREC”) issued industry-specific working drafts featuring proposed guidance for implementing Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers, by the Financial Accounting Standards Board (“FASB”). The working drafts, which could be added to Audit and Accounting Guide: Revenue Recognition, are as follows:
- Aerospace and Defense Revenue Recognition Implementation Issue # 1-5: Transfer of Control on Non-US Federal Government Contracts — Clarification on Whether a Contract Priced at a Loss Could Qualify for Over Time Recognition in Accordance with FASB ASC 606-10-25-27(c): This proposal clarifies FinREC implementation guidance on recognizing the transfer of control on contracts outside of the U.S. federal government. According to the draft guidance, FinREC believes revenue from certain money-losing contracts can be recognized over time if the seller can collect payments based on the contract price.
- Gaming Revenue Recognition Implementation Issue #6-9A: Gaming Entity’s Costs to Obtain a Management Contract: This proposal advises gaming businesses on costs incurred when acquiring the right to manage a third-party-owned gaming property. The working draft says that if a gaming company enters into a contract with a third party, the agreement should be initially reviewed to determine if it falls under the scope of ASC 606, Revenue From Contracts With Customers.
- Gaming Revenue Recognition Implementation Issue #6-13: Disclosures — Contract With Customers: This proposal discusses the revenue standard’s required disclosures and offers information that a gaming business may provide about its revenue sources.
- Health Care Revenue Recognition Implementation Issue #8-3: Application of FASB ASC 606 to Continuing Care Retirement Community Contracts: This proposal focuses on comprehensive continuing care services with residential facilities, various amenities and access to services. The working draft also offers detailed guidance on when and how to recognize revenue.
- Health Care Revenue Recognition Implementation Issue #8-7: Accounting for Contract Costs: This proposal includes draft guidance regarding accounting for items like marketing and advertising costs to acquire a contract with a customer. Healthcare companies are advised to apply Topic 340, Other Assets and Deferred Costs, for evaluating expenses related to obtaining new contracts to determine if the requirements for capitalization as an asset are met or whether they should be considered expensed as incurred.
- Insurance Revenue Recognition Implementation Issue #9-3: Accounting for Third-Party Extended Service Warranty Contracts Within the Scope of FASB ASC 606: This proposal provides draft guidance concerning extended warranty contracts not written by an insurance company. It also attempts to clarify when an extended warranty sold by a manufacturer is considered a stand-ready obligation under the FASB’s revenue standard. The working draft notes that a manufacturer’s promise in an extended warranty agreement sold independently from the covered product would usually be considered a stand-ready obligation if the deal offers services for unscheduled repairs or item replacement under the contract for an unidentified number of services for a fixed charge.
- Telecommunications Revenue Recognition Implementation Issue #15-7: Material Renewal Rights in Telecommunications Contracts: This proposal features draft guidance on the accounting application of upfront installation and activation charges when telecommunication companies set up service for customers. Accounting for upfront fees relies on whether a customer’s ability not to pay this fee for subsequent renewals signifies a material right to the customer that would not exist without the agreement. FinREC believes the upfront fee should be recognized when providing future goods or services. If a telecommunications company offers a customer the option to renew the agreement that creates a material right, recognition of the upfront fee could extend past the original contractual period.
Comments on the working drafts are due Monday, April 2.
