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Introduction

1. This Update is organized into two sections:
a. Revenue from Contracts with Customers—Amendments in this section codify the Board’s decisions in the revenue project and create a new Topic 606, Revenue from Contracts with Customers and a new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. For those amendments, see Section A.
b. Conforming Amendments—Amendments in this section conform guidance throughout the Codification as a result of the Board’s decisions in the revenue project. For those amendments, see Section B.
2. The Conforming Amendments (Section B), described in paragraphs 8–623, have been made for the following three reasons based on the Board’s decisions: a direct change, a conforming change, and an editorial change. An explanation about some of the amendments made as a direct result of the Board’s decisions is included in the basis for conclusions. The other conforming and editorial amendments resulting from the overall decisions reached are further explained in a basis paragraph that precedes each amendment.
3. The Codification is amended as described in paragraphs 4–623. In some cases, to put the change in context, not only are the amended paragraphs shown but also the preceding and following paragraphs. Terms from the Master Terms are linked (in bold type) the first time they appear in each Section and the first time they appear after a “>” symbol and a “>>” symbol heading. In the Implementation Guidance part of Section 55, Glossary terms are linked the first time they appear after a “>>” symbol heading and a “>>>” symbol heading. Paragraphs presented in bold type in Topic 606 and Subtopic 340-40 state the main principles, while the words not bolded are terms in the Master Glossary. Added text is underlined, and deleted text is
struck out
.

Section A—Revenue from Contracts with Customers: Amendments to the Accounting Standards Codification

Addition of Topic 606

4. Topic 606, Revenue from Contracts with Customers, has been added to codify the new guidance on revenue from contracts with customers. See the basis for conclusions for further discussion and rationale for decisions reached in this Subtopic.
5. Add Subtopic 606-10, with a link to transition paragraph 606-10-65-1, as follows:
[For ease of readability, the new Topic is not underlined.]
Revenue from Contracts with Customers—Overall
Overview and Background
General
606-10-05-1 This Topic specifies the accounting for revenue from contracts with customers.
606-10-05-2 This Topic establishes principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers.
606-10-05-3 The core principle of this Topic is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
606-10-05-4 An entity recognizes revenue in accordance with that core principle by applying the following steps:
a. Step 1: Identify the contract(s) with a customer—A contract is an agreement between two or more parties that creates enforceable rights and obligations. The guidance in this Topic applies to each contract that has been agreed upon with a customer and meets specified criteria. In some cases, this Topic requires an entity to combine contracts and account for them as one contract. This Topic also provides requirements for the accounting for contract modifications. (See paragraphs 606-10-25-1 through 25-13.)
b. Step 2: Identify the performance obligations in the contract—A contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately. A good or service is distinct if the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. (See paragraphs 606-10-25-14 through 25-22.)
c. Step 3: Determine the transaction price—The transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The transaction price can be a fixed amount of customer consideration, but it may sometimes include variable consideration or consideration in a form other than cash. The transaction price also is adjusted for the effects of the time value of money if the contract includes a significant financing component and for any consideration payable to the customer. If the consideration is variable, an entity estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The estimated amount of variable consideration will be included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. (See paragraphs 606-10-32-2 through 32-27.)
d. Step 4: Allocate the transaction price to the performance obligations in the contract—An entity typically allocates the transaction price to each performance obligation on the basis of the relative standalone selling prices of each distinct good or service promised in the contract. If a standalone selling price is not observable, an entity estimates it. Sometimes, the transaction price includes a discount or a variable amount of consideration that relates entirely to a part of the contract. The requirements specify when an entity allocates the discount or variable consideration to one or more, but not all, performance obligations (or distinct goods or services) in the contract. (See paragraphs 606-10-32-28 through 32-41.)
e. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation—An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). The amount of revenue recognized is the amount allocated to the satisfied performance obligation. A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For performance obligations satisfied over time, an entity recognizes revenue over time by selecting an appropriate method for measuring the entity’s progress toward complete satisfaction of that performance obligation. (See paragraphs 606-10-25-23 through 25-30.)
606-10-05-5 This Topic also includes a cohesive set of disclosure requirements that would result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. Specifically, Section 606-10-50 requires an entity to provide information about:
  1. Revenue recognized from contracts with customers, including the disaggregation of revenue into appropriate categories
  2. Contract balances, including the opening and closing balances of receivables, contract assets, and contract liabilities
  3. Performance obligations, including when the entity typically satisfies its performance obligations and the transaction price that is allocated to the remaining performance obligations in a contract
  4. Significant judgments, and changes in judgments, made in applying the requirements to those contracts.
Additionally, Section 340-40-50 requires an entity to provide quantitative and/or qualitative information about assets recognized from the costs to obtain or fulfill a contract with a customer.
606-10-05-6
Paragraphs presented in
bold type
in this Topic state the main principles. All paragraphs have equal authority.
Objectives
General
606-10-10-1The objective of the guidance in this Topic is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.
> Meeting the Objective
606-10-10-2 To meet the objective in paragraph 606-10-10-1, the core principle of the guidance in this Topic is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
606-10-10-3 An entity shall consider the terms of the contract and all relevant facts and circumstances when applying this guidance. An entity shall apply this guidance, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances.
606-10-10-4 This guidance specifies the accounting for an individual contract with a customer. However, as a practical expedient, an entity may apply this guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio. When accounting for a portfolio, an entity shall use estimates and assumptions that reflect the size and composition of the portfolio.
Scope and Scope Exceptions
General
> Entities
606-10-15-1 The guidance in this Subtopic applies to all entities.
> Transactions
606-10-15-2 An entity shall apply the guidance in this Topic to all contracts with customers, except the following:
a. Lease contracts within the scope of Topic 840, Leases.
b. Insurance contracts within the scope of Topic 944, Financial Services— Insurance.
c. Financial instruments and other contractual rights or obligations within the scope of the following Topics:
1. Topic 310, Receivables
2. Topic 320, Investments—Debt and Equity Securities
3. Topic 323, Investments—Equity Method and Joint Ventures
4. Topic 325, Investments—Other
5. Topic 405, Liabilities
6. Topic 470, Debt
7. Topic 815, Derivatives and Hedging
8. Topic 825, Financial Instruments
9. Topic 860, Transfers and Servicing.
d. Guarantees (other than product or service warranties) within the scope of Topic 460, Guarantees.
e. Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers. For example, this Topic would not apply to a contract between two oil companies that agree to an exchange of oil to fulfill demand from their customers in different specified locations on a timely basis. Topic 845 on nonmonetary transactions may apply to nonmonetary exchanges that are not within the scope of this Topic.
606-10-15-3 An entity shall apply the guidance in this Topic to a contract (other than a contract listed in paragraph 606-10-15-2) only if the counterparty to the contract is a customer. A customer is a party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. A counterparty to the contract would not be a customer if, for example, the counterparty has contracted with the entity to participate in an activity or process in which the parties to the contract share in the risks and benefits that result from the activity or process (such as developing an asset in a collaboration arrangement) rather than to obtain the output of the entity’s ordinary activities.
606-10-15-4 A contract with a customer may be partially within the scope of this Topic and partially within the scope of other Topics listed in paragraph 606-10-15-2.
  1. If the other Topics specify how to separate and/or initially measure one or more parts of the contract, then an entity shall first apply the separation and/or measurement guidance in those Topics. An entity shall exclude from the transaction price the amount of the part (or parts) of the contract that are initially measured in accordance with other Topics and shall apply paragraphs 606-10-32-28 through 32-41 to allocate the amount of the transaction price that remains (if any) to each performance obligation within the scope of this Topic and to any other parts of the contract identified by paragraph 606-10-15-4(b).
  2. If the other Topics do not specify how to separate and/or initially measure one or more parts of the contract, then the entity shall apply the guidance in this Topic to separate and/or initially measure the part (or parts) of the contract.
606-10-15-5 Subtopic 340-40 on other assets and deferred costs from contracts with customers includes guidance on accounting for the incremental costs of obtaining a contract with a customer and for the costs incurred to fulfill a contract with a customer if those costs are not within the scope of another Topic (see Subtopic 340-40). An entity shall apply that guidance only to the costs incurred that relate to a contract with a customer (or part of that contract) that is within the scope of the guidance in this Topic.
Glossary
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Contract Asset
An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time (for example, the entity’s future performance).
Contract Liability
An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
Not-for-Profit Entity
An entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity:
  1. Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
  2. Operating purposes other than to provide goods or services at a profit
  3. Absence of ownership interests like those of business entities.
Entities that clearly fall outside this definition include the following:
  1. All investor-owned entities
  2. Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.
Performance Obligation
A promise in a contract with a customer to transfer to the customer either:
  1. A good or service (or a bundle of goods or services) that is distinct
  2. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
Probable (second definition)
The future event or events are likely to occur.
Public Business Entity
A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.
  1. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
  2. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
  3. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
  4. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
  5. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.
Revenue
Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
Standalone Selling Price
The price at which an entity would sell a promised good or service separately to a customer.
Transaction Price
The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
Recognition
General
> Identifying the Contract
606-10-25-1 An entity shall account for a contract with a customer that is within the scope of this Topic only when all of the following criteria are met:
  1. The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.
  2. The entity can identify each party’s rights regarding the goods or services to be transferred.
  3. The entity can identify the payment terms for the goods or services to be transferred.
  4. The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).
  5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectibility of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession (see paragraph 606-10-32-7).
606-10-25-2 A contract is an agreement between two or more parties that creates enforceable rights and obligations. Enforceability of the rights and obligations in a contract is a matter of law. Contracts can be written, oral, or implied by an entity’s customary business practices. The practices and processes for establishing contracts with customers vary across legal jurisdictions, industries, and entities. In addition, they may vary within an entity (for example, they may depend on the class of customer or the nature of the promised goods or services). An entity shall consider those practices and processes in determining whether and when an agreement with a customer creates enforceable rights and obligations.
606-10-25-3 Some contracts with customers may have no fixed duration and can be terminated or modified by either party at any time. Other contracts may automatically renew on a periodic basis that is specified in the contract. An entity shall apply the guidance in this Topic to the duration of the contract (that is, the contractual period) in which the parties to the contract have present enforceable rights and obligations.
606-10-25-4 For the purpose of applying the guidance in this Topic, a contract does not exist if each party to the contract has the unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party (or parties). A contract is wholly unperformed if both of the following criteria are met:
  1. The entity has not yet transferred any promised goods or services to the customer.
  2. The entity has not yet received, and is not yet entitled to receive, any consideration in exchange for promised goods or services.
606-10-25-5 If a contract with a customer meets the criteria in paragraph 606-10-25-1 at contract inception, an entity shall not reassess those criteria unless there is an indication of a significant change in facts and circumstances. For example, if a customer’s ability to pay the consideration deteriorates significantly, an entity would reassess whether it is probable that the entity will collect the consideration to which the entity will be entitled in exchange for the remaining goods or services that will be transferred to the customer.
606-10-25-6 If a contract with a customer does not meet the criteria in paragraph 606-10-25-1, an entity shall continue to assess the contract to determine whether the criteria in paragraph 606-10-25-1 are subsequently met.
606-10-25-7 When a contract with a customer does not meet the criteria in paragraph 606-10-25-1and an entity receives consideration from the customer, the entity shall recognize the consideration received as revenue only when either of the following events has occurred:
  1. The entity has no remaining obligations to transfer goods or services to the customer, and all, or substantially all, of the consideration promised by the customer has been received by the entity and is nonrefundable.
  2. The contract has been terminated, and the consideration received from the customer is nonrefundable.
606-10-25-8 An entity shall recognize the consideration received from a customer as a liability until one of the events in paragraph 606-10-25-7 occurs or until the criteria in paragraph 606-10-25-1 are subsequently met (see paragraph 606-10-25-6).
Depending on the facts and circumstances relating to the contract, the liability recognized represents the entity’s obligation to either transfer goods or services in the future or refund the consideration received. In either case, the liability shall be measured at the amount of consideration received from the customer.
> Combination of Contracts
606-10-25-9 An entity shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met:
  1. The contracts are negotiated as a package with a single commercial objective.
  2. The amount of consideration to be paid in one contract depends on the price or performance of the other contract.
  3. The goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation in accordance with paragraphs 606-10-25-14 through 25-22.
> Contract Modifications
606-10-25-10 A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract. In some industries and jurisdictions, a contract modification may be described as a change order, a variation, or an amendment. A contract modification exists when the parties to a contract approve a modification that either creates new or changes existing enforceable rights and obligations of the parties to the contract. A contract modification could be approved in writing, by oral agreement, or implied by customary business practices. If the parties to the contract have not approved a contract modification, an entity shall continue to apply the guidance in this Topic to the existing contract until the contract modification is approved.
606-10-25-11 A contract modification may exist even though the parties to the contract have a dispute about the scope or price (or both) of the modification or the parties have approved a change in the scope of the contract but have not yet determined the corresponding change in price. In determining whether the rights and obligations that are created or changed by a modification are enforceable, an entity shall consider all relevant facts and circumstances including the terms of the contract and other evidence. If the parties to a contract have approved a change in the scope of the contract but have not yet determined the corresponding change in price, an entity shall estimate the change to the transaction price arising from the modification in accordance with paragraphs 606-10-32-5 through 32-9 on estimating variable consideration and paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration.
606-10-25-12 An entity shall account for a contract modification as a separate contract if both of the following conditions are present:
  1. The scope of the contract increases because of the addition of promised goods or services that are distinct (in accordance with paragraphs 606-10-25-18 through 25-22).
  2. The price of the contract increases by an amount of consideration that reflects the entity’s standalone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract. For example, an entity may adjust the standalone selling price of an additional good or service for a discount that the customer receives, because it is not necessary for the entity to incur the selling-related costs that it would incur when selling a similar good or service to a new customer.
606-10-25-13 If a contract modification is not accounted for as a separate contract in accordance with paragraph 606-10-25-12, an entity shall account for the promised goods or services not yet transferred at the date of the contract modification (that is, the remaining promised goods or services) in whichever of the following ways is applicable:
a. An entity shall account for the contract modification as if it were a termination of the existing contract, and the creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification. The amount of consideration to be allocated to the remaining performance obligations (or to the remaining distinct goods or services in a single performance obligation identified in accordance with paragraph 606-10-25-14(b)) is the sum of:
1. The consideration promised by the customer (including amounts already received from the customer) that was included in the estimate of the transaction price and that had not been recognized as revenue and
2. The consideration promised as part of the contract modification.
b. An entity shall account for the contract modification as if it were a part of the existing contract if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification. The effect that the contract modification has on the transaction price, and on the entity’s measure of progress toward complete satisfaction of the performance obligation, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification (that is, the adjustment to revenue is made on a cumulative catch-up basis).
c. If the remaining goods or services are a combination of items (a) and (b), then the entity shall account for the effects of the modification on the unsatisfied (including partially unsatisfied) performance obligations in the modified contract in a manner that is consistent with the objectives of this paragraph
> Identifying Performance Obligations
606-10-25-14 At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:
  1. A good or service (or a bundle of goods or services) that is distinct
  2. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (see paragraph 606-10-25-15).
606-10-25-15 A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met:
  1. Each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria in paragraph 606-10-25-27 to be a performance obligation satisfied over time.
  2. In accordance with paragraphs 606-10-25-31 through 25-32, the same method would be used to measure the entity’s progress toward complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.
> > Promises in Contracts with Customers
606-10-25-16 A contract with a customer generally explicitly states the goods or services that an entity promises to transfer to a customer. However, the performance obligations identified in a contract with a customer may not be limited to the goods or services that are explicitly stated in that contract. This is because a contract with a customer also may include promises that are implied by an entity’s customary business practices, published policies, or specific statements if, at the time of entering into the contract, those promises create a valid expectation of the customer that the entity will transfer a good or service to the customer.
606-10-25-17 Performance obligations do not include activities that an entity must undertake to fulfill a contract unless those activities transfer a good or service to a customer. For example, a services provider may need to perform various administrative tasks to set up a contract. The performance of those tasks does not transfer a service to the customer as the tasks are performed. Therefore, those setup activities are not a performance obligation.
> > Distinct Goods or Services
606-10-25-18 Depending on the contract, promised goods or services may include, but are not limited to, the following:
  1. Sale of goods produced by an entity (for example, inventory of a manufacturer)
  2. Resale of goods purchased by an entity (for example, merchandise of a retailer)
  3. Resale of rights to goods or services purchased by an entity (for example, a ticket resold by an entity acting as a principal, as described in paragraphs 606-10-55-36 through 55-40)
  4. Performing a contractually agreed-upon task (or tasks) for a customer
  5. Providing a service of standing ready to provide goods or services (for example, unspecified updates to software that are provided on a when-and-if-available basis) or of making goods or services available for a customer to use as and when the customer decides
  6. Providing a service of arranging for another party to transfer goods or services to a customer (for example, acting as an agent of another party, as described in paragraphs 606-10-55-36 through 55-40)
  7. Granting rights to goods or services to be provided in the future that a customer can resell or provide to its customer (for example, an entity selling a product to a retailer promises to transfer an additional good or service to an individual who purchases the product from the retailer)
  8. Constructing, manufacturing, or developing an asset on behalf of a customer
  9. Granting licenses (see paragraphs 606-10-55-54 through 55-65)
  10. Granting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs 606-10-55-41 through 55-45).
606-10-25-19 A good or service that is promised to a customer is distinct if both of the following criteria are met:
  1. 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 (that is, the good or service is capable of being distinct).
  2. The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (that is, the good or service is distinct within the context of the contract).
606-10-25-20 A customer can benefit from a good or service in accordance with paragraph 606-10-25-19(a) if the good or service could be used, consumed, sold for an amount that is greater than scrap value, or otherwise held in a way that generates economic benefits. For some goods or services, a customer may be able to benefit from a good or service on its own. For other goods or services, a customer may be able to benefit from the good or service only in conjunction with other readily available resources. A readily available resource is a good or service that is sold separately (by the entity or another entity) or a resource that the customer has already obtained from the entity (including goods or services that the entity will have already transferred to the customer under the contract) or from other transactions or events. Various factors may provide evidence that the customer can benefit from a good or service either on its own or in conjunction with other readily available resources. For example, the fact that the entity regularly sells a good or service separately would indicate that a customer can benefit from the good or service on its own or with other readily available resources.
606-10-25-21 Factors that indicate that an entity’s promise to transfer a good or service to a customer is separately identifiable (in accordance with paragraph 606-10-25-19(b)) include, but are not limited to, the following:
  1. The entity does not provide a significant service of integrating the good or service with other goods or services promised in the contract into a bundle of goods or services that represent the combined output for which the customer has contracted. In other words, the entity is not using the good or service as an input to produce or deliver the combined output specified by the customer.
  2. The good or service does not significantly modify or customize another good or service promised in the contract.
  3. The good or service is not highly dependent on, or highly interrelated with, other goods or services promised in the contract. For example, the fact that a customer could decide to not purchase the good or service without significantly affecting the other promised goods or services in the contract might indicate that the good or service is not highly dependent on, or highly interrelated with, those other promised goods or services.
606-10-25-22 If a promised good or service is not distinct, an entity shall combine that good or service with other promised goods or services until it identifies a bundle of goods or services that is distinct. In some cases, that would result in the entity accounting for all the goods or services promised in a contract as a single performance obligation.
> Satisfaction of Performance Obligations
606-10-25-23 An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.
606-10-25-24 For each performance obligation identified in accordance with paragraphs 606-10-25-14 through 25-22, an entity shall determine at contract inception whether it satisfies the performance obligation over time (in accordance with paragraphs 606-10-25-27 through 25-29) or satisfies the performance obligation at a point in time (in accordance with paragraph 606-10-25-30). If an entity does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.
606-10-25-25 Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services). Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:
  1. Using the asset to produce goods or provide services (including public services)
  2. Using the asset to enhance the value of other assets
  3. Using the asset to settle liabilities or reduce expenses
  4. Selling or exchanging the asset
  5. Pledging the asset to secure a loan
  6. Holding the asset.
606-10-25-26 When evaluating whether a customer obtains control of an asset, an entity shall consider any agreement to repurchase the asset (see paragraphs 606-10-55-66 through 55-78).
> > Performance Obligations Satisfied Over Time
606-10-25-27 An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met:
  1. The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (see paragraphs 606-10-55-5 through 55-6).
  2. The entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced (see paragraph 606-10-55-7).
  3. The entity’s performance does not create an asset with an alternative use to the entity (see paragraph 606-10-25-28), and the entity has an enforceable right to payment for performance completed to date (see paragraph 606-10-25-29).
606-10-25-28 An asset created by an entity’s performance does not have an alternative use to an entity if the entity is either restricted contractually from readily directing the asset for another use during the creation or enhancement of that asset or limited practically from readily directing the asset in its completed state for another use. The assessment of whether an asset has an alternative use to the entity is made at contract inception. After contract inception, an entity shall not update the assessment of the alternative use of an asset unless the parties to the contract approve a contract modification that substantively changes the performance obligation. Paragraphs 606-10-55-8 through 55-10 provide guidance for assessing whether an asset has an alternative use to an entity.
606-10-25-29 An entity shall consider the terms of the contract, as well as any laws that apply to the contract, when evaluating whether it has an enforceable right to payment for performance completed to date in accordance with paragraph 606-10-25-27(c). The right to payment for performance completed to date does not need to be for a fixed amount. However, at all times throughout the duration of the contract, the entity must be entitled to an amount that at least compensates the entity for performance completed to date if the contract is terminated by the customer or another party for reasons other than the entity’s failure to perform as promised. Paragraphs 606-10-55-11 through 55-15 provide guidance for assessing the existence and enforceability of a right to payment and whether an entity’s right to payment would entitle the entity to be paid for its performance completed to date.
> > Performance Obligations Satisfied at a Point in Time
606-10-25-30 If a performance obligation is not satisfied over time in accordance with paragraphs 606-10-25-27 through 25-29, an entity satisfies the performance obligation at a point in time. To determine the point in time at which a customer obtains control of a promised asset and the entity satisfies a performance obligation, the entity shall consider the guidance on control in paragraphs 606-10-25-23 through 25-26. In addition, an entity shall consider indicators of the transfer of control, which include, but are not limited to, the following:
  1. The entity has a present right to payment for the asset—If a customer presently is obliged to pay for an asset, then that may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset in exchange.
  2. The customer has legal title to the asset—Legal title may indicate which party to a contract has the ability to direct the use of, and obtain substantially all of the remaining benefits from, an asset or to restrict the access of other entities to those benefits. Therefore, the transfer of legal title of an asset may indicate that the customer has obtained control of the asset. If an entity retains legal title solely as protection against the customer’s failure to pay, those rights of the entity would not preclude the customer from obtaining control of an asset.
  3. The entity has transferred physical possession of the asset—The customer’s physical possession of an asset may indicate that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset or to restrict the access of other entities to those benefits. However, physical possession may not coincide with control of an asset. For example, in some repurchase agreements and in some consignment arrangements, a customer or consignee may have physical possession of an asset that the entity controls. Conversely, in some bill-and-hold arrangements, the entity may have physical possession of an asset that the customer controls. Paragraphs 606-10-55-66 through 55-78, 606-10-55-79 through 55-80, and 606-10-55-81 through 55-84 provide guidance on accounting for repurchase agreements, consignment arrangements, and bill-and-hold arrangements, respectively.
  4. The customer has the significant risks and rewards of ownership of the asset—The transfer of the significant risks and rewards of ownership of an asset to the customer may indicate that the customer has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. However, when evaluating the risks and rewards of ownership of a promised asset, an entity shall exclude any risks that give rise to a separate performance obligation in addition to the performance obligation to transfer the asset. For example, an entity may have transferred control of an asset to a customer but not yet satisfied an additional performance obligation to provide maintenance services related to the transferred asset.
  5. The customer has accepted the asset—The customer’s acceptance of an asset may indicate that it has obtained the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. To evaluate the effect of a contractual customer acceptance clause on when control of an asset is transferred, an entity shall consider the guidance in paragraphs 606-10-55-85 through 55-88.
> > Measuring Progress toward Complete Satisfaction of a Performance Obligation
606-10-25-31 For each performance obligation satisfied over time in accordance with paragraphs 606-10-25-27 through 25-29, an entity shall recognize revenue over time by measuring the progress toward complete satisfaction of that performance obligation. The objective when measuring progress is to depict an entity’s performance in transferring control of goods or services promised to a customer (that is, the satisfaction of an entity’s performance obligation).
606-10-25-32 An entity shall apply a single method of measuring progress for each performance obligation satisfied over time, and the entity shall apply that method consistently to similar performance obligations and in similar circumstances. At the end of each reporting period, an entity shall remeasure its progress toward complete satisfaction of a performance obligation satisfied over time.
> > > Methods for Measuring Progress
606-10-25-33 Appropriate methods of measuring progress include output methods and input methods. Paragraphs 606-10-55-16 through 55-21 provide guidance for using output methods and input methods to measure an entity’s progress toward complete satisfaction of a performance obligation. In determining the appropriate method for measuring progress, an entity shall consider the nature of the good or service that the entity promised to transfer to the customer.
606-10-25-34 When applying a method for measuring progress, an entity shall exclude from the measure of progress any goods or services for which the entity does not transfer control to a customer. Conversely, an entity shall include in the measure of progress any goods or services for which the entity does transfer control to a customer when satisfying that performance obligation.
606-10-25-35 As circumstances change over time, an entity shall update its measure of progress to reflect any changes in the outcome of the performance obligation. Such changes to an entity’s measure of progress shall be accounted for as a change in accounting estimate in accordance with Subtopic 250-10 on accounting changes and error corrections.
> > > Reasonable Measures of Progress
606-10-25-36 An entity shall recognize revenue for a performance obligation satisfied over time only if the entity can reasonably measure its progress toward complete satisfaction of the performance obligation. An entity would not be able to reasonably measure its progress toward complete satisfaction of a performance obligation if it lacks reliable information that would be required to apply an appropriate method of measuring progress.
606-10-25-37 In some circumstances (for example, in the early stages of a contract), an entity may not be able to reasonably measure the outcome of a performance obligation, but the entity expects to recover the costs incurred in satisfying the performance obligation. In those circumstances, the entity shall recognize revenue only to the extent of the costs incurred until such time that it can reasonably measure the outcome of the performance obligation.
Measurement
General Note: The Measurement Section provides guidance on both initial and subsequent measurement. Specifically, this Section provides the criteria and amounts used to measure a particular item at the date of initial recognition. In addition, this Section provides guidance on an entity’s subsequent measurement and subsequent recognition of an item. Situations that may result in subsequent changes to carrying amounts include impairment, fair value adjustments, depreciation and amortization, and so forth.
General
606-10-32-1 When (or as) a performance obligation is satisfied, an entity shall recognize as revenue the amount of the transaction price (which excludes estimates of variable consideration that are constrained in accordance with paragraphs 606-10-32-11 through 32-13) that is allocated to that performance obligation.
> Determining the Transaction Price
606-10-32-2 An entity shall consider the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, some sales taxes). The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both.
606-10-32-3 The nature, timing, and amount of consideration promised by a customer affect the estimate of the transaction price. When determining the transaction price, an entity shall consider the effects of all of the following:
  1. Variable consideration (see paragraphs 606-10-32-5 through 32-10 and 606-10-32-14)
  2. Constraining estimates of variable consideration (see paragraphs 606-10-32-11 through 32-13)
  3. The existence of a significant financing component in the contract (see paragraphs 606-10-32-15 through 32-20)
  4. Noncash consideration (see paragraphs 606-10-32-21 through 32-24)
  5. Consideration payable to a customer (see paragraphs 606-10-32-25 through 32-27).
606-10-32-4 For the purpose of determining the transaction price, an entity shall assume that the goods or services will be transferred to the customer as promised in accordance with the existing contract and that the contract will not be cancelled, renewed, or modified.
> > Variable Consideration
606-10-32-5 If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer.
606-10-32-6 An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, penalties, or other similar items. The promised consideration also can vary if an entity’s entitlement to the consideration is contingent on the occurrence or nonoccurrence of a future event. For example, an amount of consideration would be variable if either a product was sold with a right of return or a fixed amount is promised as a performance bonus on achievement of a specified milestone.
606-10-32-7 The variability relating to the consideration promised by a customer may be explicitly stated in the contract. In addition to the terms of the contract, the promised consideration is variable if either of the following circumstances exists:
  1. The customer has a valid expectation arising from an entity’s customary business practices, published policies, or specific statements that the entity will accept an amount of consideration that is less than the price stated in the contract. That is, it is expected that the entity will offer a price concession. Depending on the jurisdiction, industry, or customer this offer may be referred to as a discount, rebate, refund, or credit.
  2. Other facts and circumstances indicate that the entity’s intention, when entering into the contract with the customer, is to offer a price concession to the customer.
606-10-32-8 An entity shall estimate an amount of variable consideration by using either of the following methods, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled:
  1. The expected value—The expected value is the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characteristics.
  2. The most likely amount—The most likely amount is the single most likely amount in a range of possible consideration amounts (that is, the single most likely outcome of the contract). The most likely amount may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or does not).
606-10-32-9 An entity shall apply one method consistently throughout the contract when estimating the effect of an uncertainty on an amount of variable consideration to which the entity will be entitled. In addition, an entity shall consider all the information (historical, current, and forecast) that is reasonably available to the entity and shall identify a reasonable number of possible consideration amounts. The information that an entity uses to estimate the amount of variable consideration typically would be similar to the information that the entity’s management uses during the bid-and-proposal process and in establishing prices for promised goods or services.
> > > Refund Liabilities
606-10-32-10 An entity shall recognize a refund liability if the entity receives consideration from a customer and expects to refund some or all of that consideration to the customer. A refund liability is measured at the amount of consideration received (or receivable) for which the entity does not expect to be entitled (that is, amounts not included in the transaction price). The refund liability (and corresponding change in the transaction price and, therefore, the contract liability) shall be updated at the end of each reporting period for changes in circumstances. To account for a refund liability relating to a sale with a right of return, an entity shall apply the guidance in paragraphs 606-10-55-22 through 55-29.
> > > Constraining Estimates of Variable Consideration
606-10-32-11 An entity shall include in the transaction price some or all of an amount of variable consideration estimated in accordance with paragraph 606-10-32-8 only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
606-10-32-12 In assessing whether it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty related to the variable consideration is subsequently resolved, an entity shall consider both the likelihood and the magnitude of the revenue reversal. Factors that could increase the likelihood or the magnitude of a revenue reversal include, but are not limited to, any of the following:
  1. The amount of consideration is highly susceptible to factors outside the entity’s influence. Those factors may include volatility in a market, the judgment or actions of third parties, weather conditions, and a high risk of obsolescence of the promised good or service.
  2. The uncertainty about the amount of consideration is not expected to be resolved for a long period of time.
  3. The entity’s experience (or other evidence) with similar types of contracts is limited, or that experience (or other evidence) has limited predictive value.
  4. The entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances.
  5. The contract has a large number and broad range of possible consideration amounts.
606-10-32-13 An entity shall apply paragraph 606-10-55-65 to account for consideration in the form of a sales-based or usage-based royalty that is promised in exchange for a license of intellectual property.
> > > Reassessment of Variable Consideration
606-10-32-14 At the end of each reporting period, an entity shall update the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period and the changes in circumstances during the reporting period. The entity shall account for changes in the transaction price in accordance with paragraphs 606-10-32-42 through 32-45.
> > The Existence of a Significant Financing Component in the Contract
606-10-32-15 In determining the transaction price, an entity shall adjust the promised amount of consideration for the effects of the time value of money if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer. In those circumstances, the contract contains a significant financing component. A significant financing component may exist regardless of whether the promise of financing is explicitly stated in the contract or implied by the payment terms agreed to by the parties to the contract.
606-10-32-16 The objective when adjusting the promised amount of consideration for a significant financing component is for an entity to recognize revenue at an amount that reflects the price that a customer would have paid for the promised goods or services if the customer had paid cash for those goods or services when (or as) they transfer to the customer (that is, the cash selling price). An entity shall consider all relevant facts and circumstances in assessing whether a contract contains a financing component and whether that financing component is significant to the contract, including both of the following:
a. The difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services
b. The combined effect of both of the following:
1. The expected length of time between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services
2. The prevailing interest rates in the relevant market.
606-10-32-17 Notwithstanding the assessment in paragraph 606-10-32-16, a contract with a customer would not have a significant financing component if any of the following factors exist:
  1. The customer paid for the goods or services in advance, and the timing of the transfer of those goods or services is at the discretion of the customer.
  2. A substantial amount of the consideration promised by the customer is variable, and the amount or timing of that consideration varies on the basis of the occurrence or nonoccurrence of a future event that is not substantially within the control of the customer or the entity (for example, if the consideration is a sales-based royalty).
  3. The difference between the promised consideration and the cash selling price of the good or service (as described in paragraph 606-10-32-16) arises for reasons other than the provision of finance to either the customer or the entity, and the difference between those amounts is proportional to the reason for the difference. For example, the payment terms might provide the entity or the customer with protection from the other party failing to adequately complete some or all of its obligations under the contract.
606-10-32-18 As a practical expedient, an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
606-10-32-19 To meet the objective in paragraph 606-10-32-16 when adjusting the promised amount of consideration for a significant financing component, an entity shall use the discount rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. That rate would reflect the credit characteristics of the party receiving financing in the contract, as well as any collateral or security provided by the customer or the entity, including assets transferred in the contract. An entity may be able to determine that rate by identifying the rate that discounts the nominal amount of the promised consideration to the price that the customer would pay in cash for the goods or services when (or as) they transfer to the customer. After contract inception, an entity shall not update the discount rate for changes in interest rates or other circumstances (such as a change in the assessment of the customer’s credit risk).
606-10-32-20 An entity shall present the effects of financing (interest income or interest expense) separately from revenue from contracts with customers in the statement of comprehensive income (statement of activities). Interest income or interest expense is recognized only to the extent that a contract asset (or receivable) or a contract liability is recognized in accounting for a contract with a customer. In accounting for the effects of the time value of money, an entity also shall consider the subsequent measurement guidance in Subtopic 835-30, specifically the guidance in paragraphs 835-30-45-1A through 45-3 on presentation of the discount and premium in the financial statements and the guidance in paragraphs 835-30-55-2 through 55-3 on the application of the interest method.
> > Noncash Consideration
606-10-32-21 To determine the transaction price for contracts in which a customer promises consideration in a form other than cash, an entity shall measure the noncash consideration (or promise of noncash consideration) at fair value.
606-10-32-22 If an entity cannot reasonably estimate the fair value of the noncash consideration, the entity shall measure the consideration indirectly by reference to the standalone selling price of the goods or services promised to the customer (or class of customer) in exchange for the consideration.
606-10-32-23 The fair value of the noncash consideration may vary because of the form of the consideration (for example, a change in the price of a share to which an entity is entitled to receive from a customer). If the fair value of the noncash consideration promised by a customer varies for reasons other than only the form of the consideration (for example, the fair value could vary because of the entity’s performance), an entity shall apply the guidance in paragraphs 606-10-32-11 through 32-13.
606-10-32-24 If a customer contributes goods or services (for example, materials, equipment, or labor) to facilitate an entity’s fulfillment of the contract, the entity shall assess whether it obtains control of those contributed goods or services. If so, the entity shall account for the contributed goods or services as noncash consideration received from the customer.
> > Consideration Payable to a Customer
606-10-32-25 Consideration payable to a customer includes cash amounts that an entity pays, or expects to pay, to the customer (or to other parties that purchase the entity’s goods or services from the customer). Consideration payable to a customer also includes credit or other items (for example, a coupon or voucher) that can be applied against amounts owed to the entity (or to other parties that purchase the entity’s goods or services from the customer). An entity shall account for consideration payable to a customer as a reduction of the transaction price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct good or service (as described in paragraphs 606-10-25-18 through 25-22) that the customer transfers to the entity. If the consideration payable to a customer includes a variable amount, an entity shall estimate the transaction price (including assessing whether the estimate of variable consideration is constrained) in accordance with paragraphs 606-10-32-5 through 32-13.
606-10-32-26 If consideration payable to a customer is a payment for a distinct good or service from the customer, then an entity shall account for the purchase of the good or service in the same way that it accounts for other purchases from suppliers. If the amount of consideration payable to the customer exceeds the fair value of the distinct good or service that the entity receives from the customer, then the entity shall account for such an excess as a reduction of the transaction price. If the entity cannot reasonably estimate the fair value of the good or service received from the customer, it shall account for all of the consideration payable to the customer as a reduction of the transaction price.
606-10-32-27 Accordingly, if consideration payable to a customer is accounted for as a reduction of the transaction price, an entity shall recognize the reduction of revenue when (or as) the later of either of the following events occurs:
  1. The entity recognizes revenue for the transfer of the related goods or services to the customer.
  2. The entity pays or promises to pay the consideration (even if the payment is conditional on a future event). That promise might be implied by the entity’s customary business practices.
> Allocating the Transaction Price to Performance Obligations
606-10-32-28 The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.
606-10-32-29 To meet the allocation objective, an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative standalone selling price basis in accordance with paragraphs 606-10-32-31 through 32-35, except as specified in paragraphs 606-10-32-36 through 32-38 (for allocating discounts) and paragraphs 606-10-32-39 through 32-41 (for allocating consideration that includes variable amounts).
606-10-32-30 Paragraphs 606-10-32-31 through 32-41 do not apply if a contract has only one performance obligation. However, paragraphs 606-10-32-39 through 32-41 may apply if an entity promises to transfer a series of distinct goods or services identified as a single performance obligation in accordance with paragraph 606-10-25-14(b) and the promised consideration includes variable amounts.
> > Allocation Based on Standalone Selling Prices
606-10-32-31 To allocate the transaction price to each performance obligation on a relative standalone selling price basis, an entity shall determine the standalone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those standalone selling prices.
606-10-32-32 The standalone selling price is the price at which an entity would sell a promised good or service separately to a customer. The best evidence of a standalone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers. A contractually stated price or a list price for a good or service may be (but shall not be presumed to be) the standalone selling price of that good or service.
606-10-32-33 If a standalone selling price is not directly observable, an entity shall estimate the standalone selling price at an amount that would result in the allocation of the transaction price meeting the allocation objective in paragraph 606-10-32-28. When estimating a standalone selling price, an entity shall consider all information (including market conditions, entity-specific factors, and information about the customer or class of customer) that is reasonably availableto the entity. In doing so, an entity shall maximize the use of observable inputs and apply estimation methods consistently in similar circumstances.
606-10-32-34 Suitable methods for estimating the standalone selling price of a good or service include, but are not limited to, the following:
a. Adjusted market assessment approach—An entity could evaluate the market in which it sells goods or services and estimate the price that a customer in that market would be willing to pay for those goods or services. That approach also might include referring to prices from the entity’s competitors for similar goods or services and adjusting those prices as necessary to reflect the entity’s costs and margins.
b. Expected cost plus a margin approach—An entity could forecast its expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service.
c. Residual approach—An entity may estimate the standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract. However, an entity may use a residual approach to estimate, in accordance with paragraph 606-10-32-33, the standalone selling price of a good or service only if one of the following criteria is met:
1. The entity sells the same good or service to different customers (at or near the same time) for a broad range of amounts (that is, the selling price is highly variable because a representative standalone selling price is not discernible from past transactions or other observable evidence).
2. The entity has not yet established a price for that good or service, and the good or service has not previously been sold on a standalone basis (that is, the selling price is uncertain).
606-10-32-35 A combination of methods may need to be used to estimate the standalone selling prices of the goods or services promised in the contract if two or more of those goods or services have highly variable or uncertain standalone selling prices. For example, an entity may use a residual approach to estimate the aggregate standalone selling price for those promised goods or services with highly variable or uncertain standalone selling prices and then use another method to estimate the standalone selling prices of the individual goods or services relative to that estimated aggregate standalone selling price determined by the residual approach. When an entity uses a combination of methods to estimate the standalone selling price of each promised good or service in the contract, the entity shall evaluate whether allocating the transaction price at those estimated standalone selling prices would be consistent with the allocation objective in paragraph 606-10-32-28 and the guidance on estimating standalone selling prices in paragraph 606-10-32-33.
> > Allocation of a Discount
606-10-32-36 A customer receives a discount for purchasing a bundle of goods or services if the sum of the standalone selling prices of those promised goods or services in the contract exceeds the promised consideration in a contract. Except when an entity has observable evidence in accordance with paragraph 606-10-32-37 that the entire discount relates to only one or more, but not all, performance obligations in a contract, the entity shall allocate a discount proportionately to all performance obligations in the contract. The proportionate allocation of the discount in those circumstances is a consequence of the entity allocating the transaction price to each performance obligation on the basis of the relative standalone selling prices of the underlying distinct goods or services.
606-10-32-37 An entity shall allocate a discount entirely to one or more, but not all, performance obligations in the contract if all of the following criteria are met:
  1. The entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a standalone basis.
  2. The entity also regularly sells on a standalone basis a bundle (or bundles) of some of those distinct goods or services at a discount to the standalone selling prices of the goods or services in each bundle.
  3. The discount attributable to each bundle of goods or services described in (b) is substantially the same as the discount in the contract, and an analysis of the goods or services in each bundle provides observable evidence of the performance obligation (or performance obligations) to which the entire discount in the contract belongs.
606-10-32-38 If a discount is allocated entirely to one or more performance obligations in the contract in accordance with paragraph 606-10-32-37, an entity shall allocate the discount before using the residual approach to estimate the standalone selling price of a good or service in accordance with paragraph 606-10-32-34(c).
> > Allocation of Variable Consideration
606-10-32-39 Variable consideration that is promised in a contract may be attributable to the entire contract or to a specific part of the contract, such as either of the following:
  1. One or more, but not all, performance obligations in the contract (for example, a bonus may be contingent on an entity transferring a promised good or service within a specified period of time)
  2. One or more, but not all, distinct goods or services promised in a series of distinct goods or services that forms part of a single performance obligation in accordance with paragraph 606-10-25-14(b) (for example, the consideration promised for the second year of a two-year cleaning service contract will increase on the basis of movements in a specified inflation index).
606-10-32-40 An entity shall allocate a variable amount (and subsequent changes to that amount) entirely to a performance obligation or to a distinct good or service that forms part of a single performance obligation in accordance with paragraph 606-10-25-14(b) if both of the following criteria are met:
  1. The terms of a variable payment relate specifically to the entity’s efforts to satisfy the performance obligation or transfer the distinct good or service (or to a specific outcome from satisfying the performance obligation or transferring the distinct good or service).
  2. Allocating the variable amount of consideration entirely to the performance obligation or the distinct good or service is consistent with the allocation objective in paragraph 606-10-32-28 when considering all of the performance obligations and payment terms in the contract.
606-10-32-41 The allocation requirements in paragraphs 606-10-32-28 through 32-38 shall be applied to allocate the remaining amount of the transaction price that does not meet the criteria in paragraph 606-10-32-40.
> Changes in the Transaction Price
606-10-32-42 After contract inception, the transaction price can change for various reasons, including the resolution of uncertain events or other changes in circumstances that change the amount of consideration to which an entity expects to be entitled in exchange for the promised goods or services.
606-10-32-43
An entity shall allocate to the
performance obligations
in the contract any subsequent changes in the transaction price on the same basis as at contract inception. Consequently, an entity shall not reallocate the transaction price to reflect changes in
standalone selling prices
after contract inception. Amounts allocated to a satisfied performance obligation shall be recognized as
revenue
, or as a reduction of revenue, in the period in which the transaction price changes.
606-10-32-44 An entity shall allocate a change in the transaction price entirely to one or more, but not all, performance obligations or distinct goods or services promised in a series that forms part of a single performance obligation in accordance with paragraph 606-10-25-14(b) only if the criteria in paragraph 606-10-32-40 on allocating variable consideration are met.
606-10-32-45 An entity shall account for a change in the transaction price that arises as a result of a contract modification in accordance with paragraphs 606-10-25-10 through 25-13. However, for a change in the transaction price that occurs after a contract modification, an entity shall apply paragraphs 606-10-32-42 through 32-44 to allocate the change in the transaction price in whichever of the following ways is applicable:
a. An entity shall allocate the change in the transaction price to the performance obligations identified in the contract before the modification if, and to the extent that, the change in the transaction price is attributable to an amount of variable consideration promised before the modification and the modification is accounted for in accordance with paragraph 606-10-25-13(a).
b. In all other cases in which the modification was not accounted for as a separate contract in accordance with paragraph 606-10-25-12, an entity shall allocate the change in the transaction price to the performance obligations in the modified contract (that is, the performance obligations that were unsatisfied or partially unsatisfied immediately after the modification).
Other Presentation Matters
General
606-10-45-1 When either party to a contract has performed, an entity shall present the contract in the statement of financial position as a contract asset or a contract liability, depending on the relationship between the entity’s performance and the customer’s payment. An entity shall present any unconditional rights to consideration separately as a receivable.
606-10-45-2 If a customer pays consideration, or an entity has a right to an amount of consideration that is unconditional (that is, a receivable), before the entity transfers a good or service to the customer, the entity shall present the contract as a contract liability when the payment is made or the payment is due (whichever is earlier). A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer.
606-10-45-3 If an entity performs by transferring goods or services to a customer before the customer pays consideration or before payment is due, the entity shall present the contract as a contract asset, excluding any amounts presented as a receivable. A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer. An entity shall assess a contract asset for impairment in accordance with Topic 310 on receivables. An impairment of a contract asset shall be measured, presented, and disclosed in accordance with Topic 310 (see also paragraph 606-10-50-4(b)).
606-10-45-4 A receivable is an entity’s right to consideration that is unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. For example, an entity would recognize a receivable if it has a present right to payment even though that amount may be subject to refund in the future. An entity shall account for a receivable in accordance with Topic 310. Upon initial recognition of a receivable from a contract with a customer, any difference between the measurement of the receivable in accordance with Topic 310 and the corresponding amount of revenue recognized shall be presented as an expense (for example, as an impairment loss).
606-10-45-5 This guidance uses the terms contract asset and contract liability but does not prohibit an entity from using alternative descriptions in the statement of financial position for those items. If an entity uses an alternative description for a contract asset, the entity shall provide sufficient information for a user of the financial statements to distinguish between receivables and contract assets.
Disclosure
General
606-10-50-1 The objective of the disclosure requirements in this Topic is for an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. To achieve that objective, an entity shall disclose qualitative and quantitative information about all of the following:
  1. Its contracts with customers (see paragraphs 606-10-50-4 through 50-16)
  2. The significant judgments, and changes in the judgments, made in applying the guidance in this Topic to those contracts (see paragraphs 606-10-50-17 through 50-21)
  3. Any assets recognized from the costs to obtain or fulfill a contract with a customer in accordance with paragraph 340-40-25-1 or 340-40-25-5 (see paragraphs 340-40-50-1 through 50-6).
606-10-50-2 An entity shall consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the various requirements. An entity shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have substantially different characteristics.
606-10-50-3 Amounts disclosed are for each reporting period for which a statement of comprehensive income (statement of activities) is presented and as of each reporting period for which a statement of financial position is presented. An entity need not disclose information in accordance with the guidance in this Topic if it has provided the information in accordance with another Topic.
> Contracts with Customers
606-10-50-4 An entity shall disclose all of the following amounts for the reporting period unless those amounts are presented separately in the statement of comprehensive income (statement of activities) in accordance with other Topics:
  1. Revenue recognized from contracts with customers, which the entity shall disclose separately from its other sources of revenue
  2. Any impairment losses recognized (in accordance with Topic 310 on receivables) on any receivables or contract assets arising from an entity’s contracts with customers, which the entity shall disclose separately from impairment losses from other contracts.
> > Disaggregation of Revenue
606-10-50-5 An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. An entity shall apply the guidance in paragraphs 606-10-55-89 through 55-91 when selecting the categories to use to disaggregate revenue.
606-10-50-6 In addition, an entity shall disclose sufficient information to enable users of financial statements to understand the relationship between the disclosure of disaggregated revenue (in accordance with paragraph 606-10-50-5) and revenue information that is disclosed for each reportable segment, if the entity applies Topic 280 on segment reporting.
606-10-50-7 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission (SEC), may elect not to apply the quantitative disaggregation disclosure guidance in paragraphs 606-10-50-5 through 50-6 and 606-10-55-89 through 55-91. If an entity elects not to provide those disclosures, the entity shall disclose, at a minimum, revenue disaggregated according to the timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred to customers over time) and qualitative information about how economic factors (such as type of customer, geographical location of customers, and type of contract) affect the nature, amount, timing, and uncertainty of revenue and cash flows.
> > Contract Balances
606-10-50-8 An entity shall disclose all of the following:
  1. The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed
  2. Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period
  3. Revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price).
606-10-50-9 An entity shall explain how the timing of satisfaction of its performance obligations (see paragraph 606-10-50-12(a)) relates to the typical timing of payment (see paragraph 606-10-50-12(b)) and the effect that those factors have on the contract asset and the contract liability balances. The explanation provided may use qualitative information.
606-10-50-10 An entity shall provide an explanation of the significant changes in the contract asset and the contract liability balances during the reporting period. The explanation shall include qualitative and quantitative information. Examples of changes in the entity’s balances of contract assets and contract liabilities include any of the following:
  1. Changes due to business combinations
  2. Cumulative catch-up adjustments to revenue that affect the corresponding contract asset or contract liability, including adjustments arising from a change in the measure of progress, a change in an estimate of the transaction price (including any changes in the assessment of whether an estimate of variable consideration is constrained), or a contract modification
  3. Impairment of a contract asset
  4. A change in the time frame for a right to consideration to become unconditional (that is, for a contract asset to be reclassified to a receivable)
  5. A change in the time frame for a performance obligation to be satisfied (that is, for the recognition of revenue arising from a contract liability).
606-10-50-11 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide any or all of the disclosures in paragraphs 606-10-50-8 through 50-10. However, if an entity elects not to provide the disclosures in paragraphs 606-10-50-8 through 50-10, the entity shall provide the disclosure in paragraph 606-10-50-8(a), which requires the disclosure of the opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed.
> > Performance Obligations
606-10-50-12 An entity shall disclose information about its performance obligations in contracts with customers, including a description of all of the following:
  1. When the entity typically satisfies its performance obligations (for example, upon shipment, upon delivery, as services are rendered, or upon completion of service) including when performance obligations are satisfied in a bill-and-hold arrangement
  2. The significant payment terms (for example, when payment typically is due, whether the contract has a significant financing component, whether the consideration amount is variable, and whether the estimate of variable consideration is typically constrained in accordance with paragraphs 606-10-32-11 through 32-13)
  3. The nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (that is, if the entity is acting as an agent)
  4. Obligations for returns, refunds, and other similar obligations
  5. Types of warranties and related obligations.
> > Transaction Price Allocated to the Remaining Performance Obligations
606-10-50-13 An entity shall disclose the following information about its remaining performance obligations:
a. The aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period
b. An explanation of when the entity expects to recognize as revenue the amount disclosed in accordance with paragraph 606-10-50-13(a), which the entity shall disclose in either of the following ways:
1. On a quantitative basis using the time bands that would be most appropriate for the duration of the remaining performance obligations
2. By using qualitative information.
606-10-50-14 As a practical expedient, an entity need not disclose the information in paragraph 606-10-50-13 for a performance obligation if either of the following conditions is met:
  1. The performance obligation is part of a contract that has an original expected duration of one year or less.
  2. The entity recognizes revenue from the satisfaction of the performance obligation in accordance with paragraph 606-10-55-18.
606-10-50-15 An entity shall explain qualitatively whether it is applying the practical expedient in paragraph 606-10-50-14 and whether any consideration from contracts with customers is not included in the transaction price and, therefore, not included in the information disclosed in accordance with paragraph 606-10-50-13. For example, an estimate of the transaction price would not include any estimated amounts of variable consideration that are constrained (see paragraphs 606-10-32-11 through 32-13).
606-10-50-16 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide the disclosures in paragraphs 606-10-50-13 through 50-15.
> Significant Judgments in the Application of the Guidance in This Topic
606-10-50-17 An entity shall disclose the judgments, and changes in the judgments, made in applying the guidance in this Topic that significantly affect the determination of the amount and timing of revenue from contracts with customers. In particular, an entity shall explain the judgments, and changes in the judgments, used in determining both of the following:
  1. The timing of satisfaction of performance obligations (see paragraphs 606-10-50-18 through 50-19)
  2. The transaction price and the amounts allocated to performance obligations (see paragraph 606-10-50-20).
> > Determining the Timing of Satisfaction of Performance Obligations
606-10-50-18 For performance obligations that an entity satisfies over time, an entity shall disclose both of the following:
  1. The methods used to recognize revenue (for example, a description of the output methods or input methods used and how those methods are applied)
  2. An explanation of why the methods used provide a faithful depiction of the transfer of goods or services.
606-10-50-19 For performance obligations satisfied at a point in time, an entity shall disclose the significant judgments made in evaluating when a customer obtains control of promised goods or services.
> > Determining the Transaction Price and the Amounts Allocated to Performance Obligations
606-10-50-20 An entity shall disclose information about the methods, inputs, and assumptions used for all of the following:
  1. Determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money, and measuring noncash consideration
  2. Assessing whether an estimate of variable consideration is constrained
  3. Allocating the transaction price, including estimating standalone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable)
  4. Measuring obligations for returns, refunds, and other similar obligations.
606-10-50-21 An entity except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide any or all of the following disclosures:
  1. Paragraph 606-10-50-18(b), which states that an entity shall disclose, for performance obligations satisfied over time, an explanation of why the methods used to recognize revenue provide a faithful depiction of the transfer of goods or services to a customer
  2. Paragraph 606-10-50-19, which states that an entity shall disclose, for performance obligations satisfied at a point in time, the significant judgments made in evaluating when a customer obtains control of promised goods or services
  3. Paragraph 606-10-50-20, which states that an entity shall disclose the methods, inputs, and assumptions used to determine the transaction price and to allocate the transaction price. However, if an entity elects not to provide the disclosures in paragraph 606-10-50-20, the entity shall provide the disclosure in paragraph 606-10-50-20(b), which states that an entity shall disclose the methods, inputs, and assumptions used to assess whether an estimate of variable consideration is constrained.
> Practical Expedients
606-10-50-22 If an entity elects to use the practical expedient in either paragraph 606-10-32-18 (about the existence of a significant financing component) or paragraph 340-40-25-4 (about the incremental costs of obtaining a contract), the entity shall disclose that fact.
606-10-50-23 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the SEC, may elect not to provide the disclosures in paragraph 606-10-50-22.
Implementation Guidance and Illustrations
606-10-55-1 The implementation guidance and illustrations Section is organized as follows:
  1. Implementation guidance is provided in paragraphs 606-10-55-2 through 55-91 with a listing of contents in paragraph 606-10-55-3.
  2. Illustrations are provided in paragraphs 606-10-55-92 through 55-429 with a listing of contents in paragraph 606-10-55-93.
> Implementation Guidance
606-10-55-2 Paragraphs 606-10-55-2 through 55-91 are an integral part of this Topic. These paragraphs provide additional guidance that addresses the application of the guidance on revenue from contracts with customers.
606-10-55-3 This implementation guidance is organized into the following categories:
  1. Performance obligations satisfied over time (paragraphs 606-10-55-4 through 55-15)
  2. Methods for measuring progress toward complete satisfaction of a performance obligation (paragraphs 606-10-55-16 through 55-21)
  3. Sale with a right of return (paragraphs 606-10-55-22 through 55-29)
  4. Warranties (paragraphs 606-10-55-30 through 55-35)
  5. Principal versus agent considerations (paragraphs 606-10-55-36 through 55-40)
  6. Customer options for additional goods or services (paragraphs 606-10-55-41 through 55-45)
  7. Customers’ unexercised rights (paragraphs 606-10-55-46 through 55-49)
  8. Nonrefundable upfront fees (and some related costs) (paragraphs 606-10-55-50 through 55-53)
  9. Licensing (paragraphs 606-10-55-54 through 55-65)
  10. Repurchase agreements (paragraphs 606-10-55-66 through 55-78)
  11. Consignment arrangements (paragraphs 606-10-55-79 through 55-80)
  12. Bill-and-hold arrangements (paragraphs 606-10-55-81 through 55-84)
  13. Customer acceptance (paragraphs 606-10-55-85 through 55-88)
  14. Disclosure of disaggregated revenue (paragraphs 606-10-55-89 through 55-91).
> > Performance Obligations Satisfied Over Time
606-10-55-4 In accordance with paragraph 606-10-25-27, a performance obligation is satisfied over time if one of the following criteria is met:
  1. The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (see paragraphs 606-10-55-5 through 55-6).
  2. The entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced (see paragraph 606-10-55-7).
  3. The entity’s performance does not create an asset with an alternative use to the entity (see paragraphs 606-10-55-8 through 55-10), and the entity has an enforceable right to payment for performance completed to date (see paragraphs 606-10-55-11 through 55-15).
> > > Simultaneous Receipt and Consumption of the Benefits of the Entity’s Performance (paragraph 606-10-25-27(a))
606-10-55-5 For some types of performance obligations, the assessment of whether a customer receives the benefits of an entity’s performance as the entity performs and simultaneously consumes those benefits as they are received will be straightforward. Examples include routine or recurring services (such as a cleaning service) in which the receipt and simultaneous consumption by the customer of the benefits of the entity’s performance can be readily identified.
606-10-55-6 For other types of performance obligations, an entity may not be able to readily identify whether a customer simultaneously receives and consumes the benefits from the entity’s performance as the entity performs. In those circumstances, a performance obligation is satisfied over time if an entity determines that another entity would not need to substantially reperform the work that the entity has completed to date if that other entity were to fulfill the remaining performance obligation to the customer. In determining whether another entity would not need to substantially reperform the work the entity has completed to date, an entity should make both of the following assumptions:
  1. Disregard potential contractual restrictions or practical limitations that otherwise would prevent the entity from transferring the remaining performance obligation to another entity
  2. Presume that another entity fulfilling the remainder of the performance obligation would not have the benefit of any asset that is presently controlled by the entity and that would remain controlled by the entity if the performance obligation were to transfer to another entity.
> > > Customer Controls the Asset As It Is Created or Enhanced (paragraph 606-10-25-27(b))
606-10-55-7 In determining whether a customer controls an asset as it is created or enhanced in accordance with paragraph 606-10-25-27(b), an entity should apply the guidance on control in paragraphs 606-10-25-23 through 25-26 and 606-10-25-30. The asset that is being created or enhanced (for example, a work in process asset) could be either tangible or intangible.
> > > Entity’s Performance Does Not Create an Asset with an Alternative Use (paragraph 606-10-25-27(c))
606-10-55-8 In assessing whether an asset has an alternative use to an entity in accordance with paragraph 606-10-25-28, an entity should consider the effects of contractual restrictions and practical limitations on the entity’s ability to readily direct that asset for another use, such as selling it to a different customer. The possibility of the contract with the customer being terminated is not a relevant consideration in assessing whether the entity would be able to readily direct the asset for another use.
606-10-55-9 A contractual restriction on an entity’s ability to direct an asset for another use must be substantive for the asset not to have an alternative use to the entity. A contractual restriction is substantive if a customer could enforce its rights to the promised asset if the entity sought to direct the asset for another use. In contrast, a contractual restriction is not substantive if, for example, an asset is largely interchangeable with other assets that the entity could transfer to another customer without breaching the contract and without incurring significant costs that otherwise would not have been incurred in relation to that contract.
606-10-55-10 A practical limitation on an entity’s ability to direct an asset for another use exists if an entity would incur significant economic losses to direct the asset for another use. A significant economic loss could arise because the entity either would incur significant costs to rework the asset or would only be able to sell the asset at a significant loss. For example, an entity may be practically limited from redirecting assets that either have design specifications that are unique to a customer or are located in remote areas.
> > > Right to Payment for Performance Completed to Date (paragraph 606-10-25-27(c))
606-10-55-11 In accordance with paragraph 606-10-25-29, an entity has a right to payment for performance completed to date if the entity would be entitled to an amount that at least compensates the entity for its performance completed to date in the event that the customer or another party terminates the contract for reasons other than the entity’s failure to perform as promised. An amount that would compensate an entity for performance completed to date would be an amount that approximates the selling price of the goods or services transferred to date (for example, recovery of the costs incurred by an entity in satisfying the performance obligation plus a reasonable profit margin) rather than compensation for only the entity’s potential loss of profit if the contract were to be terminated. Compensation for a reasonable profit margin need not equal the profit margin expected if the contract was fulfilled as promised, but an entity should be entitled to compensation for either of the following amounts:
  1. A proportion of the expected profit margin in the contract that reasonably reflects the extent of the entity’s performance under the contract before termination by the customer (or another party)
  2. A reasonable return on the entity’s cost of capital for similar contracts (or the entity’s typical operating margin for similar contracts) if the contract-specific margin is higher than the return the entity usually generates from similar contracts.
606-10-55-12 An entity’s right to payment for performance completed to date need not be a present unconditional right to payment. In many cases, an entity will have an unconditional right to payment only at an agreed-upon milestone or upon complete satisfaction of the performance obligation. In assessing whether it has a right to payment for performance completed to date, an entity should consider whether it would have an enforceable right to demand or retain payment for performance completed to date if the contract were to be terminated before completion for reasons other than the entity’s failure to perform as promised.
606-10-55-13 In some contracts, a customer may have a right to terminate the contract only at specified times during the life of the contract or the customer might not have any right to terminate the contract. If a customer acts to terminate a contract without having the right to terminate the contract at that time (including when a customer fails to perform its obligations as promised), the contract (or other laws) might entitle the entity to continue to transfer to the customer the goods or services promised in the contract and require the customer to pay the consideration promised in exchange for those goods or services. In those circumstances, an entity has a right to payment for performance completed to date because the entity has a right to continue to perform its obligations in accordance with the contract and to require the customer to perform its obligations (which include paying the promised consideration).
606-10-55-14 In assessing the existence and enforceability of a right to payment for performance completed to date, an entity should consider the contractual terms as well as any legislation or legal precedent that could supplement or override those contractual terms. This would include an assessment of whether:
  1. Legislation, administrative practice, or legal precedent confers upon the entity a right to payment for performance to date even though that right is not specified in the contract with the customer.
  2. Relevant legal precedent indicates that similar rights to payment for performance completed to date in similar contracts have no binding legal effect.
  3. An entity’s customary business practices of choosing not to enforce a right to payment has resulted in the right being rendered unenforceable in that legal environment. However, notwithstanding that an entity may choose to waive its right to payment in similar contracts, an entity would continue to have a right to payment to date if, in the contract with the customer, its right to payment for performance to date remains enforceable.
606-10-55-15 The payment schedule specified in a contract does not necessarily indicate whether an entity has an enforceable right to payment for performance completed to date. Although the payment schedule in a contract specifies the timing and amount of consideration that is payable by a customer, the payment schedule might not necessarily provide evidence of the entity’s right to payment for performance completed to date. This is because, for example, the contract could specify that the consideration received from the customer is refundable for reasons other than the entity failing to perform as promised in the contract.
> > Methods for Measuring Progress toward Complete Satisfaction of a Performance Obligation
606-10-55-16 Methods that can be used to measure an entity’s progress toward complete satisfaction of a performance obligation satisfied over time in accordance with paragraphs 606-10-25-27 through 25-29 include the following:
  1. Output methods (see paragraphs 606-10-55-17 through 55-19)
  2. Input methods (see paragraphs 606-10-55-20 through 55-21).
> > > Output Methods
606-10-55-17 Output methods recognize revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Output methods include methods such as surveys of performance completed to date, appraisals of results achieved, milestones reached, time elapsed, and units produced or units delivered. When an entity evaluates whether to apply an output method to measure its progress, the entity should consider whether the output selected would faithfully depict the entity’s performance toward complete satisfaction of the performance obligation. An output method would not provide a faithful depiction of the entity’s performance if the output selected would fail to measure some of the goods or services for which control has transferred to the customer. For example, output methods based on units produced or units delivered would not faithfully depict an entity’s performance in satisfying a performance obligation if, at the end of the reporting period, the entity’s performance has produced work in process or finished goods controlled by the customer that are not included in the measurement of the output.
606-10-55-18 As a practical expedient, if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date (for example, a service contract in which an entity bills a fixed amount for each hour of service provided), the entity may recognize revenue in the amount to which the entity has a right to invoice.
606-10-55-19 The disadvantages of output methods are that the outputs used to measure progress may not be directly observable and the information required to apply them may not be available to an entity without undue cost. Therefore, an input method may be necessary.
> > > Input Methods
606-10-55-20 Input methods recognize revenue on the basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labor hours expended, costs incurred, time elapsed, or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. If the entity’s efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the entity to recognize revenue on a straight-line basis.
606-10-55-21 A shortcoming of input methods is that there may not be a direct relationship between an entity’s inputs and the transfer of control of goods or services to a customer. Therefore, an entity should exclude from an input method the effects of any inputs that, in accordance with the objective of measuring progress in paragraph 606-10-25-31, do not depict the entity’s performance in transferring control of goods or services to the customer. For instance, when using a cost-based input method, an adjustment to the measure of progress may be required in the following circumstances:
a. When a cost incurred does not contribute to an entity’s progress in satisfying the performance obligation. For example, an entity would not recognize revenue on the basis of costs incurred that are attributable to significant inefficiencies in the entity’s performance that were not reflected in the price of the contract (for example, the costs of unexpected amounts of wasted materials, labor, or other resources that were incurred to satisfy the performance obligation).
b. When a cost incurred is not proportionate to the entity’s progress in satisfying the performance obligation. In those circumstances, the best depiction of the entity’s performance may be to adjust the input method to recognize revenue only to the extent of that cost incurred. For example, a faithful depiction of an entity’s performance might be to recognize revenue at an amount equal to the cost of a good used to satisfy a performance obligation if the entity expects at contract inception that all of the following conditions would be met:
1. The good is not distinct.
2. The customer is expected to obtain control of the good significantly before receiving services related to the good.
3. The cost of the transferred good is significant relative to the total expected costs to completely satisfy the performance obligation.
4. The entity procures the good from a third party and is not significantly involved in designing and manufacturing the good (but the entity is acting as a principal in accordance with paragraphs 606-10-55-36 through 55-40).
> > Sale with a Right of Return
606-10-55-22 In some contracts, an entity transfers control of a product to a customer and also grants the customer the right to return the product for various reasons (such as dissatisfaction with the product) and receive any combination of the following:
  1. A full or partial refund of any consideration paid
  2. A credit that can be applied against amounts owed, or that will be owed, to the entity
  3. Another product in exchange.
606-10-55-23 To account for the transfer of products with a right of return (and for some services that are provided subject to a refund), an entity should recognize all of the following:
  1. Revenue for the transferred products in the amount of consideration to which the entity expects to be entitled (therefore, revenue would not be recognized for the products expected to be returned)
  2. A refund liability
  3. An asset (and corresponding adjustment to cost of sales) for its right to recover products from customers on settling the refund liability.
606-10-55-24 An entity’s promise to stand ready to accept a returned product during the return period should not be accounted for as a performance obligation in addition to the obligation to provide a refund.
606-10-55-25 An entity should apply the guidance in paragraphs 606-10-32-2 through 32-27 (including the guidance on constraining estimates of variable consideration in paragraphs 606-10-32-11 through 32-13) to determine the amount of consideration to which the entity expects to be entitled (that is, excluding the products expected to be returned). For any amounts received (or receivable) for which an entity does not expect to be entitled, the entity should not recognize revenue when it transfers products to customers but should recognize those amounts received (or receivable) as a refund liability. Subsequently, at the end of each reporting period, the entity should update its assessment of amounts for which it expects to be entitled in exchange for the transferred products and make a corresponding change to the transaction price and, therefore, in the amount of revenue recognized.
606-10-55-26 An entity should update the measurement of the refund liability at the end of each reporting period for changes in expectations about the amount of refunds. An entity should recognize corresponding adjustments as revenue (or reductions of revenue).
606-10-55-27 An asset recognized for an entity’s right to recover products from a customer on settling a refund liability initially should be measured by reference to the former carrying amount of the product (for example, inventory) less any expected costs to recover those products (including potential decreases in the value to the entity of returned products). At the end of each reporting period, an entity should update the measurement of the asset arising from changes in expectations about products to be returned. An entity should present the asset separately from the refund liability.
606-10-55-28 Exchanges by customers of one product for another of the same type, quality, condition, and price (for example, one color or size for another) are not considered returns for the purposes of applying the guidance in this Topic.
606-10-55-29 Contracts in which a customer may return a defective product in exchange for a functioning product should be evaluated in accordance with the guidance on warranties in paragraphs 606-10-55-30 through 55-35.
> > Warranties
606-10-55-30 It is common for an entity to provide (in accordance with the contract, the law, or the entity’s customary business practices) a warranty in connection with the sale of a product (whether a good or service). The nature of a warranty can vary significantly across industries and contracts. Some warranties provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications. Other warranties provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications.
606-10-55-31 If a customer has the option to purchase a warranty separately (for example, because the warranty is priced or negotiated separately), the warranty is a distinct service because the entity promises to provide the service to the customer in addition to the product that has the functionality described in the contract. In those circumstances, an entity should account for the promised warranty as a performance obligation in accordance with paragraphs 606-10-25-14 through 25-22 and allocate a portion of the transaction price to that performance obligation in accordance with paragraphs 606-10-32-28 through 32-41.
606-10-55-32 If a customer does not have the option to purchase a warranty separately, an entity should account for the warranty in accordance with the guidance on product warranties in Subtopic 460-10 on guarantees, unless the promised warranty, or a part of the promised warranty, provides the customer with a service in addition to the assurance that the product complies with agreed-upon specifications.
606-10-55-33 In assessing whether a warranty provides a customer with a service in addition to the assurance that the product complies with agreed-upon specifications, an entity should consider factors such as:
  1. Whether the warranty is required by law—If the entity is required by law to provide a warranty, the existence of that law indicates that the promised warranty is not a performance obligation because such requirements typically exist to protect customers from the risk of purchasing defective products.
  2. The length of the warranty coverage period—The longer the coverage period, the more likely it is that the promised warranty is a performance obligation because it is more likely to provide a service in addition to the assurance that the product complies with agreed-upon specifications.
  3. The nature of the tasks that the entity promises to perform—If it is necessary for an entity to perform specified tasks to provide the assurance that a product complies with agreed-upon specifications (for example, a return shipping service for a defective product), then those tasks likely do not give rise to a performance obligation.
606-10-55-34 If a warranty, or a part of a warranty, provides a customer with a service in addition to the assurance that the product complies with agreed-upon specifications, the promised service is a performance obligation. Therefore, an entity should allocate the transaction price to the product and the service. If an entity promises both an assurance-type warranty and a service-type warranty but cannot reasonably account for them separately, the entity should account for both of the warranties together as a single performance obligation.
606-10-55-35 A law that requires an entity to pay compensation if its products cause harm or damage does not give rise to a performance obligation. For example, a manufacturer might sell products in a jurisdiction in which the law holds the manufacturer liable for any damages (for example, to personal property) that might be caused by a consumer using a product for its intended purpose. Similarly, an entity’s promise to indemnify the customer for liabilities and damages arising from claims of patent, copyright, trademark, or other infringement by the entity’s products does not give rise to a performance obligation. The entity should account for such obligations in accordance with the guidance on loss contingencies in Subtopic 450-20 on contingencies.
> > Principal versus Agent Considerations
606-10-55-36 When another party is involved in providing goods or services to a customer, the entity should determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (that is, the entity is a principal) or to arrange for the other party to provide those goods or services (that is, the entity is an agent).
606-10-55-37 An entity is a principal if the entity controls a promised good or service before the entity transfers the good or service to a customer. However, an entity is not necessarily acting as a principal if the entity obtains legal title of a product only momentarily before legal title is transferred to a customer. An entity that is a principal in a contract may satisfy a performance obligation by itself or it may engage another party (for example, a subcontractor) to satisfy some or all of a performance obligation on its behalf. When an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for those goods or services transferred.
606-10-55-38 An entity is an agent if the entity’s performance obligation is to arrange for the provision of goods or services by another party. When an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the other party to provide its goods or services. An entity’s fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party.
606-10-55-39 Indicators that an entity is an agent (and therefore does not control the good or service before it is provided to a customer) include the following:
  1. Another party is primarily responsible for fulfilling the contract.
  2. The entity does not have inventory risk before or after the goods have been ordered by a customer, during shipping, or on return.
  3. The entity does not have discretion in establishing prices for the other party’s goods or services and, therefore, the benefit that the entity can receive from those goods or services is limited.
  4. The entity’s consideration is in the form of a commission.
  5. The entity is not exposed to credit risk for the amount receivable from a customer in exchange for the other party’s goods or services.
606-10-55-40 If another entity assumes the entity’s performance obligations and contractual rights in the contract so that the entity is no longer obliged to satisfy the performance obligation to transfer the promised good or service to the customer (that is, the entity is no longer acting as the principal), the entity should not recognize revenue for that performance obligation. Instead, the entity should evaluate whether to recognize revenue for satisfying a performance obligation to obtain a contract for the other party (that is, whether the entity is acting as an agent).
> > Customer Options for Additional Goods or Services
606-10-55-41 Customer options to acquire additional goods or services for free or at a discount come in many forms, including sales incentives, customer award credits (or points), contract renewal options, or other discounts on future goods or services.
606-10-55-42 If, in a contract, an entity grants a customer the option to acquire additional goods or services, that option gives rise to a performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into that contract (for example, a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer in that geographical area or market). If the option provides a material right to the customer, the customer in effect pays the entity in advance for future goods or services, and the entity recognizes revenue when those future goods or services are transferred or when the option expires.
606-10-55-43 If a customer has the option to acquire an additional good or service at a price that would reflect the standalone selling price for that good or service, that option does not provide the customer with a material right even if the option can be exercised only by entering into a previous contract. In those cases, the entity has made a marketing offer that it should account for in accordance with the guidance in this Topic only when the customer exercises the option to purchase the additional goods or services.
606-10-55-44 Paragraph 606-10-32-29 requires an entity to allocate the transaction price to performance obligations on a relative standalone selling price basis. If the standalone selling price for a customer’s option to acquire additional goods or services is not directly observable, an entity should estimate it. That estimate should reflect the discount that the customer would obtain when exercising the option, adjusted for both of the following:
  1. Any discount that the customer could receive without exercising the option
  2. The likelihood that the option will be exercised.
606-10-55-45 If a customer has a material right to acquire future goods or services and those goods or services are similar to the original goods or services in the contract and are provided in accordance with the terms of the original contract, then an entity may, as a practical alternative to estimating the standalone selling price of the option, allocate the transaction price to the optional goods or services by reference to the goods or services expected to be provided and the corresponding expected consideration. Typically, those types of options are for contract renewals.
> > Customers’ Unexercised Rights
606-10-55-46 In accordance with paragraph 606-10-45-2, upon receipt of a prepayment from a customer, an entity should recognize a contract liability in the amount of the prepayment for its performance obligation to transfer, or to stand ready to transfer, goods or services in the future. An entity should derecognize that contract liability (and recognize revenue) when it transfers those goods or services and, therefore, satisfies its performance obligation.
606-10-55-47 A customer’s nonrefundable prepayment to an entity gives the customer a right to receive a good or service in the future (and obliges the entity to stand ready to transfer a good or service). However, customers may not exercise all of their contractual rights. Those unexercised rights are often referred to as breakage.
606-10-55-48 If an entity expects to be entitled to a breakage amount in a contract liability, the entity should recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer. If an entity does not expect to be entitled to a breakage amount, the entity should recognize the expected breakage amount as revenue when the likelihood of the customer exercising its remaining rights becomes remote. To determine whether an entity expects to be entitled to a breakage amount, the entity should consider the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration.
606-10-55-49 An entity should recognize a liability (and not revenue) for any consideration received that is attributable to a customer’s unexercised rights for which the entity is required to remit to another party, for example, a government entity in accordance with applicable unclaimed property laws.
> > Nonrefundable Upfront Fees (and Some Related Costs)
606-10-55-50 In some contracts, an entity charges a customer a nonrefundable upfront fee at or near contract inception. Examples include joining fees in health club membership contracts, activation fees in telecommunication contracts, setup fees in some services contracts, and initial fees in some supply contracts.
606-10-55-51 To identify performance obligations in such contracts, an entity should assess whether the fee relates to the transfer of a promised good or service. In many cases, even though a nonrefundable upfront fee relates to an activity that the entity is required to undertake at or near contract inception to fulfill the contract, that activity does not result in the transfer of a promised good or service to the customer (see paragraph 606-10-25-17). Instead, the upfront fee is an advance payment for future goods or services and, therefore, would be recognized as revenue when those future goods or services are provided. The revenue recognition period would extend beyond the initial contractual period if the entity grants the customer the option to renew the contract and that option provides the customer with a material right as described in paragraph 606-10-55-42.
606-10-55-52 If the nonrefundable upfront fee relates to a good or service, the entity should evaluate whether to account for the good or service as a separate performance obligation in accordance with paragraphs 606-10-25-14 through 25-22.
606-10-55-53 An entity may charge a nonrefundable fee in part as compensation for costs incurred in setting up a contract (or other administrative tasks as described in paragraph 606-10-25-17). If those setup activities do not satisfy a performance obligation, the entity should disregard those activities (and related costs) when measuring progress in accordance with paragraph 606-10-55-21. That is because the costs of setup activities do not depict the transfer of services to the customer. The entity should assess whether costs incurred in setting up a contract have resulted in an asset that should be recognized in accordance with paragraph 340-40-25-5.
> > Licensing
606-10-55-54 A license establishes a customer’s rights to the intellectual property of an entity. Licenses of intellectual property may include, but are not limited to, any of the following:
  1. Software and technology
  2. Motion pictures, music, and other forms of media and entertainment
  3. Franchises
  4. Patents, trademarks, and copyrights.
606-10-55-55 In addition to a promise to grant a license to a customer, an entity may also promise to transfer other goods or services to the customer. Those promises may be explicitly stated in the contract or implied by an entity’s customary business practices, published policies, or specific statements (see paragraph 606-10-25-16). As with other types of contracts, when a contract with a customer includes a promise to grant a license in addition to other promised goods or services, an entity applies paragraphs 606-10-25-14 through 25-22 to identify each of the performance obligations in the contract.
606-10-55-56 If the promise to grant a license is not distinct from other promised goods or services in the contract in accordance with paragraphs 606-10-25-18 through 25-22, an entity should account for the promise to grant a license and those other promised goods or services together as a single performance obligation. Examples of licenses that are not distinct from other goods or services promised in the contract include the following:
  1. A license that forms a component of a tangible good and that is integral to the functionality of the good
  2. A license that the customer can benefit from only in conjunction with a related service (such as an online service provided by the entity that enables, by granting a license, the customer to access content).
606-10-55-57 If the license is not distinct, an entity should apply paragraphs 606-10-25-23 through 25-30 to determine whether the performance obligation (which includes the promised license) is a performance obligation that is satisfied over time or satisfied at a point in time.
606-10-55-58 If the promise to grant the license is distinct from the other promised goods or services in the contract and, therefore, the promise to grant the license is a separate performance obligation, an entity should determine whether the license transfers to a customer either at a point in time or over time. In making this determination, an entity should consider whether the nature of the entity’s promise in granting the license to a customer is to provide the customer with either:
  1. A right to access the entity’s intellectual property as it exists throughout the license period
  2. A right to use the entity’s intellectual property as it exists at the point in time at which the license is granted.
> > > Determining the Nature of the Entity’s Promise
606-10-55-59 To determine whether an entity’s promise to grant a license provides a customer with either a right to access an entity’s intellectual property or a right to use an entity’s intellectual property, an entity should consider whether a customer can direct the use of, and obtain substantially all of the remaining benefits from, a license at the point in time at which the license is granted. A customer cannot direct the use of, and obtain substantially all of the remaining benefits from, a license at the point in time at which the license is granted if the intellectual property to which the customer has rights changes throughout the license period. The intellectual property will change (and thus affect the entity’s assessment of when the customer controls the license) when the entity continues to be involved with its intellectual property and the entity undertakes activities that significantly affect the intellectual property to which the customer has rights. In these cases, the license provides the customer with a right to access the entity’s intellectual property (see paragraph 606-10-55-60). In contrast, a customer can direct the use of, and obtain substantially all of the remaining benefits from, the license at the point in time at which the license is granted if the intellectual property to which the customer has rights will not change (see paragraph 606-10-55-63). In those cases, any activities undertaken by the entity merely change its own asset (that is, the underlying intellectual property), which may affect the entity’s ability to provide future licenses; however, those activities would not affect the determination of what the license provides or what the customer controls.
606-10-55-60 The nature of an entity’s promise in granting a license is a promise to provide a right to access the entity’s intellectual property if all of the following criteria are met:
  1. The contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property to which the customer has rights (see paragraph 606-10-55-61).
  2. The rights granted by the license directly expose the customer to any positive or negative effects of the entity’s activities identified in paragraph 606-10-55-60(a).
  3. Those activities do not result in the transfer of a good or a service to the customer as those activities occur (see paragraph 606-10-25-17).
606-10-55-61 Factors that may indicate that a customer could reasonably expect that an entity will undertake activities that significantly affect the intellectual property include the entity’s customary business practices, published policies, or specific statements. Although not determinative, the existence of a shared economic interest (for example, a sales-based royalty) between the entity and the customer related to the intellectual property to which the customer has rights may also indicate that the customer could reasonably expect that the entity will undertake such activities.
606-10-55-62 If the criteria in paragraph 606-10-55-60 are met, an entity should account for the promise to grant a license as a performance obligation satisfied over time because the customer will simultaneously receive and consume the benefit from the entity’s performance of providing access to its intellectual property as the performance occurs (see paragraph 606-10-25-27(a)). An entity should apply paragraphs 606-10-25-31 through 25-37 to select an appropriate method to measure its progress toward complete satisfaction of that performance obligation to provide access.
606-10-55-63 If the criteria in paragraph 606-10-55-60 are not met, the nature of an entity’s promise is to provide a right to use the entity’s intellectual property as that intellectual property exists (in terms of form and functionality) at the point in time at which the license is granted to the customer. This means that the customer can direct the use of, and obtain substantially all of the remaining benefits from, the license at the point in time at which the license transfers. An entity should account for the promise to provide a right to use the entity’s intellectual property as a performance obligation satisfied at a point in time. An entity should apply paragraph 606-10-25-30 to determine the point in time at which the license transfers to the customer. However, revenue cannot be recognized for a license that provides a right to use the entity’s intellectual property before the beginning of the period during which the customer is able to use and benefit from the license. For example, if a software license period begins before an entity provides (or otherwise makes available) to the customer a code that enables the customer to immediately use the software, the entity would not recognize revenue before that code has been provided (or otherwise made available).
606-10-55-64 An entity should disregard the following factors when determining whether a license provides a right to access the entity’s intellectual property or a right to use the entity’s intellectual property:
  1. Restrictions of time, geographical region, or use—Those restrictions define the attributes of the promised license, rather than define whether the entity satisfies its performance obligation at a point in time or over time.
  2. Guarantees provided by the entity that it has a valid patent to intellectual property and that it will defend that patent from unauthorized use—A promise to defend a patent right is not a performance obligation because the act of defending a patent protects the value of the entity’s intellectual property assets and provides assurance to the customer that the license transferred meets the specifications of the license promised in the contract.
> > > Sales-Based or Usage-Based Royalties
606-10-55-65 Notwithstanding the guidance in paragraphs 606-10-32-11 through 32-14, an entity should recognize revenue for a sales-based or usage-based royalty promised in exchange for a license of intellectual property only when (or as) the later of the following events occurs:
  1. The subsequent sale or usage occurs.
  2. The performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied (or partially satisfied).
> > Repurchase Agreements
606-10-55-66 A repurchase agreement is a contract in which an entity sells an asset and also promises or has the option (either in the same contract or in another contract) to repurchase the asset. The repurchased asset may be the asset that was originally sold to the customer, an asset that is substantially the same as that asset, or another asset of which the asset that was originally sold is a component.
606-10-55-67 Repurchase agreements generally come in three forms:
  1. An entity’s obligation to repurchase the asset (a forward)
  2. An entity’s right to repurchase the asset (a call option)
  3. An entity’s obligation to repurchase the asset at the customer’s request (a put option).
> > > A Forward or a Call Option
606-10-55-68 If an entity has an obligation or a right to repurchase the asset (a forward or a call option), a customer does not obtain control of the asset because the customer is limited in its ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset even though the customer may have physical possession of the asset. Consequently, the entity should account for the contract as either of the following:
  1. A lease in accordance with Topic 840 on leases, if the entity can or must repurchase the asset for an amount that is less than the original selling price of the asset unless the contract is part of a sale-leaseback transaction. If the contract is part of a sale-leaseback transaction, the entity should account for the contract as a financing arrangement and not as a sale-leaseback in accordance with Subtopic 840-40.
  2. A financing arrangement in accordance with paragraph 606-10-55-70, if the entity can or must repurchase the asset for an amount that is equal to or more than the original selling price of the asset.
606-10-55-69 When comparing the repurchase price with the selling price, an entity should consider the time value of money.
606-10-55-70 If the repurchase agreement is a financing arrangement, the entity should continue to recognize the asset and also recognize a financial liability for any consideration received from the customer. The entity should recognize the difference between the amount of consideration received from the customer and the amount of consideration to be paid to the customer as interest and, if applicable, as processing or holding costs (for example, insurance).
606-10-55-71 If the option lapses unexercised, an entity should derecognize the liability and recognize revenue.
> > > A Put Option
606-10-55-72 If an entity has an obligation to repurchase the asset at the customer’s request (a put option) at a price that is lower than the original selling price of the asset, the entity should consider at contract inception whether the customer has a significant economic incentive to exercise that right. The customer’s exercising of that right results in the customer effectively paying the entity consideration for the right to use a specified asset for a period of time. Therefore, if the customer has a significant economic incentive to exercise that right, the entity should account for the agreement as a lease in accordance with Topic 840 on leases unless the contract is part of a sale-leaseback transaction. If the contract is part of a sale-leaseback transaction, the entity should account for the contract as a financing arrangement and not as a sale-leaseback in accordance with Subtopic 840-40.
606-10-55-73 To determine whether a customer has a significant economic incentive to exercise its right, an entity should consider various factors, including the relationship of the repurchase price to the expected market value of the asset at the date of the repurchase and the amount of time until the right expires. For example, if the repurchase price is expected to significantly exceed the market value of the asset, this may indicate that the customer has a significant economic incentive to exercise the put option.
606-10-55-74 If the customer does not have a significant economic incentive to exercise its right at a price that is lower than the original selling price of the asset, the entity should account for the agreement as if it were the sale of a product with a right of return as described in paragraphs 606-10-55-22 through 55-29.
606-10-55-75 If the repurchase price of the asset is equal to or greater than the original selling price and is more than the expected market value of the asset, the contract is in effect a financing arrangement and, therefore, should be accounted for as described in paragraph 606-10-55-70.
606-10-55-76 If the repurchase price of the asset is equal to or greater than the original selling price and is less than or equal to the expected market value of the asset, and the customer does not have a significant economic incentive to exercise its right, then the entity should account for the agreement as if it were the sale of a product with a right of return as described in paragraphs 606-10-55-22 through 55-29.
606-10-55-77 When comparing the repurchase price with the selling price, an entity should consider the time value of money.
606-10-55-78 If the option lapses unexercised, an entity should derecognize the liability and recognize revenue.
> > Consignment Arrangements
606-10-55-79 When an entity delivers a product to another party (such as a dealer or a distributor) for sale to end customers, the entity should evaluate whether that other party has obtained control of the product at that point in time. A product that has been delivered to another party may be held in a consignment arrangement if that other party has not obtained control of the product. Accordingly, an entity should not recognize revenue upon delivery of a product to another party if the delivered product is held on consignment.
606-10-55-80 Indicators that an arrangement is a consignment arrangement include, but are not limited to, the following:
  1. The product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the dealer, or until a specified period expires.
  2. The entity is able to require the return of the product or transfer the product to a third party (such as another dealer).
  3. The dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit).
> > Bill-and-Hold Arrangements
606-10-55-81 A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point in time in the future. For example, a customer may request an entity to enter into such a contract because of the customer’s lack of available space for the product or because of delays in the customer’s production schedules.
606-10-55-82 An entity should determine when it has satisfied its performance obligation to transfer a product by evaluating when a customer obtains control of that product (see paragraph 606-10-25-30). For some contracts, control is transferred either when the product is delivered to the customer’s site or when the product is shipped, depending on the terms of the contract (including delivery and shipping terms). However, for some contracts, a customer may obtain control of a product even though that product remains in an entity’s physical possession. In that case, the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the product even though it has decided not to exercise its right to take physical possession of that product. Consequently, the entity does not control the product. Instead, the entity provides custodial services to the customer over the customer’s asset.
606-10-55-83 In addition to applying the guidance in paragraph 606-10-25-30, for a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria must be met:
  1. The reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement).
  2. The product must be identified separately as belonging to the customer.
  3. The product currently must be ready for physical transfer to the customer.
  4. The entity cannot have the ability to use the product or to direct it to another customer.
606-10-55-84 If an entity recognizes revenue for the sale of a product on a bill-and-hold basis, the entity should consider whether it has remaining performance obligations (for example, for custodial services) in accordance with paragraphs 606-10-25-14 through 25-22 to which the entity should allocate a portion of the transaction price in accordance with paragraphs 606-10-32-28 through 32-41.
> > Customer Acceptance
606-10-55-85 In accordance with paragraph 606-10-25-30(e), a customer’s acceptance of an asset may indicate that the customer has obtained control of the asset. Customer acceptance clauses allow a customer to cancel a contract or require an entity to take remedial action if a good or service does not meet agreed-upon specifications. An entity should consider such clauses when evaluating when a customer obtains control of a good or service.
606-10-55-86 If an entity can objectively determine that control of a good or service has been transferred to the customer in accordance with the agreed-upon specifications in the contract, then customer acceptance is a formality that would not affect the entity’s determination of when the customer has obtained control of the good or service. For example, if the customer acceptance clause is based on meeting specified size and weight characteristics, an entity would be able to determine whether those criteria have been met before receiving confirmation of the customer’s acceptance. The entity’s experience with contracts for similar goods or services may provide evidence that a good or service provided to the customer is in accordance with the agreed-upon specifications in the contract. If revenue is recognized before customer acceptance, the entity still must consider whether there are any remaining performance obligations (for example, installation of equipment) and evaluate whether to account for them separately.
606-10-55-87 However, if an entity cannot objectively determine that the good or service provided to the customer is in accordance with the agreed-upon specifications in the contract, then the entity would not be able to conclude that the customer has obtained control until the entity receives the customer’s acceptance. That is because, in that circumstance the entity cannot determine that the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the good or service.
606-10-55-88 If an entity delivers products to a customer for trial or evaluation purposes and the customer is not committed to pay any consideration until the trial period lapses, control of the product is not transferred to the customer until either the customer accepts the product or the trial period lapses.
> > Disclosure of Disaggregated Revenue
606-10-55-89 Paragraph 606-10-50-5 requires an entity to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Consequently, the extent to which an entity’s revenue is disaggregated for the purposes of this disclosure depends on the facts and circumstances that pertain to the entity’s contracts with customers. Some entities may need to use more than one type of category to meet the objective in paragraph 606-10-50-5 for disaggregating revenue. Other entities may meet the objective by using only one type of category to disaggregate revenue.
606-10-55-90 When selecting the type of category (or categories) to use to disaggregate revenue, an entity should consider how information about the entity’s revenue has been presented for other purposes, including all of the following:
  1. Disclosures presented outside the financial statements (for example, in earnings releases, annual reports, or investor presentations)
  2. Information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments
  3. Other information that is similar to the types of information identified in (a) and (b) and that is used by the entity or users of the entity’s financial statements to evaluate the entity’s financial performance or make resource allocation decisions.
606-10-55-91 Examples of categories that might be appropriate include, but are not limited to, all of the following:
  1. Type of good or service (for example, major product lines)
  2. Geographical region (for example, country or region)
  3. Market or type of customer (for example, government and nongovernment customers)
  4. Type of contract (for example, fixed-price and time-and-materials contracts)
  5. Contract duration (for example, short-term and long-term contracts)
  6. Timing of transfer of goods or services (for example, revenue from goods or services transferred to customers at a point in time and revenue from goods or services transferred over time)
  7. Sales channels (for example, goods sold directly to consumers and goods sold through intermediaries).
> Illustrations
606-10-55-92 These Examples portray hypothetical situations illustrating how an entity might apply some of the guidance in this Topic to particular aspects of a contract with a customer on the basis of the limited facts presented. The analysis in each Example is not intended to represent the only manner in which the guidance could be applied, nor are the Examples intended to only apply to the specific industry illustrated. Although some aspects of the Examples may be present in actual fact patterns, all relevant facts and circumstances of a particular fact pattern would need to be evaluated when applying the guidance in this Topic.
606-10-55-93 The Examples are organized as follows:
a. Identifying the Contract
Example 1—Collectibility of the Consideration
Example 2—Consideration Is Not the Stated Price—Implicit Price Concession Example 3—Implicit Price Concession Example 4—Reassessing the Criteria for Identifying a Contract
b. Contract Modifications
Example 5—Modification of a Contract for Goods
Example 6—Change in the Transaction Price after a Contract Modification Example 7—Modification of a Services Contract Example 8—Modification Resulting in a Cumulative Catch-Up Adjustment to Revenue Example 9—Unapproved Change in Scope and Price
c. Identifying Performance Obligations
Example 10—Goods and Services Are Not Distinct
Example 11—Determining Whether Goods or Services Are Distinct Example 12—Explicit and Implicit Promises in a Contract
d. Performance Obligations Satisfied Over Time
Example 13—Customer Simultaneously Receives and Consumes the Benefits
Example 14—Assessing Alternative Use and Right to Payment Example 15—Asset Has No Alternative Use to the Entity Example 16—Enforceable Right to Payment for Performance Completed to Date Example 17—Assessing Whether a Performance Obligation Is Satisfied at a Point in Time or Over Time
e. Measuring Progress toward Complete Satisfaction of a Performance Obligation
Example 18—Measuring Progress When Making Goods or Services Available
Example 19—Uninstalled Materials
f. Variable Consideration
Example 20—Penalty Gives Rise to Variable Consideration
Example 21—Estimating Variable Consideration
g. Constraining Estimates of Variable Consideration
Example 22—Right of Return
Example 23—Price Concessions Example 24—Volume Discount Incentive Example 25—Management Fees Subject to the Constraint
h. The Existence of a Significant Financing Component in the Contract
Example 26—Significant Financing Component and Right of Return
Example 27—Withheld Payments on a Long-Term Contract Example 28—Determining the Discount Rate Example 29—Advance Payment and Assessment of the Discount Rate Example 30—Advance Payment
i. Noncash Consideration
Example 31—Entitlement to Noncash Consideration
j. Consideration Payable to a Customer
Example 32—Consideration Payable to a Customer
k. Allocating the Transaction Price to Performance Obligations
Example 33—Allocation Methodology
Example 34—Allocating a Discount Example 35—Allocation of Variable Consideration
l. Contract Costs
Example 36—Incremental Costs of Obtaining a Contract
Example 37—Costs That Give Rise to an Asset
m. Presentation
Example 38—Contract Liability and Receivable
Example 39—Contract Asset Recognized for the Entity’s Performance Example 40—Receivable Recognized for the Entity’s Performance
n. Disclosure
Example 41—Disaggregation of Revenue Quantitative Disclosure
Example 42—Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations Example 43—Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations—Qualitative
o. Warranties
Example 44—Warranties
p. Principal versus Agent Considerations
Example 45—Arranging for the Provision of Goods or Services (Entity Is an Agent)
Example 46—Promise to Provide Goods or Services (Entity Is a Principal) Example 47—Promise to Provide Goods or Services (Entity Is a Principal) Example 48—Arranging for the Provision of Goods or Services (Entity Is an Agent)
q. Customer Options for Additional Goods or Services
Example 49—Option That Provides the Customer with a Material Right (Discount Voucher)
Example 50—Option That Does Not Provide the Customer with a Material Right (Additional Goods or Services) Example 51—Option That Provides the Customer with a Material Right (Renewal Option) Example 52—Customer Loyalty Program
r. Nonrefundable Upfront Fees
Example 53—Nonrefundable Upfront Fee
s. Licensing
Example 54—Right to Use Intellectual Property
Example 55—License of Intellectual Property Example 56—Identifying a Distinct License Example 57—Franchise Rights Example 58—Access to Intellectual Property Example 59—Right to Use Intellectual Property Example 60—Access to Intellectual Property Example 61—Access to Intellectual Property
t. Repurchase Agreements
Example 62—Repurchase Agreements
u. Bill-and-Hold Arrangements
Example 63—Bill-and-Hold Arrangement
> > Identifying the Contract
606-10-55-94 Examples 1–4 illustrate the guidance in paragraphs 606-10-25-1 through 25-8 on identifying the contract. In addition, the following guidance is illustrated in these Examples:
  1. The interaction of paragraph 606-10-25-1 with paragraphs 606-10-32-2 and 606-10-32-7 on estimating variable consideration (Examples 2 and 3)
  2. Paragraph 606-10-55-65 on consideration in the form of sales-based or usage-based royalties on licenses of intellectual property (Example 4).
> > > Example 1—Collectibility of the Consideration
606-10-55-95 An entity, a real estate developer, enters into a contract with a customer for the sale of a building for $1 million. The customer intends to open a restaurant in the building. The building is located in an area where new restaurants face high levels of competition, and the customer has little experience in the restaurant industry.
606-10-55-96 The customer pays a nonrefundable deposit of $50,000 at inception of the contract and enters into a long-term financing agreement with the entity for the remaining 95 percent of the promised consideration. The financing arrangement is provided on a nonrecourse basis, which means that if the customer defaults, the entity can repossess the building but cannot seek further compensation from the customer, even if the collateral does not cover the full value of the amount owed. The entity’s cost of the building is $600,000. The customer obtains control of the building at contract inception.
606-10-55-97 In assessing whether the contract meets the criteria in paragraph 606-10-25-1, the entity concludes that the criterion in paragraph 606-10-25-1(e) is not met because it is not probable that the entity will collect the consideration to which it is entitled in exchange for the transfer of the building. In reaching this conclusion, the entity observes that the customer’s ability and intention to pay may be in doubt because of the following factors:
  1. The customer intends to repay the loan (which has a significant balance) primarily from income derived from its restaurant business (which is a business facing significant risks because of high competition in the industry and the customer’s limited experience).
  2. The customer lacks other income or assets that could be used to repay the loan.
  3. The customer’s liability under the loan is limited because the loan is nonrecourse.
606-10-55-98 Because the criteria in paragraph 606-10-25-1 are not met, the entity applies paragraphs 606-10-25-7 through 25-8 to determine the accounting for the nonrefundable deposit of $50,000. The entity observes that none of the events described in paragraph 606-10-25-7 have occurred—that is, the entity has not received substantially all of the consideration and it has not terminated the contract. Consequently, in accordance with paragraph 606-10-25-8, the entity accounts for the nonrefundable $50,000 payment as a deposit liability. The entity continues to account for the initial deposit, as well as any future payments of principal and interest, as a deposit liability and does not derecognize the real estate asset. Also, the entity does not recognize a receivable until such time that the entity concludes that the criteria in paragraph 606-10-25-1 are met (that is, the entity is able to conclude that it is probable that the entity will collect the consideration) or one of the events in paragraph 606-10-25-7 has occurred. The entity continues to assess the contract in accordance with paragraph 606-10-25-6 to determine whether the criteria in paragraph 606-10-25-1 are subsequently met or whether the events in paragraph 606-10-25-7 have occurred.
> > > Example 2—Consideration Is Not the Stated Price—Implicit Price Concession
606-10-55-99 An entity sells 1,000 units of a prescription drug to a customer for promised consideration of $1 million. This is the entity’s first sale to a customer in a new region, which is experiencing significant economic difficulty. Thus, the entity expects that it will not be able to collect from the customer the full amount of the promised consideration. Despite the possibility of not collecting the full amount, the entity expects the region’s economy to recover over the next two to three years and determines that a relationship with the customer could help it to forge relationships with other potential customers in the region.
606-10-55-100 When assessing whether the criterion in paragraph 606-10-25-1(e) is met, the entity also considers paragraphs 606-10-32-2 and 606-10-32-7(b). Based on the assessment of the facts and circumstances, the entity determines that it expects to provide a price concession and accept a lower amount of consideration from the customer. Accordingly, the entity concludes that the transaction price is not $1 million and, therefore, the promised consideration is variable. The entity estimates the variable consideration and determines that it expects to be entitled to $400,000.
606-10-55-101 The entity considers the customer’s ability and intention to pay the consideration and concludes that even though the region is experiencing economic difficulty it is probable that it will collect $400,000 from the customer. Consequently, the entity concludes that the criterion in paragraph 606-10-25-1(e) is met based on an estimate of variable consideration of $400,000. In addition, based on an evaluation of the contract terms and other facts and circumstances, the entity concludes that the other criteria in paragraph 606-10-25-1 are also met. Consequently, the entity accounts for the contract with the customer in accordance with the guidance in this Topic.
> > > Example 3—Implicit Price Concession
606-10-55-102 An entity, a hospital, provides medical services to an uninsured patient in the emergency room. The entity has not previously provided medical services to this patient but is required by law to provide medical services to all emergency room patients. Because of the patient’s condition upon arrival at the hospital, the entity provides the services immediately and, therefore, before the entity can determine whether the patient is committed to perform its obligations under the contract in exchange for the medical services provided. Consequently, the contract does not meet the criteria in paragraph 606-10-25-1, and in accordance with paragraph 606-10-25-6, the entity will continue to assess its conclusion based on updated facts and circumstances.
606-10-55-103 After providing services, the entity obtains additional information about the patient including a review of the services provided, standard rates for such services, and the patient’s ability and intention to pay the entity for the services provided. During the review, the entity notes its standard rate for the services provided in the emergency room is $10,000. The entity also reviews the patient’s information and to be consistent with its policies designates the patient to a customer class based on the entity’s assessment of the patient’s ability and intention to pay. The entity determines that the services provided are not charity care based on the entity’s internal policy and the patient’s income level. In addition, the patient does not qualify for governmental subsidies.
606-10-55-104 Before reassessing whether the criteria in paragraph 606-10-25-1 have been met, the entity considers paragraphs 606-10-32-2 and 606-10-32-7(b). Although the standard rate for the services is $10,000 (which may be the amount invoiced to the patient), the entity expects to accept a lower amount of consideration in exchange for the services. Accordingly, the entity concludes that the transaction price is not $10,000 and, therefore, the promised consideration is variable. The entity reviews its historical cash collections from this customer class and other relevant information about the patient. The entity estimates the variable consideration and determines that it expects to be entitled to $1,000.
606-10-55-105 In accordance with paragraph 606-10-25-1(e), the entity evaluates the patient’s ability and intention to pay (that is, the credit risk of the patient). On the basis of its collection history from patients in this customer class, the entity concludes it is probable that the entity will collect $1,000 (which is the estimate of variable consideration). In addition, on the basis of an assessment of the contract terms and other facts and circumstances, the entity concludes that the other criteria in paragraph 606-10-25-1 also are met. Consequently, the entity accounts for the contract with the patient in accordance with the guidance in this Topic.
> > > Example 4—Reassessing the Criteria for Identifying a Contract
606-10-55-106 An entity licenses a patent to a customer in exchange for a usage-based royalty. At contract inception, the contract meets all the criteria in paragraph 606-10-25-1, and the entity accounts for the contract with the customer in accordance with the guidance in this Topic. The entity recognizes revenue when the customer’s subsequent usage occurs in accordance with paragraph 606-10-55-65.
606-10-55-107 Throughout the first year of the contract, the customer provides quarterly reports of usage and pays within the agreed-upon period.
606-10-55-108 During the second year of the contract, the customer continues to use the entity’s patent, but the customer’s financial condition declines. The customer’s current access to credit and available cash on hand are limited. The entity continues to recognize revenue on the basis of the customer’s usage throughout the second year. The customer pays the first quarter’s royalties but makes nominal payments for the usage of the patent in quarters 2–4. The entity accounts for any impairment of the existing receivable in accordance with Topic 310 on receivables.
606-10-55-109 During the third year of the contract, the customer continues to use the entity’s patent. However, the entity learns that the customer has lost access to credit and its major customers and thus the customer’s ability to pay significantly deteriorates. The entity therefore concludes that it is unlikely that the customer will be able to make any further royalty payments for ongoing usage of the entity’s patent. As a result of this significant change in facts and circumstances, in accordance with paragraph 606-10-25-5, the entity reassesses the criteria in paragraph 606-10-25-1 and determines that they are not met because it is no longer probable that the entity will collect the consideration to which it will be entitled. Accordingly, the entity does not recognize any further revenue associated with the customer’s future usage of its patent. The entity accounts for any impairment of the existing receivable in accordance with Topic 310 on receivables.
> > Contract Modifications
606-10-55-110 Examples 5–9 illustrate the guidance in paragraphs 606-10-25-10 through 25-13 on contract modifications. In addition, the following guidance is illustrated in these Examples:
  1. Paragraphs 606-10-25-14 through 25-22 on identifying performance obligations (Examples 7 and 8)
  2. Paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration (Examples 6, 8, and 9)
  3. Paragraphs 606-10-32-42 through 32-45 on changes in the transaction price (Example 6).
> > > Example 5—Modification of a Contract for Goods
606-10-55-111 An entity promises to sell 120 products to a customer for $12,000 ($100 per product). The products are transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products were not included in the initial contract.
> > > > Case A—Additional Products for a Price That Reflects the Standalone Selling Price
606-10-55-112 When the contract is modified, the price of the contract modification for the additional 30 products is an additional $2,850 or $95 per product. The pricing for the additional products reflects the standalone selling price of the products at the time of the contract modification, and the additional products are distinct (in accordance with paragraph 606-10-25-19) from the original products.
606-10-55-113 In accordance with paragraph 606-10-25-12, the contract modification for the additional 30 products is, in effect, a new and separate contract for future products that does not affect the accounting for the existing contract. The entity recognizes revenue of $100 per product for the 120 products in the original contract and $95 per product for the 30 products in the new contract.
> > > > Case B—Additional Products for a Price That Does Not Reflect the Standalone Selling Price
606-10-55-114 During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of $80 per product. However, the customer discovers that the initial 60 products transferred to the customer contained minor defects that were unique to those delivered products. The entity promises a partial credit of $15 per product to compensate the customer for the poor quality of those products. The entity and the customer agree to incorporate the credit of $900 ($15 credit × 60 products) into the price that the entity charges for the additional 30 products. Consequently, the contract modification specifies that the price of the additional 30 products is $1,500 or $50 per product. That price comprises the agreed-upon price for the additional 30 products of $2,400, or $80 per product, less the credit of $900.
606-10-55-115 At the time of modification, the entity recognizes the $900 as a reduction of the transaction price and, therefore, as a reduction of revenue for the initial 60 products transferred. In accounting for the sale of the additional 30 products, the entity determines that the negotiated price of $80 per product does not reflect the standalone selling price of the additional products. Consequently, the contract modification does not meet the conditions in paragraph 606-10-25-12 to be accounted for as a separate contract. Because the remaining products to be delivered are distinct from those already transferred, the entity applies the guidance in paragraph 606-10-25-13(a) and accounts for the modification as a termination of the original contract and the creation of a new contract.
606-10-55-116 Consequently, the amount recognized as revenue for each of the remaining products is a blended price of $93.33 {[($100 × 60 products not yet transferred under the original contract) + ($80 × 30 products to be transferred under the contract modification)] ÷ 90 remaining products}.
> > > Example 6—Change in the Transaction Price after a Contract Modification
606-10-55-117 On July 1, 20X0, an entity promises to transfer two distinct products to a customer. Product X transfers to the customer at contract inception and Product Y transfers on March 31, 20X1. The consideration promised by the customer includes fixed consideration of $1,000 and variable consideration that is estimated to be $200. The entity includes its estimate of variable consideration in the transaction price because it concludes that it is probable that a significant reversal in cumulative revenue recognized will not occur when the uncertainty is resolved.
606-10-55-118 The transaction price of $1,200 is allocated equally to the performance obligation for Product X and the performance obligation for Product Y. This is because both products have the same standalone selling prices and the variable consideration does not meet the criteria in paragraph 606-10-32-40 that requires allocation of the variable consideration to one but not both of the performance obligations.
606-10-55-119 When Product X transfers to the customer at contract inception, the entity recognizes revenue of $600.
606-10-55-120 On November 30, 20X0, the scope of the contract is modified to include the promise to transfer Product Z (in addition to the undelivered Product Y) to the customer on June 30, 20X1, and the price of the contract is increased by $300 (fixed consideration), which does not represent the standalone selling price of Product Z. The standalone selling price of Product Z is the same as the standalone selling prices of Products X and Y.
606-10-55-121 The entity accounts for the modification as if it were the termination of the existing contract and the creation of a new contract. This is because the remaining Products Y and Z are distinct from Product X, which had transferred to the customer before the modification, and the promised consideration for the additional Product Z does not represent its standalone selling price. Consequently, in accordance with paragraph 606-10-25-13(a), the consideration to be allocated to the remaining performance obligations comprises the consideration that had been allocated to the performance obligation for Product Y (which is measured at an allocated transaction price amount of $600) and the consideration promised in the modification (fixed consideration of $300). The transaction price for the modified contract is $900, and that amount is allocated equally to the performance obligation for Product Y and the performance obligation for Product Z (that is, $450 is allocated to each performance obligation).
606-10-55-122 After the modification but before the delivery of Products Y and Z, the entity revises its estimate of the amount of variable consideration to which it expects to be entitled to $240 (rather than the previous estimate of $200). The entity concludes that the change in estimate of the variable consideration can be included in the transaction price because it is probable that a significant reversal in cumulative revenue recognized will not occur when the uncertainty is resolved. Even though the modification was accounted for as if it were the termination of the existing contract and the creation of a new contract in accordance with paragraph 606-10-25-13(a), the increase in the transaction price of $40 is attributable to variable consideration promised before the modification. Therefore, in accordance with paragraph 606-10-32-45, the change in the transaction price is allocated to the performance obligations for Product X and Product Y on the same basis as at contract inception. Consequently, the entity recognizes revenue of $20 for Product X in the period in which the change in the transaction price occurs. Because Product Y had not transferred to the customer before the contract modification, the change in the transaction price that is attributable to Product Y is allocated to the remaining performance obligations at the time of the contract modification. This is consistent with the accounting that would have been required by paragraph 606-10-25-13(a) if that amount of variable consideration had been estimated and included in the transaction price at the time of the contract modification.
606-10-55-123 The entity also allocates the $20 increase in the transaction price for the modified contract equally to the performance obligations for Product Y and Product Z. This is because the products have the same standalone selling prices and the variable consideration does not meet the criteria in paragraph 606-10-32-40 that require allocation of the variable consideration to one but not both of the performance obligations. Consequently, the amount of the transaction price allocated to the performance obligations for Product Y and Product Z increases by $10 to $460 each.
606-10-55-124 On March 31, 20X1, Product Y is transferred to the customer, and the entity recognizes revenue of $460. On June 30, 20X1, Product Z is transferred to the customer, and the entity recognizes revenue of $460.
> > > Example 7—Modification of a Services Contract
606-10-55-125 An entity enters into a three-year contract to clean a customer’s offices on a weekly basis. The customer promises to pay $100,000 per year. The standalone selling price of the services at contract inception is $100,000 per year. The entity recognizes revenue of $100,000 per year during the first 2 years of providing services. At the end of the second year, the contract is modified and the fee for the third year is reduced to $80,000. In addition, the customer agrees to extend the contract for 3 additional years for consideration of $200,000 payable in 3 equal annual installments of $66,667 at the beginning of years 4, 5, and 6. After the modification, the contract has 4 years remaining in exchange for total consideration of $280,000. The standalone selling price of the services at the beginning of the third year is $80,000 per year. The entity’s standalone selling price at the beginning of the third year, multiplied by the remaining number of years to provide services, is deemed to be an appropriate estimate of the standalone selling price of the multiyear contract (that is, the standalone selling price is 4 years × $80,000 per year = $320,000).
606-10-55-126 At contract inception, the entity assesses that each week of cleaning service is distinct in accordance with paragraph 606-10-25-19. Notwithstanding that each week of cleaning service is distinct, the entity accounts for the cleaning contract as a single performance obligation in accordance with paragraph 606-10-25-14(b). This is because the weekly cleaning services are a series of distinct services that are substantially the same and have the same pattern of transfer to the customer (the services transfer to the customer over time and use the same method to measure progress—that is, a time-based measure of progress).
606-10-55-127 At the date of the modification, the entity assesses the remaining services to be provided and concludes that they are distinct. However, the amount of remaining consideration to be paid ($280,000) does not reflect the standalone selling price of the services to be provided ($320,000).
606-10-55-128 Consequently, the entity accounts for the modification in accordance with paragraph 606-10-25-13(a) as a termination of the original contract and the creation of a new contract with consideration of $280,000 for 4 years of cleaning service. The entity recognizes revenue of $70,000 per year ($280,000 ÷ 4 years) as the services are provided over the remaining 4 years.
> > > Example 8—Modification Resulting in a Cumulative Catch-Up Adjustment to Revenue
606-10-55-129 An entity, a construction company, enters into a contract to construct a commercial building for a customer on customer-owned land for promised consideration of $1 million and a bonus of $200,000 if the building is completed within 24 months. The entity accounts for the promised bundle of goods and services as a single performance obligation satisfied over time in accordance with paragraph 606-10-25-27(b) because the customer controls the building during construction. At the inception of the contract, the entity expects the following:
606-10-55-130 At contract inception, the entity excludes the $200,000 bonus from the transaction price because it cannot conclude that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Completion of the building is highly susceptible to factors outside the entity’s influence, including weather and regulatory approvals. In addition, the entity has limited experience with similar types of contracts.
606-10-55-131 The entity determines that the input measure, on the basis of costs incurred, provides an appropriate measure of progress toward complete satisfaction of the performance obligation. By the end of the first year, the entity has satisfied 60 percent of its performance obligation on the basis of costs incurred to date ($420,000) relative to total expected costs ($700,000). The entity reassesses the variable consideration and concludes that the amount is still constrained in accordance with paragraphs 606-10-32-11 through 32-13. Consequently, the cumulative revenue and costs recognized for the first year are as follows:
606-10-55-132 In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor plan of the building. As a result, the fixed consideration and expected costs increase by $150,000 and $120,000, respectively. Total potential consideration after the modification is $1,350,000 ($1,150,000 fixed consideration + $200,000 completion bonus). In addition, the allowable time for achieving the $200,000 bonus is extended by 6 months to 30 months from the original contract inception date. At the date of the modification, on the basis of its experience and the remaining work to be performed, which is primarily inside the building and not subject to weather conditions, the entity concludes that it is probable that including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative revenue recognized in accordance with paragraph 606-10-32-11 and includes the $200,000 in the transaction price. In assessing the contract modification, the entity evaluates paragraph 606-10-25-19(b) and concludes (on the basis of the factors in paragraph 606-10-25-21) that the remaining goods and services to be provided using the modified contract are not distinct from the goods and services transferred on or before the date of contract modification; that is, the contract remains a single performance obligation.
606-10-55-133 Consequently, the entity accounts for the contract modification as if it were part of the original contract (in accordance with paragraph 606-10-25-13(b)). The entity updates its measure of progress and estimates that it has satisfied 51.2 percent of its performance obligation ($420,000 actual costs incurred ÷ $820,000 total expected costs). The entity recognizes additional revenue of $91,200 [(51.2 percent complete × $1,350,000 modified transaction price) – $600,000 revenue recognized to date] at the date of the modification as a cumulative catch-up adjustment.
> > > Example 9—Unapproved Change in Scope and Price
606-10-55-134 An entity enters into a contract with a customer to construct a building on customer-owned land. The contract states that the customer will provide the entity with access to the land within 30 days of contract inception. However, the entity was not provided access until 120 days after contract inception because of storm damage to the site that occurred after contract inception. The contract specifically identifies any delay (including force majeure) in the entity’s access to customer-owned land as an event that entitles the entity to compensation that is equal to actual costs incurred as a direct result of the delay. The entity is able to demonstrate that the specific direct costs were incurred as a result of the delay in accordance with the terms of the contract and prepares a claim. The customer initially disagreed with the entity’s claim.
606-10-55-135 The entity assesses the legal basis of the claim and determines, on the basis of the underlying contractual terms, that it has enforceable rights. Consequently, it accounts for the claim as a contract modification in accordance with paragraphs 606-10-25-10 through 25-13. The modification does not result in any additional goods and services being provided to the customer. In addition, all of the remaining goods and services after the modification are not distinct and form part of a single performance obligation. Consequently, the entity accounts for the modification in accordance with paragraph 606-10-25-13(b) by updating the transaction price and the measure of progress toward complete satisfaction of the performance obligation. The entity considers the constraint on estimates of variable consideration in paragraphs 606-10-32-11 through 32-13 when estimating the transaction price.
> > Identifying Performance Obligations
606-10-55-136 Examples 10–12 illustrate the guidance in paragraphs 606-10-25-14 through 25-22 on identifying performance obligations.
> > > Example 10—Goods and Services Are Not Distinct
606-10-55-137 An entity, a contractor, enters into a contract to build a hospital for a customer. The entity is responsible for the overall management of the project and identifies various goods and services to be provided, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment, and finishing.
606-10-55-138 The promised goods and services are capable of being distinct in accordance with paragraph 606-10-25-19(a). That is, the customer can benefit from the goods and services either on their own or together with other readily available resources. This is evidenced by the fact that the entity, or competitors of the entity, regularly sells many of these goods and services separately to other customers. In addition, the customer could generate economic benefit from the individual goods and services by using, consuming, selling, or holding those goods or services.
606-10-55-139 However, the goods and services are not distinct within the context of the contract in accordance with paragraph 606-10-25-19(b) (on the basis of the factors in paragraph 606-10-25-21). That is, the entity’s promise to transfer individual goods and services in the contract are not separately identifiable from other promises in the contract. This is evidenced by the fact that the entity provides a significant service of integrating the goods and services (the inputs) into the hospital (the combined output) for which the customer has contracted.
606-10-55-140 Because both criteria in paragraph 606-10-25-19 are not met, the goods and services are not distinct. The entity accounts for all of the goods and services in the contract as a single performance obligation.
> > > Example 11—Determining Whether Goods or Services Are Distinct
> > > > Case A—Distinct Goods or Services
606-10-55-141 An entity, a software developer, enters into a contract with a customer to transfer a software license, perform an installation service, and provide unspecified software updates and technical support (online and telephone) for a two-year period. The entity sells the license, installation service, and technical support separately. The installation service includes changing the web screen for each type of user (for example, marketing, inventory management, and information technology). The installation service is routinely performed by other entities and does not significantly modify the software. The software remains functional without the updates and the technical support.
606-10-55-142 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity observes that the software is delivered before the other goods and services and remains functional without the updates and the technical support. Thus, the entity concludes that the customer can benefit from each of the goods and services either on their own or together with the other goods and services that are readily available and the criterion in paragraph 606-10-25-19(a) is met.
606-10-55-143 The entity also considers the factors in paragraph 606-10-25-21 and determines that the promise to transfer each good and service to the customer is separately identifiable from each of the other promises (thus, the criterion in paragraph 606-10-25-19(b) is met). In particular, the entity observes that the installation service does not significantly modify or customize the software itself, and, as such, the software and the installation service are separate outputs promised by the entity instead of inputs used to produce a combined output.
606-10-55-144 On the basis of this assessment, the entity identifies four performance obligations in the contract for the following goods or services:
  1. The software license
  2. An installation service
  3. Software updates
  4. Technical support.
606-10-55-145 The entity applies paragraphs 606-10-25-23 through 25-30 to determine whether each of the performance obligations for the installation service, software updates, and technical support are satisfied at a point in time or over time. The entity also assesses the nature of the entity’s promise to transfer the software license in accordance with paragraph 606-10-55-60 (see Example 54 in paragraphs 606-10-55-362 through 55-363).
> > > > Case B—Significant Customization
606-10-55-146 The promised goods and services are the same as in Case A, except that the contract specifies that, as part of the installation service, the software is to be substantially customized to add significant new functionality to enable the software to interface with other customized software applications used by the customer. The customized installation service can be provided by other entities.
606-10-55-147 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity observes that the terms of the contract result in a promise to provide a significant service of integrating the licensed software into the existing software system by performing a customized installation service as specified in the contract. In other words, the entity is using the license and the customized installation service as inputs to produce the combined output (that is, a functional and integrated software system) specified in the contract (see paragraph 606-10-25-21(a)). In addition, the software is significantly modified and customized by the service (see paragraph 606-10-25-21(b)). Although the customized installation service can be provided by other entities, the entity determines that within the context of the contract, the promise to transfer the license is not separately identifiable from the customized installation service and, therefore, the criterion in paragraph 606-10-25-19(b) (on the basis of the factors in paragraph 606-10-25-21) is not met. Thus, the software license and the customized installation service are not distinct.
606-10-55-148 As in Case A, the entity concludes that the software updates and technical support are distinct from the other promises in the contract. This is because the customer can benefit from the updates and technical support either on their own or together with the other goods and services that are readily available and because the promise to transfer the software updates and the technical support to the customer are separately identifiable from each of the other promises.
606-10-55-149 On the basis of this assessment, the entity identifies three performance obligations in the contract for the following goods or services:
  1. Customized installation service (that includes the software license)
  2. Software updates
  3. Technical support.
606-10-55-150 The entity applies paragraphs 606-10-25-23 through 25-30 to determine whether each performance obligation is satisfied at a point in time or over time.
> > > Example 12—Explicit and Implicit Promises in a Contract
606-10-55-151 An entity, a manufacturer, sells a product to a distributor (that is, its customer), who will then resell it to an end customer.
> > > > Case A—Explicit Promise of Service
606-10-55-152 In the contract with the distributor, the entity promises to provide maintenance services for no additional consideration (that is, “free”) to any party (that is, the end customer) that purchases the product from the distributor. The entity outsources the performance of the maintenance services to the distributor and pays the distributor an agreed-upon amount for providing those services on the entity’s behalf. If the end customer does not use the maintenance services, the entity is not obliged to pay the distributor.
606-10-55-153 Because the promise of maintenance services is a promise to transfer goods or services in the future and is part of the negotiated exchange between the entity and the distributor, the entity determines that the promise to provide maintenance services is a performance obligation (see paragraph 606-10-25-18(g)). The entity concludes that the promise would represent a performance obligation regardless of whether the entity, the distributor, or a third party provides the service. Consequently, the entity allocates a portion of the transaction price to the promise to provide maintenance services.
> > > > Case B—Implicit Promise of Service
606-10-55-154 The entity has historically provided maintenance services for no additional consideration (that is, “free”) to end customers that purchase the entity’s product from the distributor. The entity does not explicitly promise maintenance services during negotiations with the distributor, and the final contract between the entity and the distributor does not specify terms or conditions for those services.
606-10-55-155 However, on the basis of its customary business practice, the entity determines at contract inception that it has made an implicit promise to provide maintenance services as part of the negotiated exchange with the distributor. That is, the entity’s past practices of providing these services create valid expectations of the entity’s customers (that is, the distributor and end customers) in accordance with paragraph 606-10-25-16. Consequently, the entity identifies the promise of maintenance services as a performance obligation to which it allocates a portion of the transaction price.
> > > > Case C—Services Are Not a Performance Obligation
606-10-55-156 In the contract with the distributor, the entity does not promise to provide any maintenance services. In addition, the entity typically does not provide maintenance services, and, therefore, the entity’s customary business practices, published policies, and specific statements at the time of entering into the contract have not created an implicit promise to provide goods or services to its customers. The entity transfers control of the product to the distributor and, therefore, the contract is completed. However, before the sale to the end customer, the entity makes an offer to provide maintenance services to any party that purchases the product from the distributor for no additional promised consideration.
606-10-55-157 The promise of maintenance is not included in the contract between the entity and the distributor at contract inception. That is, in accordance with paragraph 606-10-25-16, the entity does not explicitly or implicitly promise to provide maintenance services to the distributor or the end customers. Consequently, the entity does not identify the promise to provide maintenance services as a performance obligation. Instead, the obligation to provide maintenance services is accounted for in accordance with Topic 450 on contingencies.
> > Performance Obligations Satisfied over Time
606-10-55-158 Examples 13–17 illustrate the guidance in paragraphs 606-10-25-27 through 25-29 and 606-10-55-4 through 55-15 on performance obligations satisfied over time. In addition, the following guidance is illustrated in these Examples:
  1. Paragraphs 606-10-25-27(a) and 606-10-55-5 through 55-6 on when a customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs (Examples 13 and 14)
  2. Paragraphs 606-10-25-27(c) and 606-10-25-28 through 25-29 and 606-10-55-8 through 55-15 on an entity’s performance that does not create an asset with an alternative use and an entity’s enforceable right to payment for performance completed to date (Examples 14–17)
  3. Paragraph 606-10-25-30 on performance obligations satisfied at a point in time (Example 17).
> > > Example 13—Customer Simultaneously Receives and Consumes the Benefits
606-10-55-159 An entity enters into a contract to provide monthly payroll processing services to a customer for one year.
606-10-55-160 The promised payroll processing services are accounted for as a single performance obligation in accordance with paragraph 606-10-25-14(b). The performance obligation is satisfied over time in accordance with paragraph 606-10-25-27(a) because the customer simultaneously receives and consumes the benefits of the entity’s performance in processing each payroll transaction as and when each transaction is processed. The fact that another entity would not need to reperform payroll processing services for the service that the entity has provided to date also demonstrates that the customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs. (The entity disregards any practical limitations on transferring the remaining performance obligation, including setup activities that would need to be undertaken by another entity.) The entity recognizes revenue over time by measuring its progress toward complete satisfaction of that performance obligation in accordance with paragraphs 606-10-25-31 through 25-37 and 606-10-55-16 through 55-21.
> > > Example 14—Assessing Alternative Use and Right to Payment
606-10-55-161 An entity enters into a contract with a customer to provide a consulting service that results in the entity providing a professional opinion to the customer. The professional opinion relates to facts and circumstances that are specific to the customer. If the customer were to terminate the consulting contract for reasons other than the entity’s failure to perform as promised, the contract requires the customer to compensate the entity for its costs incurred plus a 15 percent margin. The 15 percent margin approximates the profit margin that the entity earns from similar contracts.
606-10-55-162 The entity considers the criterion in paragraph 606-10-25-27(a) and the guidance in paragraphs 606-10-55-5 through 55-6 to determine whether the customer simultaneously receives and consumes the benefits of the entity’s performance. If the entity were to be unable to satisfy its obligation and the customer hired another consulting firm to provide the opinion, the other consulting firm would need to substantially reperform the work that the entity had completed to date because the other consulting firm would not have the benefit of any work in progress performed by the entity. The nature of the professional opinion is such that the customer will receive the benefits of the entity’s performance only when the customer receives the professional opinion. Consequently, the entity concludes that the criterion in paragraph 606-10-25-27(a) is not met.
606-10-55-163 However, the entity’s performance obligation meets the criterion in paragraph 606-10-25-27(c) and is a performance obligation satisfied over time because of both of the following factors:
  1. In accordance with paragraphs 606-10-25-28 and 606-10-55-8 through 55-10, the development of the professional opinion does not create an asset with alternative use to the entity because the professional opinion relates to facts and circumstances that are specific to the customer. Therefore, there is a practical limitation on the entity’s ability to readily direct the asset to another customer.
  2. In accordance with paragraphs 606-10-25-29 and 606-10-55-11 through 55-15, the entity has an enforceable right to payment for its performance completed to date for its costs plus a reasonable margin, which approximates the profit margin in other contracts.
606-10-55-164 Consequently, the entity recognizes revenue over time by measuring the progress toward complete satisfaction of the performance obligation in accordance with paragraphs 606-10-25-31 through 25-37 and 606-10-55-16 through 55-21.
> > > Example 15—Asset Has No Alternative Use to the Entity
606-10-55-165 An entity enters into a contract with a customer, a government agency, to build a specialized satellite. The entity builds satellites for various customers, such as governments and commercial entities. The design and construction of each satellite differ substantially, on the basis of each customer’s needs and the type of technology that is incorporated into the satellite.
606-10-55-166 At contract inception, the entity assesses whether its performance obligation to build the satellite is a performance obligation satisfied over time in accordance with paragraph 606-10-25-27.
606-10-55-167 As part of that assessment, the entity considers whether the satellite in its completed state will have an alternative use to the entity. Although the contract does not preclude the entity from directing the completed satellite to another customer, the entity would incur significant costs to rework the design and function of the satellite to direct that asset to another customer. Consequently, the asset has no alternative use to the entity (see paragraphs 606-10-25-27(c), 606-10-25-28, and 606-10-55-8 through 55-10) because the customer-specific design of the satellite limits the entity’s practical ability to readily direct the satellite to another customer.
606-10-55-168 For the entity’s performance obligation to be satisfied over time when building the satellite, paragraph 606-10-25-27(c) also requires the entity to have an enforceable right to payment for performance completed to date. This condition is not illustrated in this Example.
> > > Example 16—Enforceable Right to Payment for Performance Completed to Date
606-10-55-169 An entity enters into a contract with a customer to build an item of equipment. The payment schedule in the contract specifies that the customer must make an advance payment at contract inception of 10 percent of the contract price, regular payments throughout the construction period (amounting to 50 percent of the contract price), and a final payment of 40 percent of the contract price after construction is completed and the equipment has passed the prescribed performance tests. The payments are nonrefundable unless the entity fails to perform as promised. If the customer terminates the contract, the entity is entitled only to retain any progress payments received from the customer. The entity has no further rights to compensation from the customer.
606-10-55-170 At contract inception, the entity assesses whether its performance obligation to build the equipment is a performance obligation satisfied over time in accordance with paragraph 606-10-25-27.
606-10-55-171 As part of that assessment, the entity considers whether it has an enforceable right to payment for performance completed to date in accordance with paragraphs 606-10-25-27(c), 606-10-25-29, and 606-10-55-11 through 55-15 if the customer were to terminate the contract for reasons other than the entity’s failure to perform as promised. Even though the payments made by the customer are nonrefundable, the cumulative amount of those payments is not expected, at all times throughout the contract, to at least correspond to the amount that would be necessary to compensate the entity for performance completed to date. This is because at various times during construction the cumulative amount of consideration paid by the customer might be less than the selling price of the partially completed item of equipment at that time. Consequently, the entity does not have a right to payment for performance completed to date.
606-10-55-172 Because the entity does not have a right to payment for performance completed to date, the entity’s performance obligation is not satisfied over time in accordance with paragraph 606-10-25-27(c). Accordingly, the entity does not need to assess whether the equipment would have an alternative use to the entity. The entity also concludes that it does not meet the criteria in paragraph 606-10-25-27(a) or (b), and, thus, the entity accounts for the construction of the equipment as a performance obligation satisfied at a point in time in accordance with paragraph 606-10-25-30.
> > > Example 17—Assessing Whether a Performance Obligation Is Satisfied at a Point in Time or Over Time
606-10-55-173 An entity is developing a multi-unit residential complex. A customer enters into a binding sales contract with the entity for a specified unit that is under construction. Each unit has a similar floor plan and is of a similar size, but other attributes of the units are different (for example, the location of the unit within the complex).
> > > > Case A—Entity Does Not Have an Enforceable Right to Payment for Performance Completed to Date
606-10-55-174 The customer pays a deposit upon entering into the contract, and the deposit is refundable only if the entity fails to complete construction of the unit in accordance with the contract. The remainder of the contract price is payable on completion of the contract when the customer obtains physical possession of the unit. If the customer defaults on the contract before completion of the unit, the entity only has the right to retain the deposit.
606-10-55-175 At contract inception, the entity applies paragraph 606-10-25-27(c) to determine whether its promise to construct and transfer the unit to the customer is a performance obligation satisfied over time. The entity determines that it does not have an enforceable right to payment for performance completed to date because until construction of the unit is complete, the entity only has a right to the deposit paid by the customer. Because the entity does not have a right to payment for work completed to date, the entity’s performance obligation is not a performance obligation satisfied over time in accordance with paragraph 606-10-25-27(c). Instead, the entity accounts for the sale of the unit as a performance obligation satisfied at a point in time in accordance with paragraph 606-10-25-30.
> > > > Case B—Entity Has an Enforceable Right to Payment for Performance Completed to Date
606-10-55-176 The customer pays a nonrefundable deposit upon entering into the contract and will make progress payments during construction of the unit. The contract has substantive terms that preclude the entity from being able to direct the unit to another customer. In addition, the customer does not have the right to terminate the contract unless the entity fails to perform as promised. If the customer defaults on its obligations by failing to make the promised progress payments as and when they are due, the entity would have a right to all of the consideration promised in the contract if it completes the construction of the unit. The courts have previously upheld similar rights that entitle developers to require the customer to perform, subject to the entity meeting its obligations under the contract.
606-10-55-177 At contract inception, the entity applies paragraph 606-10-25-27(c) to determine whether its promise to construct and transfer the unit to the customer is a performance obligation satisfied over time. The entity determines that the asset (unit) created by the entity’s performance does not have an alternative use to the entity because the contract precludes the entity from transferring the specified unit to another customer. The entity does not consider the possibility of a contract termination in assessing whether the entity is able to direct the asset to another customer.
606-10-55-178 The entity also has a right to payment for performance completed to date in accordance with paragraphs 606-10-25-29 and 606-10-55-11 through 55-15. This is because if the customer were to default on its obligations, the entity would have an enforceable right to all of the consideration promised under the contract if it continues to perform as promised.
606-10-55-179 Therefore, the terms of the contract and the practices in the legal jurisdiction indicate that there is a right to payment for performance completed to date. Consequently, the criteria in paragraph 606-10-25-27(c) are met, and the entity has a performance obligation that it satisfies over time. To recognize revenue for that performance obligation satisfied over time, the entity measures its progress toward complete satisfaction of its performance obligation in accordance with paragraphs 606-10-25-31 through 25-37 and 606-10-55-16 through 55-21.
606-10-55-180 In the construction of a multi-unit residential complex, the entity may have many contracts with individual customers for the construction of individual units within the complex. The entity would account for each contract separately. However, depending on the nature of the construction, the entity’s performance in undertaking the initial construction works (that is, the foundation and the basic structure), as well as the construction of common areas, may need to be reflected when measuring its progress toward complete satisfaction of its performance obligations in each contract.
> > > > Case C—Entity Has an Enforceable Right to Payment for Performance Completed to Date
606-10-55-181 The same facts as in Case B apply to Case C, except that in the event of a default by the customer, either the entity can require the customer to perform as required under the contract or the entity can cancel the contract in exchange for the asset under construction and an entitlement to a penalty of a proportion of the contract price.
606-10-55-182 Notwithstanding that the entity could cancel the contract (in which case the customer’s obligation to the entity would be limited to transferring control of the partially completed asset to the entity and paying the penalty prescribed), the entity has a right to payment for performance completed to date because the entity also could choose to enforce its rights to full payment under the contract. The fact that the entity may choose to cancel the contract in the event the customer defaults on its obligations would not affect that assessment (see paragraph 606-10-55-13), provided that the entity’s rights to require the customer to continue to perform as required under the contract (that is, pay the promised consideration) are enforceable.
> > Measuring Progress toward Complete Satisfaction of a Performance Obligation
606-10-55-183 Examples 18 and 19 illustrate the guidance in paragraphs 606-10-25-31 through 25-37 on measuring progress toward complete satisfaction of a performance obligation satisfied over time. Example 19 also illustrates the guidance in paragraph 606-10-55-21 on uninstalled materials when costs incurred are not proportionate to the entity’s progress in satisfying a performance obligation.
> > > Example 18—Measuring Progress When Making Goods or Services Available
606-10-55-184 An entity, an owner and manager of health clubs, enters into a contract with a customer for one year of access to any of its health clubs. The customer has unlimited use of the health clubs and promises to pay $100 per month.
606-10-55-185 The entity determines that its promise to the customer is to provide a service of making the health clubs available for the customer to use as and when the customer wishes. This is because the extent to which the customer uses the health clubs does not affect the amount of the remaining goods and services to which the customer is entitled. The entity concludes that the customer simultaneously receives and consumes the benefits of the entity’s performance as it performs by making the health clubs available. Consequently, the entity’s performance obligation is satisfied over time in accordance with paragraph 60610-25-27(a).
606-10-55-186 The entity also determines that the customer benefits from the entity’s service of making the health clubs available evenly throughout the year. (That is, the customer benefits from having the health clubs available, regardless of whether the customer uses it or not.) Consequently, the entity concludes that the best measure of progress toward complete satisfaction of the performance obligation over time is a time-based measure, and it recognizes revenue on a straight-line basis throughout the year at $100 per month.
> > > Example 19—Uninstalled Materials
606-10-55-187 In November 20X2, an entity contracts with a customer to refurbish a 3-story building and install new elevators for total consideration of $5 million. The promised refurbishment service, including the installation of elevators, is a single performance obligation satisfied over time. Total expected costs are $4 million, including $1.5 million for the elevators. The entity determines that it acts as a principal in accordance with paragraphs 606-10-55-36 through 55-40 because it obtains control of the elevators before they are transferred to the customer.
606-10-55-188 A summary of the transaction price and expected costs is as follows:
606-10-55-189 The entity uses an input method based on costs incurred to measure its progress toward complete satisfaction of the performance obligation. The entity assesses whether the costs incurred to procure the elevators are proportionate to the entity’s progress in satisfying the performance obligation in accordance with paragraph 606-10-55-21. The customer obtains control of the elevators when they are delivered to the site in December 20X2, although the elevators will not be installed until June 20X3. The costs to procure the elevators ($1.5 million) are significant relative to the total expected costs to completely satisfy the performance obligation ($4 million). The entity is not involved in designing or manufacturing the elevators.
606-10-55-190 The entity concludes that including the costs to procure the elevators in the measure of progress would overstate the extent of the entity’s performance. Consequently, in accordance with paragraph 606-10-55-21, the entity adjusts its measure of progress to exclude the costs to procure the elevators from the measure of costs incurred and from the transaction price. The entity recognizes revenue for the transfer of the elevators in an amount equal to the costs to procure the elevators (that is, at a zero margin).
606-10-55-191 As of December 31, 20X2, the entity observes that:
  1. Other costs incurred (excluding elevators) are $500,000.
  2. Performance is 20% complete (that is, $500,000 ÷ $2,500,000). 606-10-55-192 Consequently, at December 31, 20X2, the entity recognizes the following:
> > Variable Consideration
606-10-55-193 Examples 20 and 21 illustrate the guidance in paragraphs 606-10-32-5 through 32-9 on identifying variable consideration.
> > > Example 20—Penalty Gives Rise to Variable Consideration
606-10-55-194 An entity enters into a contract with a customer to build an asset for $1 million. In addition, the terms of the contract include a penalty of $100,000 if the construction is not completed within 3 months of a date specified in the contract.
606-10-55-195 The entity concludes that the consideration promised in the contract includes a fixed amount of $900,000 and a variable amount of $100,000 (arising from the penalty).
606-10-55-196 The entity estimates the variable consideration in accordance with paragraphs 606-10-32-5 through 32-9 and considers the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration.
> > > Example 21—Estimating Variable Consideration
606-10-55-197 An entity enters into a contract with a customer to build a customized asset. The promise to transfer the asset is a performance obligation that is satisfied over time. The promised consideration is $2.5 million, but that amount will be reduced or increased depending on the timing of completion of the asset. Specifically, for each day after March 31, 20X7 that the asset is incomplete, the promised consideration is reduced by $10,000. For each day before March 31, 20X7 that the asset is complete, the promised consideration increases by $10,000.
606-10-55-198 In addition, upon completion of the asset, a third party will inspect the asset and assign a rating based on metrics that are defined in the contract. If the asset receives a specified rating, the entity will be entitled to an incentive bonus of $150,000.
606-10-55-199 In determining the transaction price, the entity prepares a separate estimate for each element of variable consideration to which the entity will be entitled using the estimation methods described in paragraph 606-10-32-8:
  1. The entity decides to use the expected value method to estimate the variable consideration associated with the daily penalty or incentive (that is, $2.5 million, plus or minus $10,000 per day). This is because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled.
  2. The entity decides to use the most likely amount to estimate the variable consideration associated with the incentive bonus. This is because there are only 2 possible outcomes ($150,000 or $0) and it is the method that the entity expects to better predict the amount of consideration to which it will be entitled.
606-10-55-200 The entity considers the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration to determine whether the entity should include some or all of its estimate of variable consideration in the transaction price.
> > Constraining Estimates of Variable Consideration
606-10-55-201 Examples 22–25 illustrate the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration. In addition, the following guidance is illustrated in these Examples:
  1. Paragraph 606-10-32-10 on refund liabilities (Example 22)
  2. Paragraphs 606-10-55-22 through 55-29 on sales with a right of return (Example 22)
  3. Paragraphs 606-10-32-39 through 32-41 on allocating variable consideration to performance obligations (Example 25).
> > > Example 22—Right of Return
606-10-55-202 An entity enters into 100 contracts with customers. Each contract includes the sale of 1 product for $100 (100 total products × $100 = $10,000 total consideration). Cash is received when control of a product transfers. The entity’s customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund. The entity’s cost of each product is $60.
606-10-55-203 The entity applies the guidance in this Topic to the portfolio of 100 contracts because it reasonably expects that, in accordance with paragraph 606-10-10-4, the effects on the financial statements from applying this guidance to the portfolio would not differ materially from applying the guidance to the individual contracts within the portfolio.
606-10-55-204 Because the contract allows a customer to return the products, the consideration received from the customer is variable. To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value method (see paragraph 606-10-32-8(a)) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled. Using the expected value method, the entity estimates that 97 products will not be returned.
606-10-55-205 The entity also considers the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration of $9,700 ($100 × 97 products not expected to be returned) can be included in the transaction price. The entity considers the factors in paragraph 606-10-32-12 and determines that although the returns are outside the entity’s influence, it has significant experience in estimating returns for this product and customer class. In addition, the uncertainty will be resolved within a short time frame (that is, the 30-day return period). Thus, the entity concludes that it is probable that a significant reversal in the cumulative amount of revenue recognized (that is, $9,700) will not occur as the uncertainty is resolved (that is, over the return period).
606-10-55-206 The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit.
606-10-55-207 Upon transfer of control of the 100 products, the entity does not recognize revenue for the 3 products that it expects to be returned. Consequently, in accordance with paragraphs 606-10-32-10 and 606-10-55-23, the entity recognizes the following:
Cash $10,000 ($100 × 100 products transferred)
Revenue $9,700 ($100 × 97 products not expected to be returned)
Refund liability $300 ($100 refund × 3 products expected to be returned)
Cost of sales $5,820 ($60 × 97 products not expected to be returned)
Asset $180 ($60 × 3 products for its right to recover products from customers on settling the refund liability)
Inventory $6,000 ($60 × 100 products)
> > > Example 23—Price Concessions
606-10-55-208 An entity enters into a contract with a customer, a distributor, on December 1, 20X7. The entity transfers 1,000 products at contract inception for a price stated in the contract of $100 per product (total consideration is $100,000). Payment from the customer is due when the customer sells the products to the end customers. The entity’s customer generally sells the products within 90 days of obtaining them. Control of the products transfers to the customer on December 1, 20X7.
606-10-55-209 On the basis of its past practices and to maintain its relationship with the customer, the entity anticipates granting a price concession to its customer because this will enable the customer to discount the product and thereby move the product through the distribution chain. Consequently, the consideration in the contract is variable.
> > > > Case A—Estimate of Variable Consideration Is Not Constrained
606-10-55-210 The entity has significant experience selling this and similar products. The observable data indicate that historically the entity grants a price concession of approximately 20 percent of the sales price for these products. Current market information suggests that a 20 percent reduction in price will be sufficient to move the products through the distribution chain. The entity has not granted a price concession significantly greater than 20 percent in many years.
606-10-55-211 To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value method (see paragraph 606-10-32-8(a)) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled. Using the expected value method, the entity estimates the transaction price to be $80,000 ($80 × 1,000 products).
606-10-55-212 The entity also considers the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration to determine whether the estimated amount of variable consideration of $80,000 can be included in the transaction price. The entity considers the factors in paragraph 606-10-32-12 and determines that it has significant previous experience with this product and current market information that supports its estimate. In addition, despite some uncertainty resulting from factors outside its influence, based on its current market estimates, the entity expects the price to be resolved within a short time frame. Thus, the entity concludes that it is probable that a significant reversal in the cumulative amount of revenue recognized (that is, $80,000) will not occur when the uncertainty is resolved (that is, when the total amount of price concessions is determined). Consequently, the entity recognizes $80,000 as revenue when the products are transferred on December 1, 20X7.
> > > > Case B—Estimate of Variable Consideration Is Constrained
606-10-55-213 The entity has experience selling similar products. However, the entity’s products have a high risk of obsolescence, and the entity is experiencing high volatility in the pricing of its products. The observable data indicate that historically the entity grants a broad range of price concessions ranging from 20 to 60 percent of the sales price for similar products. Current market information also suggests that a 15 to 50 percent reduction in price may be necessary to move the products through the distribution chain.
606-10-55-214 To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value method (see paragraph 606-10-32-8(a)) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled. Using the expected value method, the entity estimates that a discount of 40 percent will be provided and, therefore, the estimate of the variable consideration is $60,000 ($60 × 1,000 products).
606-10-55-215 The entity also considers the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration to determine whether some or all of the estimated amount of variable consideration of $60,000 can be included in the transaction price. The entity considers the factors in paragraph 606-10-32-12 and observes that the amount of consideration is highly susceptible to factors outside the entity’s influence (that is, risk of obsolescence) and it is likely that the entity may be required to provide a broad range of price concessions to move the products through the distribution chain. Consequently, the entity cannot include its estimate of $60,000 (that is, a discount of 40 percent) in the transaction price because it cannot conclude that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Although the entity’s historical price concessions have ranged from 20 to 60 percent, market information currently suggests that a price concession of 15 to 50 percent will be necessary. The entity’s actual results have been consistent with then-current market information in previous, similar transactions. Consequently, the entity concludes that it is probable that a significant reversal in the cumulative amount of revenue recognized will not occur if the entity includes $50,000 in the transaction price ($100 sales price and a 50 percent price concession) and, therefore, recognizes revenue at that amount. Therefore, the entity recognizes revenue of $50,000 when the products are transferred and reassesses the estimates of the transaction price at each reporting date until the uncertainty is resolved in accordance with paragraph 606-10-32-14.
> > > Example 24—Volume Discount Incentive
606-10-55-216 An entity enters into a contract with a customer on January 1, 20X8, to sell Product A for $100 per unit. If the customer purchases more than 1,000 units of Product A in a calendar year, the contract specifies that the price per unit is retrospectively reduced to $90 per unit. Consequently, the consideration in the contract is variable.
606-10-55-217 For the first quarter ended March 31, 20X8, the entity sells 75 units of Product A to the customer. The entity estimates that the customer’s purchases will not exceed the 1,000-unit threshold required for the volume discount in the calendar year.
606-10-55-218 The entity considers the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration, including the factors in paragraph 606-10-32-12. The entity determines that it has significant experience with this product and with the purchasing pattern of the entity. Thus, the entity concludes that it is probable that a significant reversal in the cumulative amount of revenue recognized (that is, $100 per unit) will not occur when the uncertainty is resolved (that is, when the total amount of purchases is known). Consequently, the entity recognizes revenue of $7,500 (75 units × $100 per unit) for the quarter ended March 31, 20X8.
606-10-55-219 In May 20X8, the entity’s customer acquires another company and in the second quarter ended June 30, 20X8, the entity sells an additional 500 units of Product A to the customer. In light of the new fact, the entity estimates that the customer’s purchases will exceed the 1,000-unit threshold for the calendar year and, therefore, it will be required to retrospectively reduce the price per unit to $90.
606-10-55-220 Consequently, the entity recognizes revenue of $44,250 for the quarter ended June 30, 20X8. That amount is calculated from $45,000 for the sale of 500 units (500 units × $90 per unit) less the change in transaction price of $750 (75 units × $10 price reduction) for the reduction of revenue relating to units sold for the quarter ended March 31, 20X8 (see paragraphs 606-10-32-42 through 32-43).
> > > Example 25—Management Fees Subject to the Constraint
606-10-55-221 On January 1, 20X8, an entity enters into a contract with a client to provide asset management services for five years. The entity receives a 2 percent quarterly management fee based on the client’s assets under management at the end of each quarter. In addition, the entity receives a performance-based incentive fee of 20 percent of the fund’s return in excess of the return of an observable market index over the 5-year period. Consequently, both the management fee and the performance fee in the contract are variable consideration.
606-10-55-222 The entity accounts for the services as a single performance obligation in accordance with paragraph 606-10-25-14(b), because it is providing a series of distinct services that are substantially the same and have the same pattern of transfer (the services transfer to the customer over time and use the same method to measure progress—that is, a time-based measure of progress).
606-10-55-223 At contract inception, the entity considers the guidance in paragraphs 606-10-32-5 through 32-9 on estimating variable consideration and the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration, including the factors in paragraph 606-10-32-12. The entity observes that the promised consideration is dependent on the market and, thus, is highly susceptible to factors outside the entity’s influence. In addition, the incentive fee has a large number and a broad range of possible consideration amounts. The entity also observes that although it has experience with similar contracts, that experience is of little predictive value in determining the future performance of the market. Therefore, at contract inception, the entity cannot conclude that it is probable that a significant reversal in the cumulative amount of revenue recognized would not occur if the entity included its estimate of the management fee or the incentive fee in the transaction price.
606-10-55-224 At each reporting date, the entity updates its estimate of the transaction price. Consequently, at the end of each quarter, the entity concludes that it can include in the transaction price the actual amount of the quarterly management fee because the uncertainty is resolved. However, the entity concludes that it cannot include its estimate of the incentive fee in the transaction price at those dates. This is because there has not been a change in its assessment from contract inception—the variability of the fee based on the market index indicates that the entity cannot conclude that it is probable that a significant reversal in the cumulative amount of revenue recognized would not occur if the entity included its estimate of the incentive fee in the transaction price. At March 31, 20X8, the client’s assets under management are $100 million. Therefore, the resulting quarterly management fee and the transaction price is $2 million.
606-10-55-225 At the end of each quarter, the entity allocates the quarterly management fee to the distinct services provided during the quarter in accordance with paragraphs 606-10-32-39(b) and 606-10-32-40. This is because the fee relates specifically to the entity’s efforts to transfer the services for that quarter, which are distinct from the services provided in other quarters, and the resulting allocation will be consistent with the allocation objective in paragraph 606-10-32-28. Consequently, the entity recognizes $2 million as revenue for the quarter ended March 31, 20X8.
> > The Existence of a Significant Financing Component in the Contract
606-10-55-226 Examples 26–30 illustrate the guidance in paragraphs 606-10-32-15 through 32-20 on the existence of a significant financing component in the contract. In addition, the following guidance is illustrated in Example 26:
  1. Paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration
  2. Paragraphs 606-10-55-22 through 55-29 on sales with a right of return.
> > > Example 26—Significant Financing Component and Right of Return
606-10-55-227 An entity sells a product to a customer for $121 that is payable 24 months after delivery. The customer obtains control of the product at contract inception. The contract permits the customer to return the product within 90 days. The product is new, and the entity has no relevant historical evidence of product returns or other available market evidence.
606-10-55-228 The cash selling price of the product is $100, which represents the amount that the customer would pay upon delivery for the same product sold under otherwise identical terms and conditions as at contract inception. The entity’s cost of the product is $80.
606-10-55-229 The entity does not recognize revenue when control of the product transfers to the customer. This is because the existence of the right of return and the lack of relevant historical evidence means that the entity cannot conclude that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in accordance with paragraphs 606-10-32-11 through 32-13. Consequently, revenue is recognized after three months when the right of return lapses.
606-10-55-230 The contract includes a significant financing component, in accordance with paragraphs 606-10-32-15 through 32-17. This is evident from the difference between the amount of promised consideration of $121 and the cash selling price of $100 at the date that the goods are transferred to the customer.
606-10-55-231 The contract includes an implicit interest rate of 10 percent (that is, the interest rate that over 24 months discounts the promised consideration of $121 to the cash selling price of $100). The entity evaluates the rate and concludes that it is commensurate with the rate that would be reflected in a separate financing transaction between the entity and its customer at contract inception. The following journal entries illustrate how the entity accounts for this contract in accordance with paragraphs 606-10-55-22 through 55-29:
a. When the product is transferred to the customer, in accordance with paragraph 606-10-55-23.
Asset for right to recover product to be returned
$80(a)
Inventory
$80
(a) This Example does not consider expected costs to recover the asset.
b. During the three-month right of return period, no interest is recognized in accordance with paragraph 606-10-32-20 because no contract asset or receivable has been recognized.
c. When the right of return lapses (the product is not returned).
Receivable
$100(b)
Revenue
$100
Cost of sales
$80
Asset for product to be returned
$80
(b) The receivable recognized would be measured in accordance with Topic 310 on receivables. This Example does not consider the impairment accounting for the receivable.
606-10-55-232 Until the entity receives the cash payment from the customer, interest income would be recognized consistently with the subsequent measurement guidance in Subtopic 835-30 on imputation of interest. The entity would accrete the receivable up to $121 from the time the right of return lapses until customer payment.
> > > Example 27—Withheld Payments on a Long-Term Contract
606-10-55-233 An entity enters into a contract for the construction of a building that includes scheduled milestone payments for the performance by the entity throughout the contract term of three years. The performance obligation will be satisfied over time, and the milestone payments are scheduled to coincide with the entity’s expected performance. The contract provides that a specified percentage of each milestone payment is to be withheld (that is, retained) by the customer throughout the arrangement and paid to the entity only when the building is complete.
606-10-55-234 The entity concludes that the contract does not include a significant financing component. The milestone payments coincide with the entity’s performance, and the contract requires amounts to be retained for reasons other than the provision of finance in accordance with paragraph 606-10-32-17(c). The withholding of a specified percentage of each milestone payment is intended to protect the customer from the contractor failing to adequately complete its obligations under the contract.
> > > Example 28—Determining the Discount Rate
606-10-55-235 An entity enters into a contract with a customer to sell equipment. Control of the equipment transfers to the customer when the contract is signed. The price stated in the contract is $1 million plus a 5 percent contractual rate of interest, payable in 60 monthly installments of $18,871.
> > > > Case A—Contractual Discount Rate Reflects the Rate in a Separate Financing Transaction
606-10-55-236 In evaluating the discount rate in the contract that contains a significant financing component, the entity observes that the 5 percent contractual rate of interest reflects the rate that would be used in a separate financing transaction between the entity and its customer at contract inception (that is, the contractual rate of interest of 5 percent reflects the credit characteristics of the customer).
606-10-55-237 The market terms of the financing mean that the cash selling price of the equipment is $1 million. This amount is recognized as revenue and as a loan receivable when control of the equipment transfers to the customer. The entity accounts for the receivable in accordance with Topic 310 on receivables and Subtopic 835-30 on the imputation of interest.
> > > > Case B—Contractual Discount Rate Does Not Reflect the Rate in a Separate Financing Transaction
606-10-55-238 In evaluating the discount rate in the contract that contains a significant financing component, the entity observes that the 5 percent contractual rate of interest is significantly lower than the 12 percent interest rate that would be used in a separate financing transaction between the entity and its customer at contract inception (that is, the contractual rate of interest of 5 percent does not reflect the credit characteristics of the customer). This suggests that the cash selling price is less than $1 million.
606-10-55-239 In accordance with paragraph 606-10-32-19, the entity determines the transaction price by adjusting the promised amount of consideration to reflect the contractual payments using the 12 percent interest rate that reflects the credit characteristics of the customer. Consequently, the entity determines that the transaction price is $848,357 (60 monthly payments of $18,871 discounted at 12 percent). The entity recognizes revenue and a loan receivable for that amount. The entity accounts for the loan receivable in accordance with Topic 310 on receivables and Subtopic 835-30 on the imputation of interest.
> > > Example 29—Advance Payment and Assessment of Discount Rate
606-10-55-240 An entity enters into a contract with a customer to sell an asset. Control of the asset will transfer to the customer in two years (that is, the performance obligation will be satisfied at a point in time). The contract includes 2 alternative payment options: payment of $5,000 in 2 years when the customer obtains control of the asset or payment of $4,000 when the contract is signed. The customer elects to pay $4,000 when the contract is signed.
606-10-55-241 The entity concludes that the contract contains a significant financing component because of the length of time between when the customer pays for the asset and when the entity transfers the asset to the customer, as well as the prevailing interest rates in the market.
606-10-55-242 The interest rate implicit in the transaction is 11.8 percent, which is the interest rate necessary to make the 2 alternative payment options economically equivalent. However, the entity determines that, in accordance with paragraph 606-10-32-19, the rate that should be used in adjusting the promised consideration is 6 percent, which is the entity’s incremental borrowing rate.
606-10-55-243 The following journal entries illustrate how the entity would account for the significant financing component.
a. Recognize a contract liability for the $4,000 payment received at contract inception.
Cash
$4,000
Contract liability
$4,000
b. During the 2 years from contract inception until the transfer of the asset, the entity adjusts the promised amount of consideration (in accordance with paragraph 606-10-32-20) and accretes the contract liability by recognizing interest on $4,000 at 6 percent for 2 years.
Interest expense
$494(a)
Contract liability
$494
(a) $494 = $4,000 contract liability × (6 percent interest per year for 2 years)
c. Recognize revenue for the transfer of the asset.
Contract liability
$4,494
Revenue
$4,494
> > > Example 30—Advance Payment
606-10-55-244 An entity, a technology product manufacturer, enters into a contract with a customer to provide global telephone technology support and repair coverage for three years along with its technology product. The customer purchases this support service at the time of buying the product. Consideration for the service is an additional $300. Customers electing to buy this service must pay for it upfront (that is, a monthly payment option is not available).
606-10-55-245 To determine whether there is a significant financing component in the contract, the entity considers the nature of the service being offered and the purpose of the payment terms. The entity charges a single upfront amount, not with the primary purpose of obtaining financing from the customer but, instead, to maximize profitability, taking into consideration the risks associated with providing the service. Specifically, if customers could pay monthly, they would be less likely to renew, and the population of customers that continue to use the support service in the later years may become smaller and less diverse over time (that is, customers that choose to renew historically are those that make greater use of the service, thereby increasing the entity’s costs). In addition, customers tend to use services more if they pay monthly rather than making an upfront payment. Finally, the entity would incur higher administration costs such as the costs related to administering renewals and collection of monthly payments.
606-10-55-246 In assessing the guidance in paragraph 606-10-32-17(c), the entity determines that the payment terms were structured primarily for reasons other than the provision of finance to the entity. The entity charges a single upfront amount for the services because other payment terms (such as a monthly payment plan) would affect the nature of the risks assumed by the entity to provide the service and may make it uneconomical to provide the service. As a result of its analysis, the entity concludes that there is not a significant financing component.
> > Noncash Consideration
606-10-55-247 Example 31 illustrates the guidance in paragraphs 606-10-32-21 through 32-24 on noncash consideration. In addition, the following guidance is illustrated in this Example:
  1. Paragraph 606-10-25-14 on identifying performance obligations
  2. Paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration.
> > > Example 31—Entitlement to Noncash Consideration
606-10-55-248 An entity enters into a contract with a customer to provide a weekly service for one year. The contract is signed on January 1, 20X1, and work begins immediately. The entity concludes that the service is a single performance obligation in accordance with paragraph 606-10-25-14(b). This is because the entity is providing a series of distinct services that are substantially the same and have the same pattern of transfer (the services transfer to the customer over time and use the same method to measure progress—that is, a time-based measure of progress).
606-10-55-249 In exchange for the service, the customer promises 100 shares of its common stock per week of service (a total of 5,200 shares for the contract). The terms in the contract require that the shares must be paid upon the successful completion of each week of service.
606-10-55-250 The entity measures its progress toward complete satisfaction of the performance obligation as each week of service is complete. To determine the transaction price (and the amount of revenue to be recognized), the entity measures the fair value of 100 shares that are received upon completion of each weekly service. The entity does not reflect any subsequent changes in the fair value of the shares received (or receivable) in revenue.
> > Consideration Payable to a Customer
606-10-55-251 Example 32 illustrates the guidance in paragraphs 606-10-32-25 through 32-27 on consideration payable to a customer.
> > > Example 32—Consideration Payable to a Customer
606-10-55-252 An entity that manufactures consumer goods enters into a one-year contract to sell goods to a customer that is a large global chain of retail stores. The customer commits to buy at least $15 million of products during the year. The contract also requires the entity to make a nonrefundable payment of $1.5 million to the customer at the inception of the contract. The $1.5 million payment will compensate the customer for the changes it needs to make to its shelving to accommodate the entity’s products.
606-10-55-253 The entity considers the guidance in paragraphs 606-10-32-25 through 32-27 and concludes that the payment to the customer is not in exchange for a distinct good or service that transfers to the entity. This is because the entity does not obtain control of any rights to the customer’s shelves. Consequently, the entity determines that, in accordance with paragraph 606-10-32-25, the $1.5 million payment is a reduction of the transaction price.
606-10-55-254 The entity applies the guidance in paragraph 606-10-32-27 and concludes that the consideration payable is accounted for as a reduction in the transaction price when the entity recognizes revenue for the transfer of the goods. Consequently, as the entity transfers goods to the customer, the entity reduces the transaction price for each good by 10 percent ($1.5 million ÷ $15 million). Therefore, in the first month in which the entity transfers goods to the customer, the entity recognizes revenue of $1.8 million ($2.0 million invoiced amount – $0.2 million of consideration payable to the customer).
> > Allocating the Transaction Price to Performance Obligations
606-10-55-255 Examples 33–35 illustrate the guidance in paragraphs 606-10-32-28 through 32-41 on allocating the transaction price to performance obligations. In addition, the following guidance is illustrated in Example 35:
  1. Paragraph 606-10-32-8 on variable consideration
  2. Paragraph 606-10-55-65 on consideration in the form of sales-based or usage-based royalties on licenses of intellectual property.
> > > Example 33—Allocation Methodology
606-10-55-256 An entity enters into a contract with a customer to sell Products A, B, and C in exchange for $100. The entity will satisfy the performance obligations for each of the products at different points in time. The entity regularly sells Product A separately, and, therefore the standalone selling price is directly observable. The standalone selling prices of Products B and C are not directly observable.
606-10-55-257 Because the standalone selling prices for Products B and C are not directly observable, the entity must estimate them. To estimate the standalone selling prices, the entity uses the adjusted market assessment approach for Product B and the expected cost plus a margin approach for Product C. In making those estimates, the entity maximizes the use of observable inputs (in accordance with paragraph 606-10-32-33). The entity estimates the standalone selling prices as follows:
606-10-55-258 The customer receives a discount for purchasing the bundle of goods because the sum of the standalone selling prices ($150) exceeds the promised consideration ($100). The entity considers whether it has observable evidence about the performance obligation to which the entire discount belongs (in accordance with paragraph 606-10-32-37) and concludes that it does not. Consequently, in accordance with paragraphs 606-10-32-31 and 606-10-32-36, the discount is allocated proportionately across Products A, B, and C. The discount, and therefore the transaction price, is allocated as follows:
> > > Example 34—Allocating a Discount
606-10-55-259 An entity regularly sells Products A, B, and C individually, thereby establishing the following standalone selling prices:
606-10-55-260 In addition, the entity regularly sells Products B and C together for $60.
> > > > Case A—Allocating a Discount to One or More Performance Obligations
606-10-55-261 The entity enters into a contract with a customer to sell Products A, B, and C in exchange for $100. The entity will satisfy the performance obligations for each of the products at different points in time.
606-10-55-262 The contract includes a discount of $40 on the overall transaction, which would be allocated proportionately to all 3 performance obligations when allocating the transaction price using the relative standalone selling price method (in accordance with paragraph 606-10-32-36). However, because the entity regularly sells Products B and C together for $60 and Product A for $40, it has evidence that the entire discount should be allocated to the promises to transfer Products B and C in accordance with paragraph 606-10-32-37.
606-10-55-263 If the entity transfers control of Products B and C at the same point in time, then the entity could, as a practical matter, account for the transfer of those products as a single performance obligation. That is, the entity could allocate $60 of the transaction price to the single performance obligation and recognize revenue of $60 when Products B and C simultaneously transfer to the customer.
606-10-55-264 If the contract requires the entity to transfer control of Products B and C at different points in time, then the allocated amount of $60 is individually allocated to the promises to transfer Product B (standalone selling price of $55) and Product C (standalone selling price of $45) as follows:
> > > > Case B—Residual Approach Is Appropriate
606-10-55-265 The entity enters into a contract with a customer to sell Products A, B, and C as described in Case A. The contract also includes a promise to transfer Product D. Total consideration in the contract is $130. The standalone selling price for Product D is highly variable (see paragraph 606-10-32-34(c)(1)) because the entity sells Product D to different customers for a broad range of amounts ($15 – $45). Consequently, the entity decides to estimate the standalone selling price of Product D using the residual approach.
606-10-55-266 Before estimating the standalone selling price of Product D using the residual approach, the entity determines whether any discount should be allocated to the other performance obligations in the contract in accordance with paragraphs 606-10-32-37 through 32-38.
606-10-55-267 As in Case A, because the entity regularly sells Products B and C together for $60 and Product A for $40, it has observable evidence that $100 should be allocated to those 3 products and a $40 discount should be allocated to the promises to transfer Products B and C in accordance with paragraph 606-10-32-37. Using the residual approach, the entity estimates the standalone selling price of Product D to be $30 as follows:
606-10-55-268 The entity observes that the resulting $30 allocated to Product D is within the range of its observable selling prices ($15 – $45). Therefore, the resulting allocation (see above table) is consistent with the allocation objective in paragraph 606-10-32-28 and the guidance in paragraph 606-10-32-33.
> > > > Case C—Residual Approach Is Inappropriate
606-10-55-269 The same facts as in Case B apply to Case C except the transaction price is $105 instead of $130. Consequently, the application of the residual approach would result in a standalone selling price of $5 for Product D ($105 transaction price less $100 allocated to Products A, B, and C). The entity concludes that $5 would not faithfully depict the amount of consideration to which the entity expects to be entitled in exchange for satisfying its performance obligation to transfer Product D because $5 does not approximate the standalone selling price of Product D, which ranges from $15 – $45. Consequently, the entity reviews its observable data, including sales and margin reports, to estimate the standalone selling price of Product D using another suitable method. The entity allocates the transaction price of $130 to Products A, B, C, and D using the relative standalone selling prices of those products in accordance with paragraphs 606-10-32-28 through 32-35.
> > > Example 35—Allocation of Variable Consideration
606-10-55-270 An entity enters into a contract with a customer for two intellectual property licenses (Licenses X and Y), which the entity determines to represent two performance obligations each satisfied at a point in time. The standalone selling prices of Licenses X and Y are $800 and $1,000, respectively.
> > Case A—Variable Consideration Allocated Entirely to One Performance Obligation
606-10-55-271 The price stated in the contract for License X is a fixed amount of $800, and for License Y the consideration is 3 percent of the customer’s future sales of products that use License Y. For purposes of allocation, the entity estimates its sales-based royalties (that is, the variable consideration) to be $1,000, in accordance with paragraph 606-10-32-8.
606-10-55-272 To allocate the transaction price, the entity considers the criteria in paragraph 606-10-32-40 and concludes that the variable consideration (that is, the sales-based royalties) should be allocated entirely to License Y. The entity concludes that the criteria in paragraph 606-10-32-40 are met for the following reasons:
  1. The variable payment relates specifically to an outcome from the performance obligation to transfer License Y (that is, the customer’s subsequent sales of products that use License Y).
  2. Allocating the expected royalty amounts of $1,000 entirely to License Y is consistent with the allocation objective in paragraph 606-10-32-28. This is because the entity’s estimate of the amount of sales-based royalties ($1,000) approximates the standalone selling price of License Y and the fixed amount of $800 approximates the standalone selling price of License X. The entity allocates $800 to License X in accordance with paragraph 606-10-32-41. This is because, based on an assessment of the facts and circumstances relating to both licenses, allocating to License Y some of the fixed consideration in addition to all of the variable consideration would not meet the allocation objective in paragraph 606-10-32-28.
606-10-55-273 The entity transfers License Y at inception of the contract and transfers License X one month later. Upon the transfer of License Y, the entity does not recognize revenue because the consideration allocated to License Y is in the form of a sales-based royalty. Therefore, in accordance with paragraph 606-10-55-65, the entity recognizes revenue for the sales-based royalty when those subsequent sales occur.
606-10-55-274 When License X is transferred, the entity recognizes as revenue the $800 allocated to License X.
> > > > Case B—Variable Consideration Allocated on the Basis of Standalone Selling Prices
606-10-55-275 The price stated in the contract for License X is a fixed amount of $300, and for License Y the consideration is 5 percent of the customer’s future sales of products that use License Y. The entity’s estimate of the sales-based royalties (that is, the variable consideration) is $1,500 in accordance with paragraph 606-10-32-8.
606-10-55-276 To allocate the transaction price, the entity applies the criteria in paragraph 606-10-32-40 to determine whether to allocate the variable consideration (that is, the sales-based royalties) entirely to License Y. In applying the criteria, the entity concludes that even though the variable payments relate specifically to an outcome from the performance obligation to transfer License Y (that is, the customer’s subsequent sales of products that use License Y), allocating the variable consideration entirely to License Y would be inconsistent with the principle for allocating the transaction price. Allocating $300 to License X and $1,500 to License Y does not reflect a reasonable allocation of the transaction price on the basis of the standalone selling prices of Licenses X and Y of $800 and $1,000, respectively. Consequently, the entity applies the general allocation requirements in paragraphs 606-10-32-31 through 32-35.
606-10-55-277 The entity allocates the transaction price of $300 to Licenses X and Y on the basis of relative standalone selling prices of $800 and $1,000, respectively. The entity also allocates the consideration related to the sales-based royalty on a relative standalone selling price basis. However, in accordance with paragraph 606-10-55-65, when an entity licenses intellectual property in which the consideration is in the form of a sales-based royalty, the entity cannot recognize revenue until the later of the following events: the subsequent sales occur or the performance obligation is satisfied (or partially satisfied).
606-10-55-278 License Y is transferred to the customer at the inception of the contract, and License X is transferred three months later. When License Y is transferred, the entity recognizes as revenue the $167 ($1,000 ÷ $1,800 × $300) allocated to License Y. When License X is transferred, the entity recognizes as revenue the $133 ($800 ÷ $1,800 × $300) allocated to License X.
606-10-55-279 In the first month, the royalty due from the customer’s first month of sales is $200. Consequently, in accordance with paragraph 606-10-55-65, the entity recognizes as revenue the $111 ($1,000 ÷ $1,800 × $200) allocated to License Y (which has been transferred to the customer and is therefore a satisfied performance obligation). The entity recognizes a contract liability for the $89 ($800 ÷ $1,800 × $200) allocated to License X. This is because although the subsequent sale by the entity’s customer has occurred, the performance obligation to which the royalty has been allocated has not been satisfied.
> > Contract Costs
606-10-55-280 Examples 36 and 37 illustrate the guidance in paragraphs 340-40-25-1 through 25-4 on incremental costs of obtaining a contract, paragraphs 340-40-25-5 through 25-8 on costs to fulfill a contract, and paragraphs 340-40-35-1 through 35-6 on amortization and impairment of contract costs.
> Example 36—Incremental Costs of Obtaining a Contract
606-10-55-281 For an illustration of the incremental costs of obtaining a contract, see Example 1 in Subtopic 340-40 on other assets and deferred costs—costs related to a contract with a customer (paragraphs 340-40-55-2 through 55-4).
> > > Example 37—Costs That Give Rise to an Asset
606-10-55-282 For an illustration of costs that give rise to an asset, see Example 2 in Subtopic 340-40 on other assets and deferred costs—costs related to a contract with a customer (paragraphs 340-40-55-5 through 55-9).
> > Presentation
606-10-55-283 Examples 38–40 illustrate the guidance in paragraphs 606-10-45-1 through 45-5 on the presentation of contract balances.
> > > Example 38—Contract Liability and Receivable
> > > > Case A—Cancellable Contract
606-10-55-284 On January 1, 20X9, an entity enters into a cancellable contract to transfer a product to a customer on March 31, 20X9. The contract requires the customer to pay consideration of $1,000 in advance on January 31, 20X9. The customer pays the consideration on March 1, 20X9. The entity transfers the product on March 31, 20X9. The following journal entries illustrate how the entity accounts for the contract:
a. The entity receives cash of $1,000 on March 1, 20X9 (cash is received in advance of performance).
Cash
$1,000
Contract liability
$1,000
b. The entity satisfies the performance obligation on March 31, 20X9.
Contract liability
$1,000
Revenue
$1,000
> > > > Case B—Noncancellable Contract
606-10-55-285 The same facts as in Case A apply to Case B except that the contract is noncancellable. The following journal entries illustrate how the entity accounts for the contract:
a. The amount of consideration is due on January 31, 20X9 (which is when the entity recognizes a receivable because it has an unconditional right to consideration).
Receivable
$1,000
Contract liability
$1,000
b. The entity receives the cash on March 1, 20X9.
Cash
$1,000
Receivable
$1,000
c. The entity satisfies the performance obligation on March 31, 20X9.
Contract liability
$1,000
Revenue
$1,000
606-10-55-286 If the entity issued the invoice before January 31, 20X9 (the due date of the consideration), the entity would not present the receivable and the contract liability on a gross basis in the statement of financial position because the entity does not yet have a right to consideration that is unconditional.
> > > Example 39—Contract Asset Recognized for the Entity’s Performance
606-10-55-287 On January 1, 20X8, an entity enters into a contract to transfer Products A and B to a customer in exchange for $1,000. The contract requires Product A to be delivered first and states that payment for the delivery of Product A is conditional on the delivery of Product B. In other words, the consideration of $1,000 is due only after the entity has transferred both Products A and B to the customer. Consequently, the entity does not have a right to consideration that is unconditional (a receivable) until both Products A and B are transferred to the customer.
606-10-55-288 The entity identifies the promises to transfer Products A and B as performance obligations and allocates $400 to the performance obligation to transfer Product A and $600 to the performance obligation to transfer Product B on the basis of their relative standalone selling prices. The entity recognizes revenue for each respective performance obligation when control of the product transfers to the customer.
606-10-55-289 The entity satisfies the performance obligation to transfer Product A.
Contract asset
$400
Revenue
$400
606-10-55-290 The entity satisfies the performance obligation to transfer Product B and to recognize the unconditional right to consideration.
Receivable
$1,000
Contract asset
$400
Revenue
$600
> > > Example 40—Receivable Recognized for the Entity’s Performance
606-10-55-291 An entity enters into a contract with a customer on January 1, 20X9, to transfer products to the customer for $150 per product. If the customer purchases more than 1 million products in a calendar year, the contract indicates that the price per unit is retrospectively reduced to $125 per product.
606-10-55-292 Consideration is due when control of the products transfer to the customer. Therefore, the entity has an unconditional right to consideration (that is, a receivable) for $150 per product until the retrospective price reduction applies (that is, after 1 million products are shipped).
606-10-55-293 In determining the transaction price, the entity concludes at contract inception that the customer will meet the 1 million products threshold and therefore estimates that the transaction price is $125 per product. Consequently, upon the first shipment to the customer of 100 products the entity recognizes the following.
Receivable
$15,000(a)
Revenue
$12,500(b)
Refund liability (contract liability)
$ 2,500
(a) $150 per product × 100 products
(b) $125 transaction price per product × 100 products
606-10-55-294 The refund liability (see paragraph 606-10-32-10) represents a refund of $25 per product, which is expected to be provided to the customer for the volume-based rebate (that is, the difference between the $150 price stated in the contract that the entity has an unconditional right to receive and the $125 estimated transaction price).
> > Disclosure
606-10-55-295 Example 41 illustrates the guidance in paragraphs 606-10-50-5 through 50-6 and 606-10-55-89 through 55-91 on the disaggregation of revenue disclosure. Examples 42 and 43 illustrate the guidance in paragraphs 606-10-50-13 through 50-15 on the disclosure of the transaction price allocated to the remaining performance obligations. In addition, the following guidance is illustrated in Example 42:
  1. Paragraph 606-10-32-12 on constraining estimates of variable consideration
  2. Paragraph 606-10-55-18 on methods for measuring progress toward complete satisfaction of a performance obligation.
> > > Example 41—Disaggregation of Revenue—Quantitative Disclosure
606-10-55-296 An entity reports the following segments: consumer products, transportation, and energy, in accordance with Topic 280 on segment reporting. When the entity prepares its investor presentations, it disaggregates revenue into primary geographical markets, major product lines, and timing of revenue recognition (that is, goods transferred at a point in time or services transferred over time).
606-10-55-297 The entity determines that the categories used in the investor presentations can be used to meet the objective of the disaggregation disclosure requirement in paragraph 606-10-50-5, which is to disaggregate revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table illustrates the disaggregation disclosure by primary geographical market, major product line, and timing of revenue recognition, including a reconciliation of how the disaggregated revenue ties in with the consumer products, transportation, and energy segments in accordance with paragraphs 606-10-50-6.
> > > Example 42—Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations
606-10-55-298 On June 30, 20X7, an entity enters into three contracts (Contracts A, B, and C) with separate customers to provide services. Each contract has atwo-year noncancellable term. The entity considers the guidance in paragraphs 606-10-50-13 through 50-15 in determining the information in each contract to be included in the disclosure of the transaction price allocated to the remaining performance obligations at December 31, 20X7.
> > > > Contract A
606-10-55-299 Cleaning services are to be provided over the next two years typically at least once per month. For services provided, the customer pays an hourly rate of $25.
606-10-55-300 Because the entity bills a fixed amount for each hour of service provided, the entity has a right to invoice the customer in the amount that corresponds directly with the value of the entity’s performance completed to date in accordance with paragraph 606-10-55-18. Consequently, no disclosure is necessary if the entity elects to apply the practical expedient in paragraph 606-10-50-14(b).
> > > > Contract B
606-10-55-301 Cleaning services and lawn maintenance services are to be provided as and when needed with a maximum of four visits per month over the next two years. The customer pays a fixed price of $400 per month for both services. The entity measures its progress toward complete satisfaction of the performance obligation using a time-based measure.
606-10-55-302 The entity discloses the amount of the transaction price that has not yet been recognized as revenue in a table with quantitative time bands that illustrates when the entity expects to recognize the amount as revenue. The information for Contract B included in the overall disclosure is as follows.
> > > > Contract C
606-10-55-303 Cleaning services are to be provided as and when needed over the next two years. The customer pays fixed consideration of $100 per month plus a one-time variable consideration payment ranging from $0 – $1,000 corresponding to a one-time regulatory review and certification of the customer’s facility (that is, a performance bonus). The entity estimates that it will be entitled to $750 of the variable consideration. On the basis of the entity’s assessment of the factors in paragraph 606-10-32-12, the entity includes its estimate of $750 of variable consideration in the transaction price because it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The entity measures its progress toward complete satisfaction of the performance obligation using a time-based measure.
606-10-55-304 The entity discloses the amount of the transaction price that has not yet been recognized as revenue in a table with quantitative time bands that illustrates when the entity expects to recognize the amount as revenue. The entity also includes a qualitative discussion about any significant variable consideration that is not included in the disclosure. The information for Contract C included in the overall disclosure is as follows.
606-10-55-305 In addition, in accordance with paragraph 606-10-50-15, the entity discloses qualitatively that part of the performance bonus has been excluded from the disclosure because it was not included in the transaction price. That part of the performance bonus was excluded from the transaction price in accordance with the guidance on constraining estimates of variable consideration.
> > > Example 43—Disclosure of the Transaction Price Allocated to the Remaining Performance Obligations—Qualitative Disclosure
606-10-55-306 On January 1, 20X2, an entity enters into a contract with a customer to construct a commercial building for fixed consideration of $10 million. The construction of the building is a single performance obligation that the entity satisfies over time. As of December 31, 20X2, the entity has recognized $3.2 million of revenue. The entity estimates that construction will be completed in 20X3 but it is possible that the project will be completed in the first half of 20X4.
606-10-55-307 At December 31, 20X2, the entity discloses the amount of the transaction price that has not yet been recognized as revenue in its disclosure of the transaction price allocated to the remaining performance obligations. The entity also discloses an explanation of when the entity expects to recognize that amount as revenue. The explanation can be disclosed either on a quantitative basis using time bands that are most appropriate for the duration of the remaining performance obligation or by providing a qualitative explanation. Because the entity is uncertain about the timing of revenue recognition, the entity discloses this information qualitatively as follows:
As of December 31, 20X2, the aggregate amount of the transaction price allocated to the remaining performance obligation is $6.8 million, and the entity will recognize this revenue as the building is completed, which is expected to occur over the next 12–18 months.
> > Warranties
606-10-55-308 Example 44 illustrates the guidance in paragraphs 606-10-55-30 through 55-35 on warranties. In addition, Example 44 illustrates the guidance in paragraphs 606-10-25-19 through 25-21 on identifying performance obligations.
> > > Example 44—Warranties
606-10-55-309 An entity, a manufacturer, provides its customer with a warranty with the purchase of a product. The warranty provides assurance that the product complies with agreed-upon specifications and will operate as promised for one year from the date of purchase. The contract also provides the customer with the right to receive up to 20 hours of training services on how to operate the product at no additional cost.
606-10-55-310 The entity assesses the goods and services in the contract to determine whether they are distinct and therefore give rise to separate performance obligations.
606-10-55-311 The product is distinct because it meets both criteria in paragraph 606-10-25-19. The product is capable of being distinct in accordance with paragraphs 606-10-25-19(a) and 606-10-25-20 because the customer can benefit from the product on its own without the training services. The entity regularly sells the product separately without the training services. In addition, the product is distinct within the context of the contract in accordance with paragraphs 606-10-25-19(b) and 606-10-25-21 because the entity’s promise to transfer the product is separately identifiable from other promises in the contract.
606-10-55-312 In addition, the training services are distinct because they meet both criteria in paragraph 606-10-25-19. The training services are capable of being distinct in accordance with paragraphs 606-10-25-19(a) and 606-10-25-20 because the customer can benefit from the training services together with the product that has already been provided by the entity. In addition, the training services are distinct within the context of the contract in accordance with paragraphs 606-10-25-19(b) and 606-10-25-21 because the entity’s promise to transfer the training services are separately identifiable from other promises in the contract. The entity does not provide a significant service of integrating the training services with the product (see paragraph 606-10-25-21(a)). The training services are not significantly modified or customized by the product (see paragraph 606-10-25-21(b)). The training services are not highly dependent on, or highly interrelated with, the product as described in paragraph 606-10-25-21(c).
606-10-55-313 The product and training services are each distinct and therefore give rise to two separate performance obligations.
606-10-55-314 Finally, the entity assesses the promise to provide a warranty and observes that the warranty provides the customer with the assurance that the product will function as intended for one year. The entity concludes, in accordance with paragraphs 606-10-55-30 through 55-35, that the warranty does not provide the customer with a good or service in addition to that assurance and, therefore, the entity does not account for it as a performance obligation. The entity accounts for the assurance-type warranty in accordance with the requirements on product warranties in Subtopic 460-10.
606-10-55-315 As a result, the entity allocates the transaction price to the two performance obligations (the product and the training services) and recognizes revenue when (or as) those performance obligations are satisfied.
> > Principal versus Agent Considerations
606-10-55-316 Examples 45–48 illustrate the guidance in paragraphs606-10-55-36 through 55-40 on principal versus agent considerations.
> > > Example 45—Arranging for the Provision of Goods or Services (Entity Is an Agent)
606-10-55-317 An entity operates a website that enables customers to purchase goods from a range of suppliers who deliver the goods directly to the customers. When a good is purchased via the website, the entity is entitled to a commission that is equal to 10 percent of the sales price. The entity’s website facilitates payment between the supplier and the customer at prices that are set by the supplier. The entity requires payment from customers before orders are processed, and all orders are nonrefundable. The entity has no further obligations to the customer after arranging for the products to be provided to the customer.
606-10-55-318 To determine whether the entity’s performance obligation is to provide the specified goods itself (that is, the entity is a principal) or to arrange for the supplier to provide those goods (that is, the entity is an agent), the entity considers the nature of its promise. Specifically, the entity observes that the supplier of the goods delivers its goods directly to the customer and, thus, the entity does not obtain control of the goods. Instead, the entity’s promise is to arrange for the supplier to provide those goods to the customer. In reaching that conclusion the entity considers the following indicators from paragraph 606-10-55-39 as follows:
  1. The supplier is primarily responsible for fulfilling the contract—that is, by shipping the goods to the customer.
  2. The entity does not take inventory risk at any time during the transaction because the goods are shipped directly by the supplier to the customer.
  3. The entity’s consideration is in the form of a commission (10 percent of the sales price).
  4. The entity does not have discretion in establishing prices for the supplier’s goods and, therefore, the benefit the entity can receive from those goods is limited.
  5. Neither the entity nor the supplier has credit risk because payments from customers are made in advance.
606-10-55-319 Consequently, the entity concludes that it is an agent and its performance obligation is to arrange for the provision of goods by the supplier. When the entity satisfies its promise to arrange for the goods to be provided by the supplier to the customer (which, in this example, is when goods are purchased by the customer), the entity recognizes revenue in the amount of the commission to which it is entitled.
> > > Example 46—Promise to Provide Goods or Services (Entity Is a Principal)
606-10-55-320 An entity enters into a contract with a customer for equipment with unique specifications. The entity and the customer develop the specifications for the equipment, which the entity communicates to a supplier that the entity contracts with to manufacture the equipment. The entity also arranges to have the supplier deliver the equipment directly to the customer. Upon delivery of the equipment to the customer, the terms of the contract require the entity to pay the supplier the price agreed to by the entity and the supplier for manufacturing the equipment.
606-10-55-321 The entity and the customer negotiate the selling price, and the entity invoices the customer for the agreed-upon price with 30-day payment terms. The entity’s profit is based on the difference between the sales price negotiated with the customer and the price charged by the supplier.
606-10-55-322 The contract between the entity and the customer requires the customer to seek remedies for defects in the equipment from the supplier under the supplier’s warranty. However, the entity is responsible for any corrections to the equipment required resulting from errors in specifications.
606-10-55-323 To determine whether the entity’s performance obligation is to provide the specified goods or services itself (that is, the entity is a principal) or to arrange for another party to provide those goods or services (that is, the entity is an agent), the entity considers the nature of its promise. The entity has promised to provide the customer with specialized equipment; however, the entity has subcontracted the manufacturing of the equipment to the supplier. In determining whether the entity obtains control of the equipment before control transfers to the customer and whether the entity is a principal, the entity considers the indicators in paragraph 606-10-55-39 as follows:
  1. The entity is primarily responsible for fulfilling the contract. Although the entity subcontracted the manufacturing, the entity is ultimately responsible for ensuring that the equipment meets the specifications for which the customer has contracted.
  2. The entity has inventory risk because of its responsibility for corrections to the equipment resulting from errors in specifications, even though the supplier has inventory risk during production and before shipment.
  3. The entity has discretion in establishing the selling price with the customer, and the profit earned by the entity is an amount that is equal to the difference between the selling price negotiated with the customer and the amount to be paid to the supplier.
  4. The entity’s consideration is not in the form of a commission.
  5. The entity has credit risk for the amount receivable from the customer in exchange for the equipment.
606-10-55-324 The entity concludes that its promise is to provide the equipment to the customer. On the basis of the indicators in paragraph 606-10-55-39, the entity concludes that it controls the equipment before it is transferred to the customer. Thus, the entity is a principal in the transaction and recognizes revenue in the gross amount of consideration to which it is entitled from the customer in exchange for the equipment.
> > > Example 47—Promise to Provide Goods or Services (Entity Is a Principal)
606-10-55-325 An entity negotiates with major airlines to purchase tickets at reduced rates compared with the price of tickets sold directly by the airlines to the public. The entity agrees to buy a specific number of tickets and must pay for those tickets regardless of whether it is able to resell them. The reduced rate paid by the entity for each ticket purchased is negotiated and agreed in advance.
606-10-55-326 The entity determines the prices at which the airline tickets will be sold to its customers. The entity sells the tickets and collects the consideration from customers when the tickets are purchased; therefore, there is no credit risk.
606-10-55-327 The entity also assists the customers in resolving complaints with the service provided by airlines. However, each airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for dissatisfaction with the service.
606-10-55-328 To determine whether the entity’s performance obligation is to provide the specified goods or services itself (that is, the entity is a principal) or to arrange for another party to provide those goods or services (that is, the entity is an agent), the entity considers the nature of its promise. The entity determines that its promise is to provide the customer with a ticket, which provides the right to fly on the specified flight or another flight if the specified flight is changed or cancelled. In determining whether the entity obtains control of the right to fly before control transfers to the customer and whether the entity is a principal, the entity considers the indicators in paragraph 606-10-55-39 as follows:
  1. The entity is primarily responsible for fulfilling the contract, which is providing the right to fly. However, the entity is not responsible for providing the flight itself, which will be provided by the airline.
  2. The entity has inventory risk for the tickets because they are purchased before they are sold to the entity’s customers and the entity is exposed to any loss as a result of not being able to sell the tickets for more than the entity’s cost.
  3. The entity has discretion in setting the sales prices for tickets to its customers.
  4. As a result of the entity’s ability to set the sales prices, the amount that the entity earns is not in the form of a commission but, instead, depends on the sales price it sets and the costs of the tickets that were negotiated with the airline.
606-10-55-329 The entity concludes that its promise is to provide a ticket (that is, a right to fly) to the customer. On the basis of the indicators in paragraph 606-10-55-39, the entity concludes that it controls the ticket before it is transferred to the customer. Thus, the entity concludes that it is a principal in the transaction and recognizes revenue in the gross amount of consideration to which it is entitled in exchange for the tickets transferred.
> > > Example 48—Arranging for the Provision of Goods or Services (Entity Is an Agent)
606-10-55-330 An entity sells vouchers that entitle customers to future meals at specified restaurants. These vouchers are sold by the entity, and the sales price of the voucher provides the customer with a significant discount when compared with the normal selling prices of the meals (for example, a customer pays $100 for a voucher that entitles the customer to a meal at a restaurant that would otherwise cost $200). The entity does not purchase vouchers in advance; instead, it purchases vouchers only as they are requested by the customers. The entity sells the vouchers through its website, and the vouchers are nonrefundable.
606-10-55-331 The entity and the restaurants jointly determine the prices at which the vouchers will be sold to customers. The entity is entitled to 30 percent of the voucher price when it sells the voucher. The entity has no credit risk because the customers pay for the vouchers when purchased.
606-10-55-332 The entity also assists the customers in resolving complaints about the meals and has a buyer satisfaction program. However, the restaurant is responsible for fulfilling obligations associated with the voucher, including remedies to a customer for dissatisfaction with the service.
606-10-55-333 To determine whether the entity is a principal or an agent, the entity considers the nature of its promise and whether it takes control of the voucher (that is, a right) before control transfers to the customer. In making this determination, the entity considers the indicators in paragraph 606-10-55-39 as follows:
  1. The entity is not responsible for providing the meals itself, which will be provided by the restaurants.
  2. The entity does not have inventory risk for the vouchers because they are not purchased before being sold to customers and the vouchers are nonrefundable.
  3. The entity has some discretion in setting the sales prices for vouchers to customers, but the sales prices are jointly determined with the restaurants.
  4. The entity’s consideration is in the form of a commission, because it is entitled to a stipulated percentage (30 percent) of the voucher price.
606-10-55-334 The entity concludes that its promise is to arrange for goods or services to be provided to customers (the purchasers of the vouchers) in exchange for a commission. On the basis of the indicators in paragraph 606-10-55-39, the entity concludes that it does not control the vouchers that provide a right to meals before they are transferred to the customers. Thus, the entity concludes that it is an agent in the arrangement and recognizes revenue in the net amount of consideration to which the entity will be entitled in exchange for the service, which is the 30 percent commission it is entitled to upon the sale of each voucher.
> > Customer Options for Additional Goods or Services
606-10-55-335 Examples 49–52 illustrate the guidance in paragraphs 606-10-55-41 through 55-45 on customer options for additional goods or services. Example 50 illustrates the guidance in paragraphs 606-10-25-19 through 25-21 on identifying performance obligations. Example 52 illustrates a customer loyalty program. That Example may not apply to all customer loyalty arrangements because the terms and conditions may differ. In particular, when there are more than two parties to the arrangement, an entity should consider all facts and circumstances to determine the customer in the transaction that gives rise to the award credits.
> > > Example 49—Option That Provides the Customer with a Material Right (Discount Voucher)
606-10-55-336 An entity enters into a contract for the sale of Product A for $100. As part of the contract, the entity gives the customer a 40 percent discount voucher for any future purchases up to $100 in the next 30 days. The entity intends to offer a 10 percent discount on all sales during the next 30 days as part of a seasonal promotion. The 10 percent discount cannot be used in addition to the 40 percent discount voucher.
606-10-55-337 Because all customers will receive a 10 percent discount on purchases during the next 30 days, the only discount that provides the customer with a material right is the discount that is incremental to that 10 percent (that is, the additional 30 percent discount). The entity accounts for the promise to provide the incremental discount as a performance obligation in the contract for the sale of Product A.
606-10-55-338 To estimate the standalone selling price of the discount voucher in accordance with paragraph 606-10-55-44, the entity estimates an 80 percent likelihood that a customer will redeem the voucher and that a customer will, on average, purchase $50 of additional products. Consequently, the entity’s estimated standalone selling price of the discount voucher is $12 ($50 average purchase price of additional products × 30 percent incremental discount × 80 percent likelihood of exercising the option). The standalone selling prices of Product A and the discount voucher and the resulting allocation of the $100 transaction price are as follows:
606-10-55-339 The entity allocates $89 to Product A and recognizes revenue for Product A when control transfers. The entity allocates $11 to the discount voucher and recognizes revenue for the voucher when the customer redeems it for goods or services or when it expires.
> > > Example 50—Option That Does Not Provide the Customer with a Material Right (Additional Goods or Services)
606-10-55-340 An entity in the telecommunications industry enters into a contract with a customer to provide a handset and monthly network service for two years. The network service includes up to 1,000 call minutes and 1,500 text messages each month for a fixed monthly fee. The contract specifies the price for any additional call minutes or texts that the customer may choose to purchase in any month. The prices for those services are equal to their standalone selling prices.
606-10-55-341 The entity determines that the promises to provide the handset and network service are each separate performance obligations. This is because the customer can benefit from the handset and network service either on their own or together with other resources that are readily available to the customer in accordance with the criterion in paragraph 606-10-25-19(a). In addition, the handset and network service are separately identifiable in accordance with the criterion in paragraph 606-10-25-19(b) (on the basis of the factors in paragraph 606-10-25-21).
606-10-55-342 The entity determines that the option to purchase the additional call minutes and texts does not provide a material right that the customer would not receive without entering into the contract (see paragraph 606-10-55-43). This is because the prices of the additional call minutes and texts reflect the standalone selling prices for those services. Because the option for additional call minutes and texts does not grant the customer a material right, the entity concludes it is not a performance obligation in the contract. Consequently, the entity does not allocate any of the transaction price to the option for additional call minutes or texts. The entity will recognize revenue for the additional call minutes or texts if and when the entity provides those services.
> > > Example 51—Option That Provides the Customer with a Material Right (Renewal Option)
606-10-55-343 An entity enters into 100 separate contracts with customers to provide 1 year of maintenance services for $1,000 per contract. The terms of the contracts specify that at the end of the year, each customer has the option to renew the maintenance contract for a second year by paying an additional $1,000. Customers who renew for a second year also are granted the option to renew for a third year for $1,000. The entity charges significantly higher prices for maintenance services to customers that do not sign up for the maintenance services initially (that is, when the products are new). That is, the entity charges $3,000 in Year 2 and $5,000 in Year 3 for annual maintenance services if a customer does not initially purchase the service or allows the service to lapse.
606-10-55-344 The entity concludes that the renewal option provides a material right to the customer that it would not receive without entering into the contract because the price for maintenance services are significantly higher if the customer elects to purchase the services only in Year 2 or 3. Part of each customer’s payment of $1,000 in the first year is, in effect, a nonrefundable prepayment of the services to be provided in a subsequent year. Consequently, the entity concludes that the promise to provide the option is a performance obligation.
606-10-55-345 The renewal option is for a continuation of maintenance services, and those services are provided in accordance with the terms of the existing contract. Instead of determining the standalone selling prices for the renewal options directly, the entity allocates the transaction price by determining the consideration that it expects to receive in exchange for all the services that it expects to provide in accordance with paragraph 606-10-55-45.
606-10-55-346 The entity expects 90 customers to renew at the end of Year 1 (90 percent of contracts sold) and 81 customers to renew at the end of Year 2 (90 percent of the 90 customers that renewed at the end of Year 1 will also renew at the end of Year 2, that is 81 percent of contracts sold).
606-10-55-347 At contract inception, the entity determines the expected consideration for each contract is $2,710 [$1,000 + (90 percent × $1,000) + (81 percent × $1,000)]. The entity also determines that recognizing revenue on the basis of costs incurred relative to the total expected costs depicts the transfer of services to the customer. Estimated costs for a three-year contract are as follows:
Year 1 $ 600
Year 2 $ 750
Year 3 $ 1,000
606-10-55-348 Accordingly, the pattern of revenue recognition expected at contract inception for each contract is as follows:
606-10-55-349 Consequently, at contract inception, the entity allocates to the option to renew at the end of Year 1 $22,000 of the consideration received to date [cash of $100,000 – revenue to be recognized in Year 1 of $78,000 ($780 × 100)].
606-10-55-350 Assuming there is no change in the entity’s expectations and the 90 customers renew as expected, at the end of the first year, the entity has collected cash of $190,000 [(100 × $1,000) + (90 × $1,000)], has recognized revenue of $78,000 ($780 × 100), and has recognized a contract liability of $112,000.
606-10-55-351 Consequently, upon renewal at the end of the first year, the entity allocates $24,300 to the option to renew at the end of Year 2 [cumulative cash of $190,000 – cumulative revenue recognized in Year 1 and to be recognized in Year 2 of $165,700 ($78,000 + $877 × 100)].
606-10-55-352 If the actual number of contract renewals was different than what the entity expected, the entity would update the transaction price and the revenue recognized accordingly.
> > > Example 52—Customer Loyalty Program
606-10-55-353 An entity has a customer loyalty program that rewards a customer with 1 customer loyalty point for every $10 of purchases. Each point is redeemable for a $1 discount on any future purchases of the entity’s products. During a reporting period, customers purchase products for $100,000 and earn 10,000 points that are redeemable for future purchases. The consideration is fixed, and the standalone selling price of the purchased products is $100,000. The entity expects 9,500 points to be redeemed. The entity estimates a standalone selling price of $0.95 per point (totalling $9,500) on the basis of the likelihood of redemption in accordance with paragraph 606-10-55-44.
606-10-55-354 The points provide a material right to customers that they would not receive without entering into a contract. Consequently, the entity concludes that the promise to provide points to the customer is a performance obligation. The entity allocates the transaction price ($100,000) to the product and the points on a relative standalone selling price basis as follows:
Product $91,324 [$100,000 × ($100,000 standalone selling price ÷ $109,500)]
Points $8,676 [$100,000 × ($9,500 standalone selling price ÷ $109,500)]
606-10-55-355 At the end of the first reporting period, 4,500 points have been redeemed, and the entity continues to expect 9,500 points to be redeemed in total. The entity recognizes revenue for the loyalty points of $4,110 [(4,500 points ÷ 9,500 points) × $8,676] and recognizes a contract liability of $4,566 ($8,676 – $ 4,110) for the unredeemed points at the end of the first reporting period.
606-10-55-356 At the end of the second reporting period, 8,500 points have been redeemed cumulatively. The entity updates its estimate of the points that will be redeemed and now expects that 9,700 points will be redeemed. The entity recognizes revenue for the loyalty points of $3,493 {[(8,500 total points redeemed ÷ 9,700 total points expected to be redeemed) × $8,676 initial allocation] – $4,110 recognized in the first reporting period}. The contract liability balance is $1,073 ($8,676 initial allocation – $7,603 of cumulative revenue recognized).
> > Nonrefundable Upfront Fees
606-10-55-357 Example 53 illustrates the guidance in paragraphs 606-10-55-50 through 55-53 on nonrefundable upfront fees.
> > > Example 53—Nonrefundable Upfront Fee
606-10-55-358 An entity enters into a contract with a customer for one year of transaction processing services. The entity’s contracts have standard terms that are the same for all customers. The contract requires the customer to pay an upfront fee to set up the customer on the entity’s systems and processes. The fee is a nominal amount and is nonrefundable. The customer can renew the contract each year without paying an additional fee.
606-10-55-359 The entity’s setup activities do not transfer a good or service to the customer and, therefore, do not give rise to a performance obligation.
606-10-55-360 The entity concludes that the renewal option does not provide a material right to the customer that it would not receive without entering into that contract (see paragraph 606-10-55-42). The upfront fee is, in effect, an advance payment for the future transaction processing services. Consequently, the entity determines the transaction price, which includes the nonrefundable upfront fee, and recognizes revenue for the transaction processing services as those services are provided in accordance with paragraph 606-10-55-51.
> > Licensing
606-10-55-361 Examples 54–61 illustrate the guidance in paragraphs 606-10-25- 14 through 25-22 on identifying performance obligations and paragraphs 606-1055-54 through 55-65 on licensing. These Examples also illustrate other guidance as follows:
  1. Paragraphs 606-10-25-31 through 25-37 on measuring progress toward complete satisfaction of a performance obligation (Example 58)
  2. Paragraphs 606-10-32-39 through 32-41 on allocating variable consideration to performance obligations (Example 57)
  3. Paragraph 606-10-55-65 on consideration in the form of sales-based or usage-based royalties on licenses of intellectual property (Examples 57 and 61).
> > > Example 54—Right to Use Intellectual Property
606-10-55-362 Using the same facts as in Case A in Example 11 (see paragraphs 606-10-55-141 through 55-145), the entity identifies four performance obligations in a contract:
  1. The software license
  2. Installation services
  3. Software updates
  4. Technical support.
606-10-55-363 The entity assesses the nature of its promise to transfer the software license in accordance with paragraph 606-10-55-60. The entity observes that the software is functional at the time that the license transfers to the customer, and the customer can direct the use of, and obtain substantially all of the remaining benefits from, the software when the license transfers to the customer. Furthermore, the entity concludes that because the software is functional when it transfers to the customer, the customer does not reasonably expect the entity to undertake activities that significantly affect the intellectual property to which the license relates. This is because at the point in time that the license is transferred to the customer, the intellectual property will not change throughout the license period. The entity does not consider in its assessment of the criteria in paragraph 606-10-55-60 the promise to provide software updates because they represent a separate performance obligation. Therefore, the entity concludes that none of the criteria in paragraph 606-10-55-60 are met and that the nature of the entity’s promise in transferring the license is to provide a right to use the entity’s intellectual property as it exists at a point in time—that is, the intellectual property to which the customer has rights is static. Consequently, the entity accounts for the license as a performance obligation satisfied at a point in time.
> > > Example 55—License of Intellectual Property
606-10-55-364 An entity enters into a contract with a customer to license (for a period of three years) intellectual property related to the design and production processes for a good. The contract also specifies that the customer will obtain any updates to that intellectual property for new designs or production processes that may be developed by the entity. The updates are essential to the customer’s ability to use the license because the customer operates in an industry in which technologies change rapidly. The entity does not sell the updates separately, and the customer does not have the option to purchase the license without the updates.
606-10-55-365 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity determines that although the entity can conclude that the customer can obtain benefit from the license on its own without the updates (see paragraph 606-10-25-19(a)), that benefit would be limited because the updates are critical to the customer’s ability to continue to make use of the license in the rapidly changing technological environment in which the customer operates. In assessing whether the criterion in paragraph 606-10-2519(b) is met, the entity observes that the customer does not have the option to purchase the license without the updates and the customer obtains limited benefit from the license without the updates. Therefore, the entity concludes that the license and the updates are highly interrelated and the promise to grant the license is not distinct within the context of the contract because the license is not separately identifiable from the promise to provide the updates (in accordance with the criterion in paragraph 606-10-25-19(b) and the factors in paragraph 60610-25-21).
606-10-55-366 The entity applies paragraphs 606-10-25-23 through 25-30 to determine whether the performance obligation (which includes the license and the updates) is satisfied at a point in time or over time. The entity concludes that because the customer simultaneously receives and consumes the benefits of the entity’s performance as it occurs, the performance obligation is satisfied over time in accordance with paragraph 606-10-25-27(a).
> > > Example 56—Identifying a Distinct License
606-10-55-367 An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for 10 years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore, the entity will not undertake any activities to support the drug, which is consistent with its customary business practices.
> > > > Case A—License Is Not Distinct
606-10-55-368 In this case, no other entity can manufacture this drug because of the highly specialized nature of the manufacturing process. As a result, the license cannot be purchased separately from the manufacturing services.
606-10-55-369 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity determines that the customer cannot benefit from the license without the manufacturing service; therefore, the criterion in paragraph 606-10-25-19(a) is not met. Consequently, the license and the manufacturing service are not distinct, and the entity accounts for the license and the manufacturing service as a single performance obligation.
606-10-55-370 The entity applies paragraphs 606-10-25-23 through 25-30 to determine whether the performance obligation (that is, the bundle of the license and the manufacturing services) is a performance obligation satisfied at a point in time or over time.
> > > > Case B—License Is Distinct
606-10-55-371 In this case, the manufacturing process used to produce the drug is not unique or specialized, and several other entities can also manufacture the drug for the customer.
606-10-55-372 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. Because the manufacturing process can be provided by other entities, the entity concludes that the customer can benefit from the license on its own (that is, without the manufacturing service) and that the license is separately identifiable from the manufacturing process (that is, the criteria in paragraph 606-10-25-19 are met). Consequently, the entity concludes that the license and the manufacturing service are distinct and the entity has two performance obligations:
  1. License of patent rights
  2. Manufacturing service.
606-10-55-373 The entity assesses, in accordance with paragraph 606-10-55-60, the nature of the entity’s promise to grant the license. The drug is a mature product (that is, it has been approved, is currently being manufactured, and has been sold commercially for the last several years). For these types of mature products, the entity’s customary business practices are not to undertake any activities to support the drug. Consequently, the entity concludes that the criteria in paragraph 606-10-55-60 are not met because the contract does not require, and the customer does not reasonably expect, the entity to undertake activities that significantly affect the intellectual property to which the customer has rights. In its assessment of the criteria in paragraph 606-10-55-60, the entity does not take into consideration the separate performance obligation of promising to provide a manufacturing service. Consequently, the nature of the entity’s promise in transferring the license is to provide a right to use the entity’s intellectual property in the form and the functionality with which it exists at the point in time that it is granted to the customer. Consequently, the entity accounts for the license as a performance obligation satisfied at a point in time.
606-10-55-374 The entity applies paragraphs 606-10-25-23 through 25-30 to determine whether the manufacturing service is a performance obligation satisfied at a point in time or over time.
> > > Example 57—Franchise Rights
606-10-55-375 An entity enters into a contract with a customer and promises to grant a franchise license that provides the customer with the right to use the entity’s trade name and sell the entity’s products for 10 years. In addition to the license, the entity also promises to provide the equipment necessary to operate a franchise store. In exchange for granting the license, the entity receives a sales-based royalty of 5 percent of the customer’s monthly sales. The fixed consideration for the equipment is $150,000 payable when the equipment is delivered.
> > > > Identifying Performance Obligations
606-10-55-376 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity observes that the entity, as a franchisor, has developed a customary business practice to undertake activities such as analyzing the customer’s changing preferences and implementing product improvements, pricing strategies, marketing campaigns, and operational efficiencies to support the franchise name. However, the entity concludes that these activities do not directly transfer goods or services to the customer because they are part of the entity’s promise to grant a license and, in effect, change the intellectual property to which the customer has rights.
606-10-55-377 The entity determines that it has two promises to transfer goods or services: a promise to grant a license and a promise to transfer equipment. In addition, the entity concludes that the promise to grant the license and the promise to transfer the equipment are distinct. This is because the customer can benefit from each promise (that is, the promise of the license and the promise of the equipment) on their own or together with other resources that are readily available (see paragraph 606-10-25-19(a)). (That is, the customer can benefit from the license together with the equipment that is delivered before the opening of the franchise, and the equipment can be used in the franchise or sold for an amount other than scrap value.) The entity also determines that the franchise license and equipment are separately identifiable in accordance with the criterion in paragraph 606-10-25-19(b), because none of the factors in paragraph 606-1025-21 are present. Consequently, the entity has two performance obligations:
  1. The franchise license
  2. The equipment.
> > > > Allocating the Transaction Price
606-10-55-378 The entity determines that the transaction price includes fixed consideration of $150,000 and variable consideration (5 percent of customer sales).
606-10-55-379 The entity applies paragraph 606-10-32-40 to determine whether the variable consideration should be allocated entirely to the performance obligation to transfer the franchise license. The entity concludes that the variable consideration (that is, the sales-based royalty) should be allocated entirely to the franchise license because the variable consideration relates entirely to the entity’s promise to grant the franchise license. In addition, the entity observes that allocating $150,000 to the equipment and the sales-based royalty to the franchise license would be consistent with an allocation based on the entity’s relative standalone selling prices in similar contracts. That is, the standalone selling price of the equipment is $150,000 and the entity regularly licenses franchises in exchange for 5 percent of customer sales. Consequently, the entity concludes that the variable consideration (that is, the sales-based royalty) should be allocated entirely to the performance obligation to grant the franchise license.
> > > > Licensing
606-10-55-380 The entity assesses, in accordance with paragraph 606-10-55-60, the nature of the entity’s promise to grant the franchise license. The entity concludes that the criteria in paragraph 606-10-55-60 are met and the nature of the entity’s promise is to provide access to the entity’s intellectual property in its current form throughout the license period. This is because:
  1. The entity concludes that the customer would reasonably expect that the entity will undertake activities that will affect the intellectual property to which the customer has rights. This is on the basis of the entity’s customary business practice to undertake activities such as analyzing the customer’s changing preferences and implementing product improvements, pricing strategies, marketing campaigns, and operational efficiencies. In addition, the entity observes that because part of its compensation is dependent on the success of the franchisee (as evidenced through the sales-based royalty), the entity has a shared economic interest with the customer that indicates that the customer will expect the entity to undertake those activities to maximize earnings.
  2. The entity also observes that the franchise license requires the customer to implement any changes that result from those activities and thus exposes the customer to any positive or negative effects of those activities.
  3. The entity also observes that even though the customer may benefit from the activities through the rights granted by the license, they do not transfer a good or service to the customer as those activities occur.
606-10-55-381 Because the criteria in paragraph 606-10-55-60 are met, the entity concludes that the promise to transfer the license is a performance obligation satisfied over time in accordance with paragraph 606-10-25-27(a).
606-10-55-382 The entity also concludes that because the consideration is in the form of a sales-based royalty, the entity applies paragraph 606-10-55-65 and, after the transfer of the franchise license, the entity recognizes revenue as and when those sales occur.
> > > Example 58—Access to Intellectual Property
606-10-55-383 An entity, a creator of comic strips, licenses the use of the images and names of its comic strip characters in three of its comic strips to a customer for a four-year term. There are main characters involved in each of the comic strips. However, newly created characters appear regularly and the images of the characters evolve over time. The customer, an operator of cruise ships, can use the entity’s characters in various ways, such as in shows or parades, within reasonable guidelines. The contract requires the customer to use the latest images of the characters.
606-10-55-384 In exchange for granting the license, the entity receives a fixed payment of $1 million in each year of the 4-year term.
606-10-55-385 In accordance with paragraph 606-10-25-19, the entity assesses the goods and services promised to the customer to determine which goods and services are distinct. The entity concludes that it has no other performance obligations other than the promise to grant a license. That is, the additional activities associated with the license do not directly transfer a good or service to the customer because they are part of the entity’s promise to grant a license and, in effect, change the intellectual property to which the customer has rights. 606-10-55-386 The entity assesses the nature of the entity’s promise to transfer the license in accordance with paragraph 606-10-55-60. In assessing the criteria the entity considers the following:
  1. The customer reasonably expects (arising from the entity’s customary business practices) that the entity will undertake activities that will affect the intellectual property to which the customer has rights (that is, the characters). Those activities include development of the characters and the publishing of a weekly comic strip that includes the characters.
  2. The rights granted by the license directly expose the customer to any positive or negative effects of the entity’s activities because the contract requires the customer to use the latest characters.
  3. Even though the customer may benefit from those activities through the rights granted by the license, they do not transfer a good or service to the customer as those activities occur.
606-10-55-387 Consequently, the entity concludes that the criteria in paragraph 606-10-55-60 are met and that the nature of the entity’s promise to transfer the license is to provide the customer with access to the entity’s intellectual property as it exists throughout the license period. Consequently, the entity accounts for the promised license as a performance obligation satisfied over time (that is, the criterion in paragraph 606-10-25-27(a) is met).
606-10-55-388 The entity applies paragraphs 606-10-25-31 through 25-37 to identify the method that best depicts its performance in the license. Because the contract provides the customer with unlimited use of the licensed characters for a fixed term, the entity determines that a time-based method would be the most appropriate measure of progress toward complete satisfaction of the performance obligation.
> > > Example 59—Right to Use Intellectual Property
606-10-55-389 An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony by a noted orchestra. The customer, a consumer products company, has the right to use the recorded symphony in all commercials, including television, radio, and online advertisements for two years in Country A. In exchange for providing the license, the entity receives fixed consideration of $10,000 per month. The contract does not include any other goods or services to be provided by the entity. The contract is noncancellable.
606-10-55-390 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity concludes that its only performance obligation is to grant the license.
606-10-55-391 In accordance with paragraph 606-10-55-60, the entity assesses the nature of the entity’s promise to grant the license. The entity does not have any contractual or implied obligations to change the licensed recording. Thus, the intellectual property to which the customer has rights is static. Consequently, the entity concludes that the nature of its promise in transferring the license is to provide the customer with a right to use the entity’s intellectual property as it exists at the point in time that it is granted. Therefore, the promise to grant the license is a performance obligation satisfied at a point in time. The entity recognizes all of the revenue at the point in time when the customer can direct the use of, and obtain substantially all of the remaining benefits from, the licensed intellectual property.
606-10-55-392 Because of the length of time between the entity’s performance (at the beginning of the period) and the customer’s monthly payments over two years (which are noncancellable), the entity considers the guidance in paragraphs 606-10-32-15 through 32-20 to determine whether a significant financing component exists.
> > > Example 60—Access to Intellectual Property
606-10-55-393 An entity, a movie distribution company, licenses Movie XYZ to a customer. The customer, an operator of cinemas, has the right to show the movie in its cinemas for six weeks. In exchange for providing the license, the entity will receive a portion of the operator’s ticket sales for Movie XYZ (that is, variable consideration in the form of a sales-based royalty). The entity concludes that its only performance obligation is the promise to grant the license.
606-10-55-394 The entity observes that regardless of whether the promise to grant the license represents a right to access the entity’s intellectual property or a right to use the entity’s intellectual property, the entity applies paragraph 606-1055-65 and recognizes revenue as and when the ticket sales occur. This is because the consideration for its license of intellectual property is a sales-based royalty and the entity has already transferred the license to the movie to which the sales-based royalty relates.
> > > Example 61—Access to Intellectual Property
606-10-55-395 An entity, a well-known sports team, licenses the use of its name and logo to a customer. The customer, an apparel designer, has the right to use the sports team’s name and logo on items including t-shirts, caps, mugs, and towels for one year. In exchange for providing the license, the entity will receive fixed consideration of $2 million and a royalty of 5 percent of the sales price of any items using the team name or logo. The customer expects that the entity will continue to play games and provide a competitive team.
606-10-55-396 The entity assesses the goods and services promised to the customer to determine which goods and services are distinct in accordance with paragraph 606-10-25-19. The entity concludes that its only performance obligation is to transfer the license. That is, the additional activities associated with the license do not directly transfer a good or service to the customer because they are part of the entity’s promise to grant the license and, in effect, change the intellectual property to which the customer has rights.
606-10-55-397 The entity assesses the nature of the entity’s promise to transfer the license in accordance with paragraph 606-10-55-60. In assessing the criteria, the entity considers the following:
  1. The entity concludes that the customer would reasonably expect that the entity will undertake activities that will affect the intellectual property (that is, the team name and logo) to which the customer has rights. This is on the basis of the entity’s customary business practice to undertake activities such as continuing to play and providing a competitive team. In addition, the entity observes that because some of its consideration is dependent on the success of the customer (through the sales-based royalty), the entity has a shared economic interest with the customer, which indicates that the customer will expect the entity to undertake those activities to maximize earnings.
  2. The entity observes that the rights granted by the license (that is, the use of the team’s name and logo) directly expose the customer to any positive or negative effects of the entity’s activities.
  3. The entity also observes that even though the customer may benefit from the activities through the rights granted by the license, they do not transfer a good or service to the customer as those activities occur.
606-10-55-398 The entity concludes that the criteria in paragraph 606-10-55-60 are met and the nature of the entity’s promise to grant the license is to provide the customer with access to the entity’s intellectual property as it exists throughout the license period. Consequently, the entity accounts for the promised license as a performance obligation satisfied over time (that is, the criterion in paragraph 606-10-25-27(a) is met).
606-10-55-399 The entity then applies paragraphs 606-10-25-31 through 25-37 to determine a measure of progress that will depict the entity’s performance for the fixed consideration. For the consideration that is in the form of a sales-based royalty, paragraph 606-10-55-65 applies; therefore, the entity recognizes revenue as and when the sales of items using the team name or logo occur.
> > Repurchase Agreements
606-10-55-400 Example 62 illustrates the guidance in paragraphs 606-10-55-66 through 55-78 on repurchase agreements.
> > > Example 62—Repurchase Agreements
606-10-55-401 An entity enters into a contract with a customer for the sale of a tangible asset on January 1, 20X7, for $1 million.
> > > > Case A—Call Option: Financing
606-10-55-402 The contract includes a call option that gives the entity the right to repurchase the asset for $1.1 million on or before December 31, 20X7.
606-10-55-403 Control of the asset does not transfer to the customer on December 31, 20X7, because the entity has a right to repurchase the asset and therefore the customer is limited in its ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Consequently, in accordance with paragraph 606-10-55-68(b), the entity accounts for the transaction as a financing arrangement because the exercise price is more than the original selling price. In accordance with paragraph 606-10-55-70, the entity does not derecognize the asset and instead recognizes the cash received as a financial liability. The entity also recognizes interest expense for the difference between the exercise price ($1.1 million) and the cash received ($1 million), which increases the liability.
606-10-55-404 On December 31, 20X7, the option lapses unexercised; therefore, the entity derecognizes the liability and recognizes revenue of $1.1 million.
> > > > Case B—Put Option: Lease
606-10-55-405 Instead of having a call option, the contract includes a put option that obliges the entity to repurchase the asset at the customer’s request for $900,000 on or before December 31, 20X7. The market value is expected to be $750,000 on December 31, 20X7.
606-10-55-406 At the inception of the contract, the entity assesses whether the customer has a significant economic incentive to exercise the put option, to determine the accounting for the transfer of the asset (see paragraphs 606-1055-72 through 55-78). The entity concludes that the customer has a significant economic incentive to exercise the put option because the repurchase price significantly exceeds the expected market value of the asset at the date of repurchase. The entity determines there are no other relevant factors to consider when assessing whether the customer has a significant economic incentive to exercise the put option. Consequently, the entity concludes that control of the asset does not transfer to the customer because the customer is limited in its ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.
606-10-55-407 In accordance with paragraphs 606-10-55-72 through 55-73, the entity accounts for the transaction as a lease in accordance with Topic 840 on leases.
> > Bill-and-Hold Arrangements
606-10-55-408 Example 63 illustrates the guidance in paragraphs 606-10-55-81 through 55-84 on bill-and-hold arrangements.
> > > Example 63—Bill-and-Hold Arrangement
606-10-55-409 An entity enters into a contract with a customer on January 1, 20X8, for the sale of a machine and spare parts. The manufacturing lead time for the machine and spare parts is two years.
606-10-55-410 Upon completion of manufacturing, the entity demonstrates that the machine and spare parts meet the agreed-upon specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two performance obligations that each will be satisfied at a point in time. On December 31, 20X9, the customer pays for the machine and spare parts but only takes physical possession of the machine. Although the customer inspects and accepts the spare parts, the customer requests that the spare parts be stored at the entity’s warehouse because of its close proximity to the customer’s factory. The customer has legal title to the spare parts, and the parts can be identified as belonging to the customer. Furthermore, the entity stores the spare parts in a separate section of its warehouse, and the parts are ready for immediate shipment at the customer’s request. The entity expects to hold the spare parts for two to four years, and the entity does not have the ability to use the spare parts or direct them to another customer.
606-10-55-411 The entity identifies the promise to provide custodial services as a performance obligation because it is a service provided to the customer and it is distinct from the machine and spare parts. Consequently, the entity accounts for three performance obligations in the contract (the promises to provide the machine, the spare parts, and the custodial services). The transaction price is allocated to the three performance obligations and revenue is recognized when (or as) control transfers to the customer.
606-10-55-412 Control of the machine transfers to the customer on December 31, 20X9, when the customer takes physical possession. The entity assesses the indicators in paragraph 606-10-25-30 to determine the point in time at which control of the spare parts transfers to the customer, noting that the entity has received payment, the customer has legal title to the spare parts, and the customer has inspected and accepted the spare parts. In addition, the entity concludes that all of the criteria in paragraph 606-10-55-83 are met, which is necessary for the entity to recognize revenue in a bill-and-hold arrangement. The entity recognizes revenue for the spare parts on December 31, 20X9, when control transfers to the customer.
606-10-55-413 The performance obligation to provide custodial services is satisfied over time as the services are provided. The entity considers whether the payment terms include a significant financing component in accordance with paragraphs 606-10-32-15 through 32-20.
Relationships
General
> Costs Related to a Contract with a Customer
> > Other Assets and Deferred Costs—Costs Related to a Contract with a Customer
606-10-60-1 For guidance on the costs related to a contract with a customer that is within the scope of this Topic, see Subtopic 340-40.
> Revenue Recognition
> > Agriculture—Revenue Recognition
606-10-60-2 For guidance on recognizing revenue from contracts that are not within scope of this Topic by entities in the agriculture industry, see Subtopic 905-605.
> > Financial Services—Insurance—Revenue Recognition
606-10-60-3 For guidance on recognizing revenue from contracts that are not within scope of this Topic by insurance entities, see Subtopic 944-605.
> > Health Care Entities—Revenue Recognition
606-10-60-4 For guidance on recognizing revenue from contracts that are not within scope of this Topic by health care entities, see Subtopic 954-605.
> > Not-for-Profit-Entities—Revenue Recognition
606-10-60-5 For guidance on recognizing revenue from contracts that are not within scope of this Topic by not-for-profit entities, see Subtopic 958-605.
> > Regulated Operations—Revenue Recognition
606-10-60-6 For guidance on recognizing revenue and disclosure requirements for contracts that are not within scope of this Topic by entities with regulated operations, see Subtopic 980-605.
> Provision for Losses
> > Software—Revenue Recognition—Provision for Losses
606-10-60-7 For guidance on determining the need for a provision for losses on certain software arrangements, see Subtopic 985-605.
606-10-60-8 For guidance on determining the need for a provision for losses on certain reinsurance contracts, See Subtopic 944-605.
> > Revenue Recognition—Provision for Losses on Construction-Type and Production-Type Contracts
606-10-60-9 For guidance on determining the need for a provision for losses for construction-type and production-type contracts, see Subtopic 605-35.
> > Revenue Recognition—Provision for Losses on Separately Priced Extended Warranty and Product Maintenance Contracts
606-10-60-10 For guidance on recognizing a loss on separately priced extended warranty and product maintenance contracts, see Subtopic 605-20.
> > Health Care Entities—Commitments
606-10-60-11 For guidance on determining whether a liability should be recognized for a continuing care retirement community for its obligation to provide future services and the use of facilities to current residents, see Sections 954-440-25 and 954-440-35.
> > Health Care Entities—Contingencies
606-10-60-12 For guidance on determining when to recognize a loss under prepaid health care services contracts, see paragraph 954-450-30-4.
> > Regulated Operations—Intangibles—Goodwill and Other
606-10-60-13 For guidance on recognizing a loss on long-term power sales contracts, see paragraph 980-350-35-3.
> > Contractors—Federal Government—Contract Costs
606-10-60-14 For guidance on the presentation of a loss on a termination of a contract for default, see paragraph 912-20-25-4.
> Interest—Imputation of Interest
606-10-60-15 For guidance on imputation of interest on contracts that are not within scope of Topic 606, see Subtopic 835-30.
> Nonmonetary Transactions
> > Nonmonetary Transactions—Transactions including Noncash Consideration
606-10-60-16 For guidance on nonmonetary transactions (that is, transactions including noncash consideration) in contracts that are not within scope of this Topic, see Subtopic 845-10.
Transition and Open Effective Date Information
General
> Transition Related to Accounting Standards Update No. 201409, Revenue from Contracts with Customers (Topic 606)
606-10-65-1 The following represents the transition and effective date information related to Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606):
a. A public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, and an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission shall apply the pending content that links to this paragraph for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Earlier application is not permitted.
b. All other entities shall apply the pending content that links to this paragraph for annual reporting periods beginning after December 15, 2017, and interim reporting periods within annual reporting periods beginning after December 15, 2018. However, all other entities may elect to apply the pending content that links to this paragraph earlier only as of:
1. An annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period (public entity effective date).
2. An annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning after December 15, 2017.
3. An annual reporting period beginning after December 15, 2017, including interim reporting periods within that reporting period.
c. For the purposes of the transition guidance in (d) through (i):
1. The date of initial application is the start of the reporting period in which an entity first applies the pending content that links to this paragraph.
2. A completed contract is a contract for which the entity has transferred all of the goods or services identified in accordance with revenue guidance that is in effect before the date of initial application.
d. An entity shall apply the pending content that links to this paragraph using one of the following two methods:
1. Retrospectively to each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10 subject to the expedients in (f).
2. Retrospectively with the cumulative effect of initially applying the pending content that links to this paragraph recognized at the date of initial application in accordance with (h) through (i).
e. If an entity elects to apply the pending content that links to this paragraph retrospectively in accordance with (d)(1), the entity shall provide the disclosures required in paragraphs 250-10-50-1 through 503 in the period of adoption.
f. An entity may use one or more of the following practical expedients when applying the pending content that links to this paragraph retrospectively in accordance with (d)(1):
1. For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period.
2. For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods.
3. For all reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue (see paragraph 606-10-50-13).
g. For any of the practical expedients in (f) that an entity uses, the entity shall apply that expedient consistently to all contracts within all reporting periods presented. In addition, the entity shall disclose all of the following information:
1. The expedients that have been used
2. To the extent reasonably possible, a qualitative assessment of the estimated effect of applying each of those expedients.
h. If an entity elects to apply the pending content that links to this paragraph retrospectively in accordance with (d)(2), the entity shall recognize the cumulative effect of initially applying the pending content that links to this paragraph as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) of the annual reporting period that includes the date of initial application. Under this transition method, an entity shall apply this guidance retrospectively only to contracts that are not completed contracts at the date of initial application (for example, January 1, 2017, for an entity with a December 31 year-end).
i. For reporting periods that include the date of initial application, an entity shall provide both of the following additional disclosures if the pending content that links to this paragraph is applied retrospectively in accordance with (d)(2):
1. The amount by which each financial statement line item is affected in the current reporting period by the application of the pending content that links to this paragraph as compared with the guidance that was in effect before the change
2. An explanation of the reasons for significant changes identified in (i)(1).

Addition of Subtopic 340-40

6. The following Subtopic has been added to codify the guidance on other assets and deferred costs, contracts with customers, consistent with the Board’s overall objective in its revenue recognition project. See the basis for conclusions for further discussion and rationale for decisions reached in this Subtopic.
7. Add Subtopic 340-40, with a link to transition paragraph 606-10-65-1, as follows:
[For ease of readability, the new Subtopic is not underlined.]
Other Assets and Deferred Costs—Contracts with Customers
Overview and Background
General
340-40-05-1 This Subtopic provides accounting guidance for the following costs related to a contract with a customer within the scope of Topic 606 on revenue from contracts with customers:
  1. Incremental costs of obtaining a contract with a customer
  2. Costs incurred in fulfilling a contract with a customer that are not in the scope of another Topic.
340-40-05-2 Paragraphs presented in bold type in this Subtopic state the main principles. All paragraphs have equal authority.
Scope and Scope Exceptions
General
> Overall Guidance
340-40-15-1 This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic (see Section 340-10-15), with specific qualifications and exceptions noted below.
> Transactions
> > Incremental Costs of Obtaining a Contract with a Customer
340-40-15-2 The guidance in this Subtopic applies to the incremental costs of obtaining a contract with a customer within the scope of Topic 606 on revenue from contracts with customers (excluding any consideration payable to a customer, see paragraphs 606-10-32-25 through 32-27).
> > Costs Incurred in Fulfilling a Contract with a Customer
340-40-15-3 The guidance in this Subtopic applies to the costs incurred in fulfilling a contract with a customer within the scope of Topic 606 on revenue from contracts with customers, unless the costs are within the scope of another Topic or Subtopic, including, but not limited to, any of the following:
  1. Topic 330 on inventory
  2. Paragraphs 340-10-25-1 through 25-4 on preproduction costs related to long-term supply arrangements
  3. Subtopic 350-40 on internal-use software
  4. Topic 360 on property, plant, and equipment
  5. Subtopic 985-20 on costs of software to be sold, leased, or otherwise marketed.
Glossary
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
Not-for-Profit Entity
An entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity:
  1. Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
  2. Operating purposes other than to provide goods or services at a profit
  3. Absence of ownership interests like those of business entities.
Entities that clearly fall outside this definition include the following:
  1. All investor-owned entities
  2. Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.
Performance Obligation
A promise in a contract with a customer to transfer to the customer either:
  1. A good or service (or a bundle of goods or services) that is distinct
  2. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
Public Business Entity
A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.
  1. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
  2. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
  3. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
  4. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
  5. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.
Revenue
Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
Transaction Price
The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
Recognition
> Contract Costs
> > Incremental Costs of Obtaining a Contract
340-40-25-1 An entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs.
340-40-25-2 The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission).
340-40-25-3 Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained shall be recognized as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained.
340-40-25-4 As a practical expedient, an entity may recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
> > Costs to Fulfill a Contract
340-40-25-5 An entity shall recognize an asset from the costs incurred to fulfill a contract only if those costs meet all of the following criteria:
  1. The costs relate directly to a contract or to an anticipated contract that the entity can specifically identify (for example, costs relating to services to be provided under renewal of an existing contract or costs of designing an asset to be transferred under a specific contract that has not yet been approved).
  2. The costs generate or enhance resources of the entity that will be used in satisfying (or in continuing to satisfy) performance obligations in the future.
  3. The costs are expected to be recovered.
340-40-25-6 For costs incurred in fulfilling a contract with a customer that are within the scope of another Topic (for example, Topic 330 on inventory; paragraphs 340-10-25-1 through 25-4 on preproduction costs related to longterm supply arrangements; Subtopic 350-40 on internal-use software; Topic 360 on property, plant, and equipment; or Subtopic 985-20 on costs of software to be sold, leased, or otherwise marketed), an entity shall account for those costs in accordance with those other Topics or Subtopics.
340-40-25-7 Costs that relate directly to a contract (or a specific anticipated contract) include any of the following:
  1. Direct labor (for example, salaries and wages of employees who provide the promised services directly to the customer)
  2. Direct materials (for example, supplies used in providing the promised services to a customer)
  3. Allocations of costs that relate directly to the contract or to contract activities (for example, costs of contract management and supervision, insurance, and depreciation of tools and equipment used in fulfilling the contract)
  4. Costs that are explicitly chargeable to the customer under the contract
  5. Other costs that are incurred only because an entity entered into the contract (for example, payments to subcontractors).
340-40-25-8 An entity shall recognize the following costs as expenses when incurred:
  1. General and administrative costs (unless those costs are explicitly chargeable to the customer under the contract, in which case an entity shall evaluate those costs in accordance with paragraph 340-40-25-7)
  2. Costs of wasted materials, labor, or other resources to fulfill the contract that were not reflected in the price of the contract
  3. Costs that relate to satisfied performance obligations (or partially satisfied performance obligations) in the contract (that is, costs that relate to past performance)
  4. Costs for which an entity cannot distinguish whether the costs relate to unsatisfied performance obligations or to satisfied performance obligations (or partially satisfied performance obligations).
Subsequent Measurement
General
> Amortization and Impairment
340-40-35-1 An asset recognized in accordance with paragraph 340-40-25-1 or 340-40-25-5 shall be amortized on a systematic basis that is consistent with the transfer to the customer of the goods or services to which the asset relates. The asset may relate to goods or services to be transferred under a specific anticipated contract (as described in paragraph 340-40-25-5(a)).
340-40-35-2 An entity shall update the amortization to reflect a significant change in the entity’s expected timing of transfer to the customer of the goods or services to which the asset relates. Such a change shall be accounted for as a change in accounting estimate in accordance with Subtopic 250-10 on accounting changes and error corrections.
340-40-35-3 An entity shall recognize an impairment loss in profit or loss to the extent that the carrying amount of an asset recognized in accordance with paragraph 340 -40-25-1 or 340-40-25-5 exceeds:
  1. The remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates, less
  2. The costs that relate directly to providing those goods or services and that have not been recognized as expenses (see paragraph 340-40-25-7).
340-40-35-4 For the purposes of applying paragraph 340-40-35-3 to determine the amount of consideration that an entity expects to receive, an entity shall use the principles for determining the transaction price (except for the guidance in paragraphs 606-10-32-11 through 32-13 on constraining estimates of variable consideration) and adjust that amount to reflect the effects of the customer’s credit risk.
340-40-35-5 Before an entity recognizes an impairment loss for an asset recognized in accordance with paragraph 340-40-25-1 or 340-40-25-5, the entity shall recognize any impairment loss for assets related to the contract that are recognized in accordance with another Topic (for example, Topic 330 on inventory; Subtopic 985-20 on costs of software to be sold, leased, or otherwise marketed; Topic 360 on property, plant, and equipment; and Topic 350 on goodwill and other intangibles). After applying the impairment test in paragraph 340-40-35-3, an entity shall include the resulting carrying amount of the asset recognized in accordance with paragraph 340-40-25-1 or 340-40-25-5 in the carrying amount of the asset group or reporting unit to which it belongs for the purpose of applying the guidance in Topics 360 and 350 to that asset group or reporting unit.
340-40-35-6 An entity shall not recognize a reversal of an impairment loss previously recognized.
Disclosure
General
> Assets Recognized from the Costs to Obtain or Fulfill a Contract with a Customer
340-40-50-1 Consistent with the overall disclosure objective in paragraph 606-1050-1 and the guidance in paragraphs 606-10-50-2 through 50-3, an entity shall provide the following disclosures of assets recognized from the costs to obtain or fulfill a contract with a customer in accordance with paragraphs 340-40-25-1 or 340-40-25-5.
340-40-50-2 An entity shall describe both of the following:
  1. The judgments made in determining the amount of the costs incurred to obtain or fulfill a contract with a customer (in accordance with paragraph 340-40-25-1 or 340-40-25-5)
  2. The method it uses to determine the amortization for each reporting period.
340-40-50-3 An entity shall disclose all of the following:
  1. The closing balances of assets recognized from the costs incurred to obtain or fulfill a contract with a customer (in accordance with paragraph 340-40-25-1 or 340-40-25-5), by main category of asset (for example, costs to obtain contracts with customers, precontract costs, and setup costs)
  2. The amount of amortization and any impairment losses recognized in the reporting period.
340-40-50-4 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission, may elect not to provide the disclosures in paragraphs 340-40-50-2 through 50-3.
> Practical Expedients
340-40-50-5 If an entity elects to use the practical expedient in paragraph 34040-25-4 on the incremental costs of obtaining a contract, the entity shall disclose that fact.
340-40-50-6 An entity, except for a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission, may elect not to provide the disclosure in paragraph 340-40-50-5.
Implementation Guidance and Illustrations
General
> Illustrations
> > Contract Costs
340-40-55-1 Examples 1 and 2 illustrate the guidance in paragraphs 340-40-25-1 through 25-4 on incremental costs of obtaining a contract, paragraphs 340-4025-5 through 25-8 on costs to fulfill a contract, and paragraphs 340-40-35-1 through 35-6 on amortization and impairment of contract costs.
> > > Example 1—Incremental Costs of Obtaining a Contract
340-40-55-2 An entity, a provider of consulting services, wins a competitive bid to provide consulting services to a new customer. The entity incurred the following costs to obtain the contract:
340-40-55-3 In accordance with paragraph 340-40-25-1, the entity recognizes an asset for the $10,000 incremental costs of obtaining the contract arising from the commissions to sales employees because the entity expects to recover those costs through future fees for the consulting services. The entity also pays discretionary annual bonuses to sales supervisors based on annual sales targets, overall profitability of the entity, and individual performance evaluations. In accordance with paragraph 340-40-25-1, the entity does not recognize an asset for the bonuses paid to sales supervisors because the bonuses are not incremental to obtaining a contract. The amounts are discretionary and are based on other factors, including the profitability of the entity and the individuals’ performance. The bonuses are not directly attributable to identifiable contracts.
340-40-55-4 The entity observes that the external legal fees and travel costs would have been incurred regardless of whether the contract was obtained. Therefore, in accordance with paragraph 340-40-25-3, those costs are recognized as expenses when incurred, unless they are within the scope of another Topic, in which case, the guidance in that Topic applies.
> > > Example 2—Costs That Give Rise to an Asset
340-40-55-5 An entity enters into a service contract to manage a customer’s information technology data center for five years. The contract is renewable for subsequent one-year periods. The average customer term is seven years. The entity pays an employee a $10,000 sales commission upon the customer signing the contract. Before providing the services, the entity designs and builds a technology platform for the entity’s internal use that interfaces with the customer’s systems. That platform is not transferred to the customer but will be used to deliver services to the customer.
> > > > Incremental Costs of Obtaining a Contract
340-40-55-6 In accordance with paragraph 340-40-25-1, the entity recognizes an asset for the $10,000 incremental costs of obtaining the contract for the sales commission because the entity expects to recover those costs through future fees for the services to be provided. The entity amortizes the asset over seven years in accordance with paragraph 340-40-35-1 because the asset relates to the services transferred to the customer during the contract term of five years and the entity anticipates that the contract will be renewed for two subsequent one-year periods.
> > > > Costs to Fulfill a Contract
340-40-55-7 The initial costs incurred to set up the technology platform are as follows:
340-40-55-8 The initial setup costs relate primarily to activities to fulfill the contract but do not transfer goods or services to the customer. The entity accounts for the initial setup costs as follows:
  1. Hardware costs—accounted for in accordance with Topic 360 on property, plant, and equipment
  2. Software costs—accounted for in accordance with Subtopic 350-40 on internal-use software
  3. Costs of the design, migration, and testing of the data center—assessed in accordance with paragraph 340-40-25-5 to determine whether an asset can be recognized for the costs to fulfill the contract. Any resulting asset would be amortized on a systematic basis over the seven-year period (that is, the five-year contract term and two anticipated one-year renewal periods) that the entity expects to provide services related to the data center.
340-40-55-9 In addition to the initial costs to set up the technology platform, the entity also assigns two employees who are primarily responsible for providing the service to the customer. Although the costs for these two employees are incurred as part of providing the service to the customer, the entity concludes that the costs do not generate or enhance resources of the entity (see paragraph 340-4025-5(b)). Therefore, the costs do not meet the criteria in paragraph 340-40-25-5 and cannot be recognized as an asset using this Topic. In accordance with paragraph 340-40-25-8, the entity recognizes the payroll expense for these two employees when incurred.
Relationships
General
> Revenue from Contracts with Customers
340-40-60-1 For guidance on revenue from contracts with customers, see Topic 606.
> Financial Services—Insurance
340-40-60-2 For guidance regarding direct response advertising costs, see Subtopic 944-30.

Section B—Conforming Amendments Related to Revenue from Contracts with Customers: Amendments to the Accounting Standards Codification

Amendments to Master Glossary

8. Supersede the following Master Glossary terms, with a link to transition paragraph 606-10-65-1.
  • Affinity Program
  • Airbill
  • Air Cargo
  • Area Franchise
  • Assumption
  • Authorization Code
  • Bargain Purchase
  • Barter
  • Breakage
  • B Shares
  • Buydowns
  • Capitation Fee
  • Consideration
  • Continuing Investments
  • Continuing Involvement (second definition)
  • Cooperative Advertising
  • Core Software
  • Cross-Collateralized
  • Customer (second definition)
  • Delivery
  • Deposit Method (second definition)
  • Diagnosis-Related Group
  • Direct Selling Costs
  • Distributor (first definition)
  • Enhancement
  • Fare
  • Fixed Fee
  • Flip Transactions
  • Full Accrual Method
  • Half-Turn
  • Handling Costs
  • Incentive
  • Independent Third Party
  • Inducement
  • Initial Franchise Fee
  • Initial Services
  • Investor Notes
  • Licensing
  • Lifted Flight Coupon
  • Milestone (both definitions)
  • Off-the-Shelf Software
  • On-Line Lifts
  • On-Line Sale and Off-Line Sale
  • Other than Retail Land Sales
  • OTRLS
  • Ownership Interests
  • Partnership Notes
  • PCS
  • Percentage-of-Completion Method
  • Permanent Investor
  • Planned Amenities
  • Platform
  • Platform-Transfer Right
  • Postcontract Customer Support
  • Prepaid Health Care Plan
  • Profit Center
  • Prospective Rate Setting
  • Reload
  • Rescission
  • Reseller (first definition)
  • Retrospective Insurance Arrangements
  • Retrospective Rate Setting
  • Revenue Passenger Mile
  • Right-to-Use
  • Round-Turn
  • RPM
  • RTU
  • Sales Value
  • Shipping Costs
  • Site License
  • Slotting Fees
  • Street Date
  • Syndication Fees
  • Unit
  • Upgrade (second definition)
  • Upgrade Right
  • Upgrade Transaction
  • User
  • Vacation Club
  • Win
9. Amend the following Master Glossary terms, with a link to transition paragraph 606-10-65-1, as follows:
Amenities
Features that enhance the attractiveness or perceived value of a time-sharing interval. Examples of amenities include golf courses, utility plants, clubhouses, swimming pools, tennis courts, indoor recreational facilities, and parking facilities. See also
Planned Amenities and
Promised Amenities.
Customer (first definition)
A user or reseller.
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
Prematurity Period
During the prematurity period, the cable television system is partially under construction and partially in service. The prematurity period begins when revenue from
with
the first
earned
subscriber is recognized in accordance with Topic 606 on revenue from contracts with customers
revenue
. Its end will vary with circumstances of the system but will be determined based on plans for completion of the first major construction period or achievement of a specified predetermined subscriber level at which no additional investment will be required for other than cable television plant. The construction period of a cable television system varies with the size of the franchise area, density of population, and difficulty of physical construction. The construction period is not completed until the head-end, main cable, and distribution cables are installed, and includes a reasonable time to provide for installation of subscriber drops and related hardware. During the construction period, many system operators complete installation of drops and begin to provide service to some subscribers in some parts of the system while construction continues. Providing the signal for the first time is referred to as energizing the system.
The length of the prematurity period varies with the franchise development and construction plans. Such plans may consist of any of the following:
a. Small franchise that is characterized by the absence of free television signal and a short construction period. The entire system is energized at one time near the end of the construction period.
b. Medium-size franchise that is characterized by some direct competition from free television and by a more extensive geographical franchise area lending itself to incremental construction. Some parts of the system are energized as construction progresses.
c. Large metropolitan franchise that is characterized by heavy direct competition from free television and fringe area signal inadequacy, high cost, and difficult construction. Many parts of the system are energized as construction progresses.
Except in the smallest systems, programming is usually delivered to portions of the system and some revenues are obtained before construction of the entire system is complete. Thus, virtually every cable television system experiences a prematurity period during which it is receiving some revenue while continuing to incur substantial costs related to the establishment of the total system.
Promised Amenities
Amenities that a developer is obligated to construct under the terms of timesharing contracts with purchasers. See also Amenities
and Planned Amenities
.
Relative Sales Value Method
The relative sales value method is similar to a gross profit method and is used to allocate inventory cost and determine cost of sales in conjunction with a sale. Under the relative sales value method, cost of sales is calculated as a percentage of net sales using a cost-of-sales percentage—the ratio of total estimated cost (including costs to complete, if any) to total estimated timesharing revenue. Time-sharing revenue is calculated as total expected future revenue adjusted for total expected future bad-debt expense.
Revenue (first definition)
Revenue earned by an entity from its direct distribution, exploitation, or licensing of a film, before deduction for any of the entity’s direct costs of distribution. For markets and territories in which an entity’s fully or jointly-owned films are distributed by third parties, revenue is the net amounts payable to the entity by third party distributors. Revenue is reduced by appropriate allowances, estimated returns, price concessions, or similar adjustments, as applicable.
Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

Amendments to Subtopic 235-10

10. The following amendment conforms the terminology in paragraph 235-1050-4 to the terminology used in Topic 606, Revenue from Contracts with Customers.
11. Amend paragraph 235-10-50-4, with a link to transition paragraph 606-1065-1, as follows:
Notes to Financial Statements—Overall
Disclosure
> Examples of Disclosures
235-10-50-4 Examples of disclosures by an entity commonly required with respect to accounting policies would include, among others, those relating to the following:
a. Basis of consolidation
b. Depreciation methods
c. Amortization of intangibles
d. Inventory pricing
e. Recognition of revenue from contracts with customers
Accounting for recognition of profit on long-term construction-type contracts
f. Recognition of revenue from
franchising and
leasing operations.

Amendments to Subtopic 270-10

12. The following two amendments have been made to Subtopic 270-10.
a. The amendment to paragraph 270-10-45-3 reflects the removal of the terms earned and percentage of completion method to be consistent with the revenue recognition requirements in Topic 606 and to reference the relevant loss guidance within Subtopic 605-35.
b. The amendment to paragraph 270-10-45-19 updates the reference to guidance on involuntary conversions, which results in a gain or loss and not the recognition of revenue. This guidance has been moved from Subtopic 605-40, Revenue Recognition—Gains and Losses, to the newly added Subtopic 610-30, Other Income—Gains and Losses from an Involuntary Conversion.
13. Amend paragraphs 270-10-45-3 and 270-10-45-19, with a link to transition paragraph 606-10-65-1, as follows:
Interim Reporting—Overall
Other Presentation Matters
> Revenue
270-10-45-3 {Add glossary link}Revenue{Add glossary link} from products sold or services rendered shall be recognized as the entity satisfies a performance obligation by transferring a promised good or service to a customer.
earned
Those revenues shall be recognized during an interim period on the same basis as followed for the full year in accordance with Topic 606 on revenue from contracts with customers. For example, revenues from a longterm construction contract
construction-type contracts
with a customer that includes performance obligations that the entity satisfies over time in accordance with paragraphs 606-10-25-27 through 25-29
accounted for under the percentage-of-completion method
shall be recognized in interim periods on the same basis followed for the full year. Losses projected on
such
contracts within the scope of Subtopic 605-35, in accordance with paragraphs 605-35-25-45 through 25-49, shall be recognized in full during the interim period in which the existence of such losses becomes evident.
> Guidance Related to Presentation of Other Topics at Interim Dates
270-10-45-19 The following may not represent all references to interim reporting:
a. For accounting changes, see paragraphs 250-10-45-14 through 45-16.
b. For comprehensive income, see paragraph 220-10-45-18.
c. For incurred but not reported liability and interim reporting, see paragraphs 720-20-35-3 through 35-5 and 720-20-35-8.
d. For income tax provisions, see Subtopic 740-270.
e. For inventory, see paragraphs 330-10-55-2 and 610-30-25-3
605-40-25-3
.
f. For pensions and other postretirement benefits, see paragraphs 715-2055-18 through 55-19 and 715-60-35-40.
14. The following amendment reflects the Board’s decision on reporting of revenue disclosures in interim financial statements of public entities. This amendment requires disclosure of information about an entity’s contracts with customers, specifically disclosure of disaggregated revenue and contract balances. The Board observed that the disclosure of disaggregated information may be similar to that required for segment information provided on a quarterly basis. Also, the Board noted that consistent with the overall objective of interim reporting (that is, disclosure of significant changes in financial position and performance since the last annual reporting period), disclosures of contract balances should be provided if significant (for example, if there is a significant amount of revenue recognized in the reporting period from performance obligations satisfied in previous periods). Additionally, the amendments represent an update of the description of what is a nonpublic entity using the new definition of a public business entity as defined by the Board in Accounting Standards Update No. 2013-12, Definition of a Public Business Entity. Paragraph 270-1050-1 has been included for context purposes only; no amendments have been made.
15. Add paragraph 270-10-50-1A, with a link to transition paragraph 606-1065-1, as follows:
Disclosure
> Disclosure of Summarized Interim Financial Data by Publicly Traded Companies
270-10-50-1 Many publicly traded companies report summarized financial information at periodic interim dates in considerably less detail than that provided in annual financial statements. While this information provides more timely information than would result if complete financial statements were issued at the end of each interim period, the timeliness of presentation may be partially offset by a reduction in detail in the information provided. As a result, certain guides as to minimum disclosure are desirable. (It should be recognized that the minimum disclosures of summarized interim financial data required of publicly traded companies do not constitute a fair presentation of financial position and results of operations in conformity with generally accepted accounting principles [GAAP]). If publicly traded companies report summarized financial information at interim dates (including reports on fourth quarters), the following data should be reported, as a minimum:
a. Sales or gross revenues, provision for income taxes, extraordinary items (including related income tax effects), net income, and comprehensive income
b. Basic and diluted earnings per share data for each period presented, determined in accordance with the provisions of Topic 260
c. Seasonal revenue, costs, or expenses (see paragraph 270-10-45-11)
d. Significant changes in estimates or provisions for income taxes (see paragraphs 740-270-30-2, 740-270-30-6, and 740-270-30-8)
e. Disposal of a component of an entity and extraordinary, unusual or infrequently occurring items (see paragraphs 270-10-45-11A and 270-10-50-5)
f. Contingent items (see paragraph 270-10-50-6)
g. Changes in accounting principles or estimates (see paragraphs 270-10-45-12 through 45-16)
h. Significant changes in financial position (see paragraph 270-10-50-4)
i. All of the following information about reportable operating segments determined according to the provisions of Topic 280, including provisions related to restatement of segment information in previously issued financial statements:
1. Revenues from external customers
2. Intersegment revenues
3. A measure of segment profit or loss
4. Total assets for which there has been a material change from the amount disclosed in the last annual report
5. A description of differences from the last annual report in the basis of segmentation or in the measurement of segment profit or loss
6. A reconciliation of the total of the reportable segments’ measures of profit or loss to the entity’s consolidated income before income taxes, extraordinary items, and discontinued operations. However, if, for example, an entity allocates items such as income taxes and extraordinary items to segments, the entity may choose to reconcile the total of the segments’ measures of profit or loss to consolidated income after those items. Significant reconciling items shall be separately identified and described in that reconciliation.
j. All of the following information about defined benefit pension plans and other defined benefit postretirement benefit plans, disclosed for all periods presented pursuant to the provisions of Subtopic 715-20:
1. The amount of net periodic benefit cost recognized, for each period for which a statement of income is presented, showing separately the service cost component, the interest cost component, the expected return on plan assets for the period, the gain or loss component, the prior service cost or credit component, the transition asset or obligation component, and the gain or loss recognized due to a settlement or curtailment
2. The total amount of the employer’s contributions paid, and expected to be paid, during the current fiscal year, if significantly different from amounts previously disclosed pursuant to paragraph 715-20-50-1. Estimated contributions may be presented in the aggregate combining all of the following:
i. Contributions required by funding regulations or laws
ii. Discretionary contributions
iii. Noncash contributions.
k. The information about the use of fair value to measure assets and liabilities recognized in the statement of financial position pursuant to Section 820-10-50
l. The information about derivative instruments as required by Sections 815-10-50, 815-20-50, 815-25-50, 815-30-50, and 815-35-50
m. The information about fair value of financial instruments as required by Section 825-10-50
n. The information about certain investments in debt and equity securities as required by Sections 320-10-50 and 942-320-50
o. The information about other-than-temporary impairments as required by Sections 320-10-50, 325-20-50, and 958-320-50
p. All of the following information about the credit quality of financing receivables and the allowance for credit losses determined in accordance with the provisions of Topic 310:
1. Nonaccrual and past due financing receivables (see paragraphs 310-10-50-5A through 50-7B)
2. Allowance for credit losses related to financing receivables (see paragraphs 310-10-50-11A through 50-11C)
3. Impaired loans (see paragraphs 310-10-50-14A through 50-15)
4. Credit-quality information related to financing receivables (see paragraphs 310-10-50-27 through 50-30)
5. Modifications of financing receivables (see paragraphs 310-10-5031 through 50-34).
q. The gross information and net information required by paragraphs 21020-50-1 through 50-6.
r. The information about changes in accumulated other comprehensive income required by paragraphs 220-10-45-14A and 220-10-45-17 through 45-17B.
s. The carrying amount of foreclosed residential real estate property as required by the last sentence of paragraph 310-10-50-11 and the amount of loans in the process of foreclosure as required by paragraph 310-10-50-35.
If summarized financial data are regularly reported on a quarterly basis, the foregoing information with respect to the current quarter and the current year-todate or the last 12 months to date should be furnished together with comparable data for the preceding year.
270-10-50-1A Consistent with paragraph 270-10-50-1, a public business entity, a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market, or an employee benefit plan that files or furnishes financial statements with or to the Securities and Exchange Commission, shall disclose all of the following information about revenue from contracts with customers consistent with the guidance in Topic 606:
a. A disaggregation of revenue for the period, see paragraphs 606-10-50-5 through 50-6 and paragraphs 606-10-55-89 through 55-91.
b. The opening and closing balances of receivables, contract assets, and contract liabilities from contracts with customers (if not otherwise separately presented or disclosed), see paragraph 606-10-50-8(a).
c. Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period, see paragraph 606-10-50-8(b).
d. Revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, changes in transaction price), see paragraph 606-10-50-8(c).
e. Information about the entity’s remaining performance obligations as of the end of the reporting period, see paragraphs 606-10-50-13 through 50-15.

Amendments to Subtopic 275-10

16. The following amendment conforms the terminology in paragraph 275-1005-7 to the terminology used in Topic 606, Revenue from Contracts with Customers.
17. Amend paragraph 275-10-05-7, with a link to transition paragraph 606-1065-1, as follows:
Risks and Uncertainties—Overall
Overview and Background
275-10-05-7 Estimates inherent in the current financial reporting process inevitably involve assumptions about future events. For example, estimating and constraining estimates of variable consideration to be included in the transaction price for a contract with a customer in accordance with paragraphs 606-10-325 through 32-14 and measuring progress toward complete satisfaction of a performance obligation in accordance with paragraphs 606-10-25-31 through 25-37
accruing income for the current period under a long-term contract requires an estimate of the total profit to be earned on the contract
. For another example, carrying inventories at the lower of cost or market is based on an assumption that there will be sufficient demand for that product in the future to be able to sell the quantity on hand without incurring losses on the sales or, if market is used, that it can be estimated. Making reliable estimates for such matters is often difficult even in periods of economic stability; it is more so in periods of economic volatility. Although many users of financial statements are aware of that aspect of financial reporting, others often assume an unwarranted degree of reliability in financial statements. The disclosure required by this Subtopic should help dispel any such erroneous assumptions.
18. The following amendment adds a reference to the disclosure requirements in Topic 606 and removes the reference to guidance in Subtopic 605-35.
19. Amend paragraph 275-10-60-7, with a link to transition paragraph 606-1065-1, as follows:
Relationships
> Revenue Recognition
275-10-60-7 See paragraphs 606-10-50-1 through 50-23 for disclosures of revenue from contracts with customers.
Example 1 (paragraph 605-35-55-2) for an illustration of the kinds of disclosures for risks and uncertainties related to long-term construction contracts.

Amendments to Subtopic 280-10

20. The following amendments reflect the change in terminology from earned to recognized because earned is not a criterion for recognizing revenue in Topic 606.
21. Amend paragraphs 280-10-50-1 and 280-10-50-3 through 50-4, with a link to transition paragraph 606-10-65-1, as follows:
Segment Reporting—Overall
Disclosure
> Operating Segments
280-10-50-1 An operating segment is a component of a public entity that has all of the following characteristics:
a. It engages in business activities from which it may recognize
earn
revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same public entity).
b. Its operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance.
c. Its discrete financial information is available.
280-10-50-3 An operating segment may engage in business activities for which it has yet to recognize
earn
revenues, for example, start-up operations may be operating segments before recognizing
earning
revenues.
280-10-50-4 Not every part of a public entity is necessarily an operating segment or part of an operating segment. For example, a corporate headquarters or certain functional departments may not recognize
earn
revenues or may recognize
earn
revenues that are only incidental to the activities of the public entity and would not be operating segments. For purposes of this Subtopic, a public entity’s pension and other postretirement benefit plans are not considered operating segments.
22. The following amendments reflect the change in terminology from earned to recognized because earned is not a criterion for recognizing revenue in Topic 606. This amendment also updates the terminology to be consistent with the Codification style using should in Section 280-10-55 to have the same meaning as shall in other guidance.
23. Amend paragraphs 280-10-55-3 through 55-5, with a link to transition paragraph 606-10-65-1, as follows:
Implementation Guidance and Illustrations
> Implementation Guidance
> > Operating Segments-Corporate Divisions
280-10-55-3 A corporate division that recognizes
earns
revenues (for example, a treasury operation that recognizes
earns
interest income) and incurs expenses could be considered an operating segment, if, under the specific facts and circumstances being considered, it meets the definition in paragraph 280-10-501. Some believe that corporate divisions could not be considered operating segments because paragraph 280-10-50-4 indicates that not every part of a public entity is necessarily an operating segment or part of an operating segment, for example, a corporate headquarters or certain functional departments that do not recognize
earn
revenues or that recognize
earn
revenues that are only incidental to the activities of the public entity.
280-10-55-4 However, a corporate division that recognizes
earns
revenues and that has available discrete financial information and whose operating results are reviewed regularly by the chief operating decision maker should
shall
be considered an operating segment. Even if the revenues are considered incidental, this Subtopic does not preclude such a division from being a reportable segment if management believes the additional information may contribute to a better understanding of the public entity.
280-10-55-5 A division that recognizes
earns
revenues and incurs expenses but does not have any assets associated with it for internal reporting purposes could be considered an operating segment, if, under the specific facts and circumstances being considered, it otherwise meets the definition in paragraph 280-10-50-1. For example, assume Division A of a public entity conducts business with a separate class of customer using assets shared with Division B and Division B allocates expenses associated with those shared assets to Division A, but the assets, themselves, are presented in the internal financial reports of Division B. A public entity may allocate an expense to a segment without allocating the related asset; however, disclosure of that fact is required. Therefore, allocation of assets is not a criterion for the component to be considered an operating segment.

Amendments to Subtopic 310-10

24. The following amendment clarifies that the subsequent measurement of a receivable (that is, the subsequent assessment of impairment of a trade receivable) should not affect the initial recognition of revenue. Additionally, this amendment removes the term installment method from the guidance because that term has been removed from Subtopic 605-10 and has not been replaced in Topic 606. In paragraph 310-10-35-11, the cost recovery method is used for the recognition of interest income on long-term receivables or loans if the impairment loss cannot be reasonably estimated, as further discussed in paragraph 310-1035-39. Paragraph 310-10-35-39 states that “accounting methods include recognition of interest income using a cost-recovery method, a cash-basis method, or some combination of those methods.”
25. Amend paragraph 310-10-35-11, with a link to transition paragraph 60610-65-1, as follows:
Receivables—Overall
Subsequent Measurement
310-10-35-11 The inability to make a reasonable estimate of the amount of loss from uncollectible receivables (that is, failure to satisfy the condition in paragraph 450-20-25-2(b)) precludes accrual and may, if there is significant uncertainty as to collection, suggest that
the installment method,
the cost recovery method, the cash-basis method, or some other method shall be used.
of revenue recognition be used. See paragraphs 605-10-25-3 through 25-4 for further guidance.
26. Paragraphs 310-10-40-4 through 40-5 provide guidance on the subsequent accounting for an arrangement that was determined to be a real estate asset rather than a loan. The following amendments reflect the removal of guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales (formerly FAS 66), for the sale or transfer of nonfinancial assets including real estate. However, some of the guidance in Subtopic 360-20 has been retained for purposes of sale-leaseback transactions as reflected in paragraph 310-10-40-5.
27. Amend paragraphs 310-10-40-4 through 40-5, with a link to transition paragraph 606-10-65-1, as follows:
Derecognition
Acquisition, Development, and Construction Arrangements
310-10-40-4 If an acquisition, development, and construction arrangement is accounted for as an investment in real estate or joint venture and the expected residual profit is sold, the entity shall apply the guidance in paragraphs 360-1040-3A through 40-3B
gain recognition, if any, is appropriate only if the criteria in Section 360-20-40 are met after giving consideration to the entire acquisition, development, and construction arrangement including the continuing relationship between the financial institution and the project
.
310-10-40-5 If a financial institution was the seller of the property at the initiation of the project, the entity shall apply the guidance in paragraphs 360-10-40-3A through 40-3B. However, if the sale is part of a sale-leaseback transaction, gain recognition, if any, should be determined by reference to Section 360-20-40.
28. The following amendment updates the reference to reflect the removal of guidance in Subtopic 605-20.
29. Amend paragraph 310-10-60-4, with a link to transition paragraph 606-1065-1, as follows:
Relationships
> Revenue Recognition
310-10-60-4 For guidance on loan guarantees, in which an entity (guarantor) lends its creditworthiness to another party (borrower) for a fee, thereby enhancing that other party’s ability to borrow funds, see Topic 606 on revenue from contracts with customers
Subtopic 605-20
.

Amendments to Subtopic 310-40

30. The following amendments reflect the removal of guidance in Subtopics 360-20, Property, Plant, and Equipment—Real Estate Sales (formerly FAS 66), and 970-605, Real Estate—General—Revenue Recognition (formerly FAS 66). Additionally, the corresponding illustrative Examples in paragraphs 310-40-55-11 through 55-12 have been superseded.
31. Amend paragraph 310-40-40-6 and supersede paragraphs 310-40-40-6A through 40-7, with a link to transition paragraph 606-10-65-1, as follows:
Receivables—Troubled Debt Restructurings by Creditors
Derecognition
> Foreclosure
310-40-40-6
Except in the circumstances described in the following paragraph, a
A troubled debt restructuring that is in substance a repossession or foreclosure by the creditor, that is, the creditor receives physical possession of the debtor’s assets regardless of whether formal foreclosure proceedings take place, or in which the creditor otherwise obtains one or more of the debtor’s assets in place of all or part of the receivable, shall be accounted for according to the provisions of paragraphs 310-40-35-7; 310-40-40-2 through 40-4 and; if appropriate, 310-40-40-8. For guidance on when a creditor shall be considered to have received physical possession (resulting from an in substance repossession or foreclosure) of residential real estate property collateralizing a consumer mortgage loan, see paragraph 310-40-55-10A.
310-40-40-6A Paragraph superseded by Accounting Standards Update 201409.
The guidance in the following paragraph applies to initial measurement of a foreclosed property in a transaction having all of the following characteristics:
a.
A sale of real estate was financed by the seller.
b.
The buyer’s initial investment was not sufficient for recognition of profit under the full accrual method.
c.
The seller met the conditions of Subtopic 970-605 to record a sale and recognized profit on the installment or cost recovery methods.
d.
Subsequently, the buyer defaulted on the mortgage to the seller.
e.
The seller forecloses on the property.
f.
At the time of foreclosure, fair value of the property is less than the seller’s gross receivable but greater than the seller’s net receivable, that is, the principal and interest receivable less the deferred profit on the sale and related allowances.
310-40-40-7 Paragraph superseded by Accounting Standards Update 2014-09.
In a transaction having all of the characteristics set forth in the preceding paragraph, the foreclosed property shall be recorded at the lower of the net amount of the receivable or fair value of the property. The net receivable assumes that the accrual of interest income on the financing, if any, is appropriate under the circumstances. This Topic would be applied to a foreclosure related to a sale accounted for under the full accrual method, and if appropriate, the repossessed property would be recorded at its fair value. The Impairment or Disposal of Long-Lived Assets Subsections of 360-10 require a foreclosed asset that is newly acquired and that is classified as held for sale to be recognized at the lower of its carrying value or fair value less cost to sell.
32. Paragraph 310-40-55-12 illustrates the guidance in paragraph 310-40-407 and because paragraph 310-40-40-7 has been superseded, the conforming deletion of Example 1 (that is, paragraphs 310-40-55-11 through 55-12) is necessary.
33. Supersede paragraphs 310-40-55-11 through 55-12 and their related heading, with a link to transition paragraph 606-10-65-1, as follows:
Implementation Guidance and Illustrations
> Illustrations
> > Example 1: Fair Value in Excess of the Seller’s Net Receivable
310-40-55-11 Paragraph superseded by Accounting Standards Update 2014-09.
This Example illustrates the guidance in paragraph 310-40-40-7.
310-40-55-12 Paragraph superseded by Accounting Standards Update 201409.
In this Example, the foreclosed property would be recorded at the amount of the net receivable of $63 and $50, respectively, as illustrated in the following table.

Amendments to Subtopic 330-10

34. The following amendments to paragraph 330-10-30-8 reflect the removal of the term completed contract method and replace the reference to guidance on costs with a reference to the new guidance included in Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. Paragraph 330-10-30-19 has been superseded to reflect the removal of the industry-specific guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and ProductionType Contracts.
35. Amend paragraph 330-10-30-8, supersede paragraph 330-10-30-19 and its related heading, and add paragraphs 330-10-30-20 through 30-21 and their related headings, with a link to transition paragraph 606-10-65-1, as follows:
Inventory—Overall
Initial Measurement
330-10-30-8 Also, under most circumstances, general and administrative expenses shall be included as period charges, except for the portion of such expenses that may be clearly related to production and thus constitute a part of inventory costs (product charges). Selling expenses constitute no part of inventory costs. The exclusion of all overheads from inventory costs does not constitute an accepted accounting procedure. The exercise of judgment in an individual situation involves a consideration of the adequacy of the procedures of the cost accounting system in use, the soundness of the principles thereof, and their consistent application. General and administrative expenses ordinarily shall be charged to expense as incurred
but may be accounted for as contract costs under the completed-contract method of accounting or, in some circumstances, as indirect contract costs by government contractors
.
> Costs of Certain Construction-Type and Production-Type Contracts
330-10-30-19 Paragraph superseded by Accounting Standards Update 201409.
See Section 605-35-25 for a discussion of accounting for contract and precontract costs of certain construction-type and production-type contracts.
> Costs to Fulfill a Contract with a Customer
330-10-30-20 See paragraphs 340-40-25-5 through 25-8 and paragraphs 34040-35-1 through 35-6 for the accounting for the costs to fulfill a contract with a customer if those costs are not in the scope of another Topic.
> Indirect Contract Costs by Government Contractors
330-10-30-21 See paragraph 912-20-25-1 for the accounting for indirect contract costs by government contractors.
36. The following amendment to paragraph 330-10-35-21 updates the reference to guidance in Subtopic 605-50, Revenue Recognition—Customer Payments and Incentives, to the guidance on consideration payable to a customer in Topic 606. The amendment to paragraph 330-10-35-22 updates the reference to the guidance on consideration received from a vendor, which has been moved from Subtopic 605-50 to Subtopic 705-20, Costs of Sales and Services—Accounting for Consideration Received from a Vendor.
37. Amend paragraphs 330-10-35-21 through 35-22 and the related heading, with a link to transition paragraph 606-10-65-1, as follows:
Subsequent Measurement
>
Vendor
Accounting for Consideration Payable
Given
to a Customer
or Reseller
330-10-35-21 See
Subtopic 605-50
paragraphs 606-10-32-25 through 32-27 for a discussion of consideration given by
a vendor
an entity to a {add glossary link}customer{add glossary link}.
>
Customer or Reseller
Accounting for Consideration Received from a Vendor
330-10-35-22 See
Section 605-50
Subtopic 705-20 on costs of sales and services for a discussion of accounting by an entity, that is, a customer (including a {add glossary link to 2nd definition}reseller{add glossary link to 2nd definition})
for
, for consideration received from a {add glossary link}vendor{add glossary link}.
38. The following amendment reflects the removal of the industry-specific revenue guidance in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts.
39. Supersede paragraph 330-10-45-2 and its related heading, with a link to transition paragraph 606-10-65-1, as follows:
Other Presentation Matters
General
> Costs of Certain Construction-Type and Production-Type Contracts
330-10-45-2 Paragraph superseded by Accounting Standards Update 201409.
See paragraphs 605-35-45-3 through 45-5 for guidance on presenting contract costs of certain construction-type and production-type contracts.

Amendments to Subtopic 340-10

40. The following amendment reflects the removal of Subtopic 340-20, Other Assets and Deferred Costs—Capitalized Advertising Costs. Additionally, the amendment adds a reference to Subtopic 340-40, which provides guidance for some costs related to a contract with a customer within the scope of Topic 606.
41. Amend paragraph 340-10-05-1, with a link to transition paragraph 606-1065-1, as follows:
Other Assets and Deferred Costs—Overall
Overview and Background
340-10-05-1 The Other Assets and Deferred Costs Topic includes the following Subtopics:
a. Overall
b. Subparagraph superseded by Accounting Standards Update 2014-09
Capitalized Advertising Costs
c. Insurance Contracts that Do Not Transfer Insurance Risk.
d. Contracts with Customers.
42. The following amendments reflect the removal of the reference to guidance in Subtopics 605-20, Revenue Recognition—Services, and 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. Paragraph 340-10-60-8 has been superseded to reflect the removal of paragraph 912-20-45-1.
43. Supersede paragraphs 340-10-60-5 through 60-6 and 340-10-60-8 and their related headings, with a link to transition paragraph 606-10-65-1, as follows:
Relationships
> Revenue Recognition
340-10-60-5 Paragraph superseded by Accounting Standards Update 201409.
For the deferral of costs directly related to the acquisition of a contract, see paragraphs 605-20-25-1 through 25-6.
340-10-60-6 Paragraph superseded by Accounting Standards Update 201409.
For accounting for costs incurred in anticipation of future construction and certain production-type contract sales, see paragraphs 605-35-25-39 through 25- 41.
> Contractors—Federal Government
340-10-60-8 Paragraph superseded by Accounting Standards Update 201409.
For allocation of general and administrative costs to government contract inventories and cost-reimbursement contracts, see paragraph 912-20-45-1.

Amendments to Subtopic 340-20

44. Subtopic 340-20, Other Assets and Deferred Costs—Capitalized Advertising Costs, provided guidance on the accounting and reporting for capitalized advertising costs, specifically for direct-response advertising that may result in a reported asset. The following amendments have been made to this Subtopic:
a. This guidance in Subtopic 340-20 has been superseded consistent with the Board’s decisions on incremental costs of obtaining a contract as codified in Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, for contracts within the scope of Topic 606.
b. However, the guidance in Subtopic 340-20 was applicable for insurance contracts within the scope of Topic 944 that are outside the scope of Topic 606. Therefore, the following amendments reflect the relocation of relevant paragraphs, 340-20-25-4 through 25-18, to the industry-specific guidance on insurance contracts (see amendments to Subtopic 944-30, Financial Services—Insurance—Acquisition Costs). Accounting Standards Update No. 2010-26 (EITF 09-G) provided accounting guidance for costs associated with acquiring or renewing insurance contracts. This guidance was codified as Subtopic 944-30 and directly relied upon the guidance in Subtopic 340-20 on the costs of direct response advertising (specifically paragraph 340-20-25-4 and indirectly paragraphs 340-20-25-5 through 2518). Because Subtopic 340-20 has been superseded in its entirety, these paragraphs have been retained and moved to Subtopic 944-30. See the basis paragraph for Subtopic 944-30 for further discussion of amendments to that Subtopic. Additionally, in the 2013 Exposure Draft, Insurance Contracts (Topic 834), the Board proposed that direct response advertising costs would not qualify for inclusions in deferred acquisition costs and therefore would be expensed as incurred. Final conclusions on direct response advertising being included in deferred acquisition costs for insurance entities will be determined after the Board redeliberates and codifies any final conclusions in its insurance project.
45. Supersede Subtopic 340-20, Other Assets and Deferred Costs—
Capitalized Advertising Costs, with a link to transition paragraph 606-10-65-1. [Paragraphs 340-20-25-4 through 25-18 (some of which are amended) moved to paragraphs 944-30-25-1AA and 944-30-25-1C through 25-1P]

Addition of Subtopic 340-40

46. For the addition of the new Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, see paragraph 7 in Section A of the Codification amendments.

Amendments to Subtopic 350-10

47. The following amendments to Subtopic 350-10, Intangibles—Goodwill and Other—Overall, reflect the Board’s decisions to require an entity that derecognizes a nonfinancial asset (for example, an intangible asset) to use certain guidance in Topic 606. Also see new Subtopic 610-20 on the gains and losses from the derecognition of nonfinancial assets.
48. Add Section 350-10-40, with a link to transition paragraph 606-10-65-1, as follows:
Intangibles—Goodwill and Other—Overall
Derecognition
General
> Transfer or Sale of Intangible Assets
350-10-40-1 An entity shall account for the derecognition of a nonfinancial asset, including an in substance nonfinancial asset, within the scope of this Topic in accordance with Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, unless the entity sells or transfers the nonfinancial asset in a contract with a customer. The derecognition of a nonfinancial asset in a contract with a customer shall be accounted for in accordance with Topic 606 on revenue from contracts with customers.
350-10-40-2 Unless a subsidiary or group of assets is an in substance nonfinancial asset, an entity shall account for the derecognition of a subsidiary or a group of assets that is either a business or nonprofit activity in accordance with the derecognition guidance in Subtopic 810-10. The derecognition of an in substance nonfinancial asset shall be accounted for in accordance with paragraph 350-10-40-1.
350-10-40-3 If an entity transfers a nonfinancial asset in accordance with paragraph 350-10-40-1, and the contract does not meet all of the criteria in paragraph 606-10-25-1, the entity shall not derecognize the nonfinancial asset and shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to determine if and when the contract subsequently meets all of the criteria in paragraph 606-10-25-1. Until all of the criteria in paragraph 606-10-25-1 are met, the entity shall continue to do all of the following:
a. Report the nonfinancial asset in its financial statements
b. Recognize amortization expense as a period cost for those assets with a finite life
c. Apply the impairment guidance in Section 350-30-35.
350-10-40-4 Additionally, see the derecognition guidance in Section 350-20-40 regarding the disposal of all or a portion of a reporting unit.
49. The following amendment adds a relationship paragraph to acknowledge the impairment test of barter credits in Topic 845, Nonmonetary Transactions. 50. Add Section 350-10-60, with a link to transition paragraph 606-10-65-1, as follows:
Relationships
General
350-10-60-1 For guidance on recognizing an impairment loss on barter credits, see paragraph 845-10-30-19.

Amendments to Subtopic 350-40

51. The following amendment reflects the removal of the term earned and updates the guidance to differentiate between a contract with a customer, which should use the guidance in Topic 606, and the sale or transfer of a nonfinancial asset, which should use the guidance in Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets.
52. Amend paragraph 350-40-35-8, with a link to transition paragraph 606-1065-1, as follows:
Intangibles—Goodwill and Other—Internal-Use Software
Subsequent Measurement
> Internal-Use Computer Software Subsequently Marketed
350-40-35-8 No profit shall be recognized until aggregate net proceeds from licenses and amortization have reduced the carrying amount of the software to zero. Subsequent proceeds shall be recognized
in
as {add glossary link}revenue{add glossary link} in accordance with Topic 606 on revenue from contracts with customers or recognized as a gain in accordance with Subtopic 610-20 on derecognition of nonfinancial assets if the contract is not with a customer
as earned
.

Amendments to Subtopic 360-10

53. The following amendment reflects the updated scope of the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales (formerly FAS 66). Specifically, Subtopic 360-20 has been retained only for purposes of sale-leaseback transactions of real estate.
54. Amend paragraph 360-10-05-1, with a link to transition paragraph 606-1065-1, as follows:
Property, Plant, and Equipment—Overall
Overview and Background
360-10-05-1 The Property, Plant, and Equipment Topic includes the following Subtopics:
a. Overall
b. Real Estate Sales—Sale-Leaseback Accounting.
55. The following amendment reflects the removal of the term earning because that term is not a criterion for recognizing revenue in Topic 606.
56. Amend paragraph 360-10-35-7, with a link to transition paragraph 606-1065-1, as follows:
Subsequent Measurement
> > Declining Balance Method
360-10-35-7 The declining-balance method is an example of one of the methods that meet the requirements of being systematic and rational. If the expected productivity of the asset or ability of the asset to generate revenue
or revenueearning power of the asset
is relatively greater during the earlier years of its life, or maintenance charges tend to increase during later years, the decliningbalance method may provide the most satisfactory allocation of cost. That conclusion also applies to other methods, including the sum-of-the-years’-digits method, that produce substantially similar results.
57. The following amendments reflect the following three changes:
a. Paragraphs 360-10-40-1 through 40-2. Paragraphs 840-20-40-3 through 40-4 on sales of leased property have been superseded (see amendments to Subtopic 840-20) due to their risks-and-rewards notion that is inconsistent with the Board’s control-based model developed in Topic 606. As a result, paragraph 360-10-40-1 (and the reference to paragraph 840-20-40-3) has been superseded because of the Board’s decisions on the derecognition of nonfinancial assets, and paragraph 360-10-40-2 has been amended with conforming changes.
b. Paragraph 360-10-40-3. This paragraph has been superseded because the guidance in Subtopic 360-20 (formerly FAS 66) is no longer relevant.
c. Paragraphs 360-10-40-3A through 40-3C. These paragraphs reflect the derecognition guidance added to Subtopic 610-20 on the sale or transfer of a nonfinancial asset.
58. Supersede paragraphs 360-10-40-1 and 360-10-40-3 and its related heading, amend paragraph 360-10-40-2, and add paragraphs 360-10-40-3A through 40-3C and their related heading, with a link to transition paragraph 60610-65-1, as follows:
Derecognition
> Sale of Leased Property
360-10-40-1 Paragraph superseded by Accounting Standards Update 2014-09.
Paragraph 840-20-40-3 states that the sale of property subject to an operating lease (or of property that is leased by or intended to be leased by the third-party purchaser to another party) shall not be treated as a sale if the seller or any party related to the seller retains substantial risks of ownership in the leased property.
360-10-40-2 Paragraph 840-20-40-5 states that if a sale to a third party of property subject to an operating lease (or of property that is leased by or intended to be leased by the third-party purchaser to another party) is not to be recorded as a sale because
of the provisions of
the entity has not transferred control over the promised asset to the third party in accordance with paragraph 606-10-25-30
paragraph 840-20-40-3 through 40-4
, the transaction shall be accounted for as a borrowing.
> Sale of Real Estate with Property Improvements or Integral Equipment
360-10-40-3 Paragraph superseded by Accounting Standards Update 2014-09.
For a discussion of the applicability of Subtopic 360-20 to all sales of real estate, including real estate with property improvements or integral equipment, and the definition of those terms, see paragraphs 360-20-15-3 and 360-20-15-10.
> Transfer or Sale of Property, Plant, and Equipment
360-10-40-3A An entity shall account for the derecognition of a nonfinancial asset, including an in substance nonfinancial asset, within the scope of this Topic in accordance with Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets, unless the entity sells or transfers the nonfinancial asset in a contract with a customer. The derecognition of a nonfinancial asset in a contract with a customer shall be accounted for in accordance with Topic 606 on revenue from contracts with customers.
360-10-40-3B Unless a subsidiary or group of assets is an in substance nonfinancial asset, an entity shall account for the derecognition of a subsidiary or group of assets that is either a business or nonprofit activity in accordance with the derecognition guidance in Subtopic 810-10. The derecognition of an in substance nonfinancial asset shall be accounted for in accordance with paragraph 360-10-40-3A.
360-10-40-3C If an entity transfers a nonfinancial asset in accordance with paragraph 360-10-40-3A, and the contract does not meet all of the criteria in paragraph 606-10-25-1, the entity shall not derecognize the nonfinancial asset and shall follow the guidance in paragraphs 606-10-25-6 through 25-8 to determine if and when the contract subsequently meets all the criteria in paragraph 606-10-25-1. Until all the criteria in paragraph 606-10-25-1 are met, the entity shall continue to do all of the following:
a. Report the nonfinancial asset in its financial statements
b. Recognize depreciation expense as a period cost unless the assets have been classified as held for sale in accordance with paragraphs 360-10-45-9 through 45-10
c. Apply the impairment guidance in Section 360-10-35.
59. The following amendment references Subtopic 610-20, Other Income— Gains and Losses from the Derecognition of Nonfinancial Assets.
60. Amend paragraph 360-10-45-5, with a link to transition paragraph 606-1065-1, as follows:
Other Presentation Matters
Impairment or Disposal of Long-Lived Assets
> Long-Lived Assets Classified as Held and Used
> > Presentation of Disposal Gains or Losses in Continuing Operations
360-10-45-5 A gain or loss recognized (see Subtopic 610-20 on the sale or transfer of a nonfinancial asset) on the sale of a long-lived asset (disposal group) that is not a component of an entity shall be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it shall include the amounts of those gains or losses.
61. The following amendment reflects the relocation of paragraph 974-605-252 to paragraph 974-720-25-2.
62. Amend paragraph 360-10-60-1, with a link to transition paragraph 606-1065-1, as follows:
Relationships
> Real Estate—Real Estate Investment Trusts
360-10-60-1 For a discussion of the appropriate accounting affecting property, plant, and equipment by a real estate investment trust for operating support from its adviser, see paragraph 974-720-25-2
974-605-25-2
.

Amendments to Subtopic 360-20

63. Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales (formerly FAS 66), which provided broad guidance for the sale of real estate, has been amended to have a significantly narrowed scope. As a result of the Board’s decisions, the sale of real estate no longer is subject to industry-specific guidance. Therefore, if the transaction is in a contract with a customer, it is within the scope of Topic 606 and the guidance in Subtopic 360-20 no longer will be used to account for those transactions. Similarly, the guidance included in Subtopics 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, and 810-10, Consolidation—Overall, may be applicable. Subtopic 360-20 has not been superseded, however, because the guidance remains necessary for sale-leaseback transactions involving real estate assets in Subtopic 840-40, Leases—Sale-Leaseback Transactions (formerly FAS 98). Subtopic 840-40 was originally created as incremental guidance to Subtopic 36020. The joint Board project on leases is expected to provide guidance for accounting for all sale-leaseback transactions and, therefore, would replace Subtopics 360-20 and 840-40. Additionally, the Board noted in making these decisions that an entity should not analogize the retained guidance in Subtopic 360-20 to a transaction that is not a sale-leaseback transaction.
64. Amend the title of Subtopic 360-20 and add the General Note as follows:
Property, Plant, and Equipment—Real Estate Sales—SaleLeaseback Accounting
General Note on Real Estate Sales: Upon the effective date of Accounting Standards Update 2014-09, the title of this Subtopic will change to Property, Plant, and Equipment—Real Estate Sales—Sale-Leaseback Accounting.
65. Amend paragraph 360-20-05-1, with a link to transition paragraph 606-1065-1, as follows:
Overview and Background
360-20-05-1 This Subtopic provides accounting guidance to determine if a
for the
sale of real estate
other than retail land
has occurred for purposes of applying sale-leaseback accounting in Subtopic 840-40. The real estate sales guidance was placed under the Property, Plant, and Equipment Topic because it is applicable to all entities involved with real estate
sales
sale-leaseback transactions. Other guidance specific to the real estate subindustries is found in the related Real Estate Topics (Topics 970, 972, 974, 976, and 978).
66. Amend paragraphs 360-20-15-1 through 15-3, with a link to transition paragraph 606-10-65-1 as follows:
Scope and Scope Exceptions
> Entities
360-20-15-1 This Subtopic establishes standards for recognition of profit on all real estate sale-leaseback transactions (see Subtopic 840-40 for additional guidance on sale-leaseback accounting)
sales transactions, other than retail land sales (see Topic 976 for retail land sales),
without regard to the nature of the seller’s business.
> Transactions
360-20-15-2 Determining whether a transaction is in substance the sale of real estate requires judgment. However, in making that determination, one shall consider the nature of the entire real estate component being sold (that is, the land plus the property improvements and integral equipment), and not the land only, in relation to the entire sale-leaseback transaction. Further, that determination shall not consider whether the operations in which the assets are involved are traditional or nontraditional real estate activities. For example, if a ski resort is sold and the lodge and ski lifts are considered to be affixed to the land (that is, they cannot be removed and used separately without incurring significant cost), then it would appear that the sale is in substance the sale of real estate and that the entire sale transaction would be subject to the provisions of this Subtopic. Transactions involving the sale of underlying land (or the sale of the property improvements or integral equipment subject to a lease of the underlying land) shall not be bifurcated into a real estate component (the sale of the underlying land) and a non-real-estate component (the sale of the lodge and lifts) for purposes of determining profit recognition on the transaction.
360-20-15-3 The guidance in this Subtopic applies to the following
transactions and activities
assets that are part of a sale-leaseback transaction within the scope of Subtopic 840-40:
a.
All sales of real
Real estate, including real estate with property improvements or integral equipment. The terms property improvements and integral equipment as they are used in this Subtopic refer to any physical structure or equipment attached to the real estate that cannot be removed and used separately without incurring significant cost. Examples include an office building, a manufacturing facility, a power plant, and a refinery.
b.
Sales of property
Property improvements or integral equipment subject to an existing lease of the underlying land should be accounted for in accordance with paragraphs 360-20-40-56 through 40-59.
c.
The sale or transfer of an
An investment in the form of a financial asset that is in substance real estate.
d.
The sale of timberlands
Timberlands or farms (that is, land with trees or crops attached to it).
e. Subparagraph superseded by Accounting Standards Update 2014-09.
Real estate time-sharing transactions (see Topic 978).
f. Subparagraph superseded by Accounting Standards Update 2014-09.
Loss of a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate because of a default by the subsidiary on its nonrecourse debt.
67. The following amendments reflect the removal of Subtopic 360-20, except for the purpose of applying sale-leaseback guidance in Subtopic 840-40. The following paragraphs have been amended:
a. Paragraph 360-20-55-10 removes a reference to guidance that has been superseded, which previously illustrated the installment method when a retail land sale does not meet the criteria for full accrual.
b. Paragraph 360-20-55-11 removes industry-specific guidance that was referenced in this paragraph and has been superseded by the guidance in Topic 606.
c. Paragraph 360-20-55-18 removes a reference to superseded guidance on real estate project costs.
d. Paragraph 360-20-55-21 has been amended to eliminate the decision tree regarding retail land sales and updates the scope of the remaining decision tree to apply only to sales of real estate in a sale-leaseback transaction.
e. Paragraphs 360-20-55-68 through 55-77 (Examples 8 and 9) have been superseded consistent with the Board’s decision to eliminate industryspecific guidance. These Examples were added to the Codification in Accounting Standards Update No. 2011-10 (EITF 10-E) to address a derecognition scope question about whether the guidance in Subtopic 360-20 would be applicable for a parent (reporting entity) to derecognize the in substance real estate when the reporting entity ceases to have a controlling financial interest (as described in Subtopic 810-10) in the in substance real estate subsidiary as a result of a default by the subsidiary on its nonrecourse debt. The Examples are no longer necessary because these transactions do not involve a sale-leaseback transaction and, therefore, would not be subject to the guidance in Subtopic 360-20.
68. Amend paragraphs 360-20-55-10 and 360-20-55-21 and its related heading and supersede paragraphs 360-20-55-11, 360-20-55-18, and 360-2055-68 through 55-77 and their related headings, with a link to transition paragraph 606-10-65-1 as follows:
Implementation Guidance and Illustrations
> Implementation Guidance > > Methods of Accounting for Real Estate Sales when Criteria for Full Accrual Method Are Not Met > > > Installment Method
360-20-55-10 The income statement, or related footnotes, for the period including the date of sale presents the sales value, the gross profit that has not yet been recognized, and the total cost of the sale. Revenue and cost of sales (or gross profit) are presented as separate items on the income statement or are disclosed in the footnotes when profit is recognized as earned.
This presentation is illustrated in Example 2, Schedule A (see paragraph 976-605-55-13).
360-20-55-11 Paragraph superseded by Accounting Standards Update 2014-09.
Paragraph 976-605-30-3 describes accounting for obligations for future improvement costs under the percentage-of-completion method. That description applies as well to accounting for those obligations under the installment method.
> > > Deposit Method
360-20-55-18 Paragraph superseded by Accounting Standards Update 2014-09.
See the Real Estate Project Costs Subsection of Section 970-360-55 for guidance concerning use of the deposit method in the accounting for the sale of a lot and construction of a home by a homebuilder.
> > Decision Tree
Trees
360-20-55-21 The following decision tree is intended to provide an overview of the major provisions in this Subtopic that relate to the accounting for sales of real estate. It should not be used without further reference to the Subtopic.
Two
The decision tree is
trees are
provided for
—one for retail land sales (found in paragraph 976-605-55-1) and a second for all other
sales of real estate in a saleleaseback transaction
(found in this paragraph)
. The highlighted boxes describe the general requirements for recognizing all of the profit on a sale of real estate other than a retail land sale at the date of sale.
[The decision tree is not included because it is unchanged.]
> > Example 8: Conveyance of Real Estate to the Lender in Full Satisfaction of the Entity’s Obligation
360-20-55-68 Paragraph superseded by Accounting Standards Update 2014-09.
This Example illustrates the application of paragraph 360-20-40-5 for a parent (reporting entity) to derecognize the in substance real estate when the reporting entity ceases to have a controlling financial interest (as described in Subtopic 810-10) in the in substance real estate subsidiary as a result of a default by the subsidiary on its nonrecourse debt.
360-20-55-69 Paragraph superseded by Accounting Standards Update 2014-09.
This Example uses the following assumptions:
a.
A reporting entity establishes a single-purpose entity with $200,000 of equity to purchase commercial real estate
b.
The single-purpose entity is wholly owned and consolidated by the reporting entity
c.
The single-purpose entity borrows $1 million from a lender on a nonrecourse basis (for which the lender’s recourse is limited to the assets of the single-purpose entity) to acquire real estate for $1.2 million
d.
The single-purpose entity has no other significant assets or liabilities other than the real estate and related nonrecourse debt
e.
The reporting entity’s ownership interest in the single-purpose entity is considered in substance real estate.
Years later, the carrying value and fair value of the real estate and the carrying value of the debt are as follows
.
For simplicity purposes, this Example ignores the recurring accounting that is associated with the continuing ownership of real estate (for example, depreciation and other property expenses) and the associated indebtedness (for example, debt service paid or accrual of interest if unpaid) in the period between June 30, 20X1, and December 31, 20X1. Also, for simplicity purposes, this Example ignores consideration of Subtopic 470-60 with respect to measurement and disclosure (derecognition of in substance real estate is addressed by this Subtopic as illustrated in this Example).
360-20-55-70 Paragraph superseded by Accounting Standards Update 2014-09.
By applying the guidance in paragraphs 360-10-35-16 through 35-36 for longlived assets classified as held and used, the entity recognizes a $400,000 impairment loss on the real estate on June 30, 20X1. The entity applies the guidance in this Topic that requires that it measure the impairment loss without regard to the carrying amount of the single-purpose entity’s nonrecourse indebtedness.
360-20-55-71 Paragraph superseded by Accounting Standards Update 2014-09.
As of September 30, 20X1, the single-purpose entity defaults on its obligation to the lender and expects to transfer the ownership of the real estate to the lender to satisfy the nonrecourse obligation. As a result of defaulting on the obligation, the reporting entity applies the guidance in Topic 810 and concludes that it ceases to have a controlling financial interest in the single-purpose entity. Although the reporting entity has a plan to transfer ownership of the real estate to the lender, a transfer has not occurred as of the reporting date and, therefore, the derecognition criteria in paragraph 360-20-40-7 have not been met. The reporting entity should not derecognize the in substance real estate as of September 30, 20X1.
360-20-55-72 Paragraph superseded by Accounting Standards Update 2014-09.
On December 31, 20X1, an exchange of the real estate for a release from the nonrecourse indebtedness (in accordance with paragraph 405-20-40-1) occurs, and a sale is consummated in accordance with paragraph 360-20-40-7. The reporting entity need not evaluate the adequacy of the lender’s investment in accordance with paragraphs 360-20-40-15 through 40-16 because the singlepurpose entity has been completely released from its nonrecourse indebtedness and has received all consideration to which it is entitled. If the single-purpose entity was not fully released or had not received all amounts it was entitled to, then the initial and continuing investment requirements for the full accrual method of profit recognition would be applicable. Therefore, upon completion of the exchange and satisfaction of the requirements for the full accrual method of profit recognition, the reporting entity would report a $200,000 gain as a result of the release (extinguishment) of the nonrecourse indebtedness.
360-20-55-73 Paragraph superseded by Accounting Standards Update 2014-09.
The reporting entity would need to consider whether the single-purpose entity has been fully released from the nonrecourse indebtedness and whether it or the reporting entity has other related and continuing obligations to the lender (through, for example, a guarantee or other forms of contingent consideration) and then evaluate whether it has conveyed the usual risks and rewards of ownership. If the reporting entity provides a guarantee or if the lender has recourse to the reporting entity or other assets of the reporting entity, the reporting entity would need to assess the nature of the continuing involvement in accordance with this Subtopic.
360-20-55-74 Paragraph superseded by Accounting Standards Update 2014-09.
Paragraphs 360-20-55-68 through 55-72 illustrate when the single-purpose entity exchanges real estate at the same time as and in exchange for a release from the related nonrecourse indebtedness. In some circumstances, the singlepurpose entity might legally transfer the real estate to the lender without contemporaneously obtaining evidence of a legal release of its related indebtedness from the lender. In those circumstances, in accordance with paragraph 405-20-40-1(b), the transfer of real estate accomplishes a legal release of the reporting entity, unless the reporting entity has provided a guarantee to the lender or the lender has recourse to the reporting entity or other assets of the reporting entity.
> > Example 9: Effect of Loss of a Controlling Financial Interest in an Entity That Is in Substance Real Estate
360-20-55-75 Paragraph superseded by Accounting Standards Update 2014-09.
This Example illustrates the application of paragraph 360-20-40-5 to determine the effect of a loss of a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of a default by the subsidiary on its nonrecourse debt.
360-20-55-76 Paragraph superseded by Accounting Standards Update 2014-09.
For this Example, assume the same facts as those in Example 8. Also assume that the reporting entity ceases to have a controlling financial interest in the single-purpose entity as a result of default on its nonrecourse obligation and would otherwise be required to deconsolidate the single-purpose entity in accordance with Topic 810. However, the reporting entity and the lender wish to defer the income and transfer tax consequences of a legal transfer of the property and a legal extinguishment of the related debt. The reporting entity and lender agree to maintain their existing legal relationship until a third-party purchaser of the property is identified. Accordingly, the parties agree that the single-purpose entity will not make future payments to the lender, the reporting entity retains its legal ownership of all of the equity of the single-purpose entity, and the debt remains legally outstanding. During the time that the property continues to be held by the single-purpose entity, the lender makes substantially all of the operating decisions with respect to the property and receives all of the cash flows from the property’s operations. The reporting entity does not expect to have future participation in the management or economics of the single-purpose entity (because the fair value of the property is significantly less than the carrying amount of the related indebtedness). In addition, the reporting entity has waived its rights of ownership of the single-purpose entity, which provides the lender with the ability to foreclose and otherwise sell or transfer the underlying property without the reporting entity’s consent. However, the reporting entity does have the ability to cure the event of default and retain ownership of the real estate.
360-20-55-77 Paragraph superseded by Accounting Standards Update 2014-09.
In this Example, derecognition of the in substance real estate by the reporting entity in its consolidated statement of financial position is not appropriate before the date that the reporting entity’s interest in the real estate is conveyed to the lender or a third-party purchaser and the single-purpose entity is released from its debt obligation.

Amendments to Subtopic 405-10

69. The following amendment reflects the updated title of Topic 430 from Deferred Revenue to Deferred Revenue and Contract Liabilities.
70. Amend paragraph 405-10-05-2, with a link to transition paragraph 606-1065-1, as follows:
Liabilities—Overall
Overview and Background
405-10-05-2 This Subtopic does not contain any accounting guidance. Instead, its purpose is to identify the locations in the Codification that provide guidance for liabilities. The following Topics directly discuss the recognition of liabilities:
a. Asset Retirement and Environmental Obligations, see Topic 410
b. Exit or Disposal Cost Obligations, see Topic 420
c. Deferred Revenue and Contract Liabilities, see Topic 430
d. Commitments, see Topic 440
e. Contingencies, see Topic 450
f. Guarantees, see Topic 460
g. Debt, see Topic 470
h. Distinguishing Liabilities from Equity, see Topic 480.

Amendments to Subtopic 410-20

71. The following amendment replaces the reference to existing guidance in Subtopic 605-25, Revenue—Multiple Elements, with a reference to the guidance in Topic 606.
72. Amend paragraph 410-20-55-28, with a link to transition paragraph 60610-65-1, as follows:
Asset Retirement and Environmental Obligations—Asset Retirement Obligations
Implementation Guidance and Illustrations
410-20-55-28 The new asset should be measured as the residual amount (the excess of the price paid over the fair value of the asset retirement obligation transferred). That amount should be used in determining the new asset’s cost basis. The commercial user should derecognize the liability from its balance sheet and recognize a gain or loss based on the difference between the carrying amount of the liability at the date of the sale and the portion of the sales price that relates to the obligation. The producer of the new asset should recognize revenue for the total amount received reduced by the fair value of the obligation upon the transfer of the obligation from the commercial user (that is, on a net basis). The requirements for the producer to measure the revenue from the sale of the new asset as the residual amount and recognize revenue only for the sale of the new asset are applicable for those producers for which the recycling of electronic waste equipment is not a revenue-generating business activity. In situations in which the recycling of equipment is a revenue-generating business activity for the producer, that producer should apply the guidance in Topic 606 on revenue from contracts with customers
measure the revenue from the sale of the new asset and the assumption of the obligation in accordance with the provisions of Subtopic 605-25
.

Amendments to Topic 430

73. The amendments to Topic 430 have been made for the following reasons:
a. The amendments conform the terminology in paragraph 430-10-05-1 to the terminology used in Topic 606.
b. Paragraph 430-10-25-1 has been superseded because this paragraph only provided a reference to guidance in Subtopic 605-50 that is being superseded by Topic 606.
c. Paragraph 430-10-60-1 has been superseded because this paragraph only demonstrated a relationship to paragraph 926-430-25-2, which is also being deleted because it provides industry-specific deferred revenue guidance.
74. Amend the title of Topic 430 and add the General Note, as follows:
Deferred Revenue and Contract Liabilities—Overall
General Note on Deferred Revenue: Upon the effective date of Accounting Standards Update 2014-09, the title of this Topic will change to Deferred Revenue and Contract Liabilities.
75. Amend paragraph 430-10-05-1, with a link to transition paragraph 606-1065-1, as follows:
Overview and Background
430-10-05-1 This Subtopic only provides a link to guidance on deferred revenue and contract liabilities. See Topic 606 on revenue from contracts with customers for further guidance
related to vendor sales incentives
.
76. Supersede paragraph 430-10-25-1, with a link to transition paragraph 60610-65-1, as follows:
Recognition
General
430-10-25-1 Paragraph superseded by Accounting Standards Update 2014-09.
Paragraph 605-50-25-4 addresses when a vendor shall recognize a liability (or deferred revenue) for certain sales incentives (refunds or rebates) that will be claimed by customers.
77. Supersede paragraph 430-10-60-1 and its related heading, with a link to transition paragraph 606-10-65-1, as follows:
Relationships
> Entertainment—Films
430-10-60-1 Paragraph superseded by Accounting Standards Update 2014-09.
For guidance regarding deferred revenue related to advances for any form of film distribution, exhibition, or exploitation, see paragraph 926-430-25-2.

Amendments to Subtopic 440-10

78. The following amendment clarifies the scope for commitments, specifically unconditional purchase obligations, and references relevant guidance in Subtopics 470-40, Debt—Product Financing Arrangements and Topic 606.
79. Amend paragraph 440-10-15-4, with a link to transition paragraph 606-1065-1, as follows:
Commitments—Overall
Scope and Scope Exceptions
Unconditional Purchase Obligations
> Transactions
440-10-15-4 The guidance in the Unconditional
Purchasing
Purchase Obligations Subsections does not apply to either of the following:
a.
product
Product financing arrangements
, which
that are within the scope of Section 470-40-15. See paragraph 470-40-05-5 for a discussion of the distinction between a product financing arrangement and an unconditional purchase obligation.
b. Repurchase agreements that are within the scope of Topic 606, specifically in paragraphs 606-10-55-66 through 55-78.
80. The following amendments reflect the removal of industry-specific guidance in Subtopics 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, 948-605, Financial Services—Mortgage Banking— Revenue Recognition, and 976-605, Real Estate—Retail Land—Revenue Recognition, and amendments made to Subtopic 980-605, Regulated Operations—Revenue Recognition.
81. Supersede paragraphs 440-10-60-5 and 440-10-60-19 through 60-20 and their related headings, and amend paragraph 440-10-60-16, with a link to transition paragraph 606-10-65-1, as follows:
Relationships
> Revenue Recognition
440-10-60-5 Paragraph superseded by Accounting Standards Update 201409.
For disclosures of commitments to complete contracts in process, see paragraph 605-35-50-11.
> Financial Services—Mortgage Banking
440-10-60-16 For recognition of loan and commitment fees, see
Section 948605-25 and
paragraph 948-310-35-7.
> Real Estate—Retail Land
440-10-60-19 Paragraph superseded by Accounting Standards Update 201409.
For commitments for future improvement costs in a retail land sale, see paragraph 976-605-30-3.
> Regulated Operations
440-10-60-20 Paragraph superseded by Accounting Standards Update 201409.
For long-term power sales contracts, see Section 980-605-25.

Amendments to Subtopic 450-10

82. The following amendments reflect the following three changes:
a. Paragraph 450-10-60-3. The removal of industry-specific guidance in Subtopic 605-15, Revenue Recognition—Products, and replacement with the guidance in Topic 606 on sale with a right of return
b. Paragraph 450-10-60-4. The relocation of paragraph 605-40-25-4 to paragraph 610-30-25-4.
c. Paragraph 450-10-60-12. The removal of industry-specific guidance in Subtopic 985-605, Software—Revenue Recognition.
83. Amend paragraphs 450-10-60-3 through 60-4 and supersede paragraph 450-10-60-12 and its related heading, with a link to transition paragraph 606-1065-1, as follows:
Contingencies—Overall
Relationships
> Revenue Recognition
450-10-60-3 See the guidance on estimating and constraining estimates of variable consideration (for example, a sale with a right of return) in paragraphs 606-10-32-5 through 32-14 included in the transaction price for contracts with customers.
For recognition of revenue when uncertainties exist about possible returns, see Subtopic 605-15
.
450-10-60-4 For cases in which a nonmonetary asset is destroyed or damaged (that is, an involuntary conversion) and the amount of monetary assets to be received is uncertain, see paragraph 610-30-25-4
605-40-25-4
.
> Software
450-10-60-12 Paragraph superseded by Accounting Standards Update 201409.
For revenue recognition when uncertainties exist if licensing, selling, leasing, or otherwise marketing computer software, see Subtopic 985-605.

Amendments to Subtopic 460-10

84. The following amendment to paragraph 460-10-15-7 updates the listing of scope exceptions to include (k). That scope exception clarifies the guidance that was previously included in paragraph 460-10-55-17(e) as updated for the Board’s conclusions about sales incentive programs and those that should be evaluated within the scope of Topic 606 and those that would be included in the scope of Topic 460. The following amendment to paragraph 460-10-15-9 reflects the updated guidance on warranties.
85. Amend paragraphs 460-10-15-7 and 460-10-15-9, with a link to transition paragraph 606-10-65-1, as follows:
Guarantees—Overall
Scope and Scope Exceptions
General
> > Transactions That Are Excluded from the Scope of This Topic
460-10-15-7 The guidance in this Topic does not apply to the following types of guarantee contracts:
a. A guarantee or an indemnification that is excluded from the scope of Topic 450 (see paragraph 450-20-15-2—primarily employment-related guarantees)
b. A lessee’s guarantee of the residual value of the leased property at the expiration of the lease term, if the lessee (guarantor) accounts for the lease as a capital lease under Subtopic 840-30
c. A contract that meets the characteristics in paragraph 460-10-15-4(a) but is accounted for as contingent rent under Subtopic 840-30
d. A guarantee (or an indemnification) that is issued by either an insurance entity or a reinsurance entity and accounted for under Topic 944 (including guarantees embedded in either insurance contracts or investment contracts)
e. A contract that meets the characteristics in paragraph 460-10-15-4(a) but provides for payments that constitute a vendor rebate (by the guarantor) based on either the sales revenues of, or the number of units sold by, the guaranteed party
f. A contract that provides for payments that constitute a vendor rebate (by the guarantor) based on the volume of purchases by the buyer (because the underlying relates to an asset of the seller, not the buyer who receives the rebates)
g. A guarantee or an indemnification whose existence prevents the guarantor from being able to either account for a transaction as the sale of an asset that is related to the guarantee’s underlying or recognize in earnings the profit from that sale transaction
h. A registration payment arrangement within the scope of Subtopic 825-20 (see Section 825-20-15)
i. A guarantee or an indemnification of an entity’s own future performance (for example, a guarantee that the guarantor will not take a certain future action)
j. A guarantee that is accounted for as a credit derivative at fair value under Topic 815.
k. A sales incentive program in which a manufacturer contractually guarantees to reacquire the equipment at a guaranteed price or guaranteed prices at a specified time, or at specified time periods (for example, the entity is obligated to reacquire the equipment or the entity is obligated at the customer’s request to reacquire the equipment). That program shall be evaluated in accordance with Topic 606 on revenue from contracts with customers, specifically the implementation guidance on repurchase agreements in paragraphs 606-10-55-66 through 55-78.
For related implementation guidance, see Section 460-10-55.
Product Warranties
> Transactions
460-10-15-9 The guidance in the Product Warranties Subsections applies only to product warranties, which include all of the following:
a. Product warranties issued by the guarantor, regardless of whether the guarantor is required to make payment in services or cash
b. Separately priced extended warranty or product maintenance
contracts.
contracts and warranties that provide a customer with a service in addition to the assurance that the product complies with agreed-upon specifications (see paragraphs 606-10-55-30 through 55-35 for guidance on determining whether a warranty provides a customer with a service in addition to the assurance that the product complies with agreed-upon specifications)
c. Warranty obligations that are incurred in connection with the sale of the product, that is, obligations in which the customer does not have the option to purchase the warranty separately and that do not provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications.
that are not separately priced or sold but are included in the sale of the product.
86. The following amendment conforms the scope exception in Topic 460, Guarantees, for separately priced extended warranty or product maintenance contracts to the updated guidance in Topic 606. The addition of paragraph 46010-25-8A describes the retention of guidance in paragraph 605-20-25-6 that provides guidance on loss provisions for such contracts.
87. Amend paragraph 460-10-25-8 and add paragraph 460-10-25-8A, with a link to transition paragraph 606-10-65-1, as follows:
Recognition
Product Warranties
> Separately Priced Extended Warranty or Product Maintenance Contracts
460-10-25-8
Paragraphs 605-20-25-1 through 25-6
Topic 606 on revenue from contracts with customers, and specifically the guidance on warranties in paragraphs 606-10-55-30 through 55-35, provide guidance on revenue recognition by sellers of extended warranty or product maintenance
contracts.
contracts and warranties that provide a customer with a service in addition to the assurance that the product complies with agreed-upon specifications.
460-10-25-8A Paragraph 605-20-25-6 provides guidance on recognizing a loss on separately priced extended warranty and product maintenance contracts.
88. The following amendment removes the reference to deferred revenue and contract liabilities. The accounting guidance for extended warranties is now within the scope of Topic 606, including the guidance on warranties and the related disclosures.
89. Amend paragraph 460-10-50-8, with a link to transition paragraph 606-1065-1, as follows:
Disclosure
Product Warranties
460-10-50-8 A guarantor shall disclose all of the following information for product warranties and other guarantee contracts described in paragraph 460-10-15-9:
a. The information required to be disclosed by paragraph 460-10-50-4 except that a guarantor is not required to disclose the maximum potential amount of future payments specified in paragraph 460-10-50-4(b)
b. The guarantor’s accounting policy and methodology used in determining its liability for product warranties
(including any liability [such as deferred revenue] associated with extended warranties)
c. A tabular reconciliation of the changes in the guarantor’s aggregate product warranty liability for the reporting period. That reconciliation shall include all of the following amounts:
1. The beginning balance of the aggregate product warranty liability
2. The aggregate reductions in that liability for payments made (in cash or in kind) under the warranty
3. The aggregate changes in the liability for accruals related to product warranties issued during the reporting period
4. The aggregate changes in the liability for accruals related to preexisting warranties (including adjustments related to changes in estimates)
5. The ending balance of the aggregate product warranty liability.
90. The following amendments to Section 460-10-55 reflect the change in the scope of the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales (formerly FAS 66), for the sale or transfer of nonfinancial assets including real estate. The guidance in Subtopic 360-20 has been retained for purposes of sale-leaseback transactions. Additionally, the concept included in paragraph 460-10-55-17(e) has been moved to paragraph 460-10-15-7(k).
91. Amend paragraph 460-10-55-17, with a link to transition paragraph 60610-65-1, as follows:
Implementation Guidance and Illustrations
> > Scope Guidance—Guarantees Outside the Scope of This Topic Entirely
> > > Guarantees That Prevent Sale Accounting
460-10-55-17 The following are examples of contracts that are outside the scope of this Topic because they are of the type described in paragraph 460-10-15-7(g):
a. A seller’s guarantee of the return of a buyer’s investment or return on investment of a real estate property as discussed in paragraph 360-2040-41 for real estate sale-leaseback transactions.
b. A seller’s guarantee of a specified level of operations of a real estate property, as discussed in paragraphs 360-20-40-42 through 40-44 for real estate sale-leaseback transactions.
c. A transaction that involves sale of a marketable security to a third-party buyer with the buyer having an option to put the security back to the seller at a specified future date or dates for a fixed price, if the existence of the put option prevents the transferor from accounting for the transaction as a sale, as described in paragraphs 860-20-55-20 through 55-23.
d. A seller-lessee’s residual value guarantee if that guarantee results in the seller-lessee deferring profit from the sale greater than or equal to the gross amount of the guarantee (see paragraphs 840-40-55-26 through 55-28).
e. Subparagraph superseded by Accounting Standards Update 2014-09.
A sales incentive program in which a manufacturer contractually guarantees that the purchaser will receive a minimum resale amount at the time the equipment is disposed of, if that guarantee prevents the manufacturer from being able to account for a transaction as a sale of an asset, as described in paragraphs 840-10-55-12 through 55-25. (Because a manufacturer continues to recognize the residual value of the equipment it guaranteed [it is included in the seller-lessor’s net investment in the lease], if the sales incentive program qualified to be reported as a sales-type lease, it still would not be within the scope of this Topic because this Topic does not apply to a guarantee for which the underlying is related to an asset of the guarantor.)
92. The following amendments to paragraphs 460-10-60-8 through 60-10 and 460-10-60-38 reflect the removal of the industry-specific revenue guidance in Subtopics 605-15, Revenue Recognition—Products, 605-20, Revenue Recognition—Services, 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, and 926-605, Entertainment—Films—Revenue Recognition. The amendment to paragraph 460-10-60-3 reflects the change in scope of Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, for sale-leaseback transactions only.
93. Supersede paragraphs 460-10-60-8 through 60-10 and 460-10-60-38 and their related headings and amend paragraphs 460-10-60-3 and 460-10-60-41, with a link to transition paragraph 606-10-65-1, as follows:
Relationships
> Property, Plant, and Equipment
460-10-60-3 For a seller’s guarantee of a return of the buyer’s investment in real estate or a seller’s guarantee of a return on that investment for an extended period, see paragraph 360-20-40-41 for real estate sale-leaseback transactions.
> Revenue Recognition
460-10-60-8 Paragraph superseded by Accounting Standards Update 201409.
For recognition of guarantee fees, see paragraphs 605-20-25-8 through 25-12.
460-10-60-9 Paragraph superseded by Accounting Standards Update 201409.
For guaranteed sales (arrangements in which customers buy products for resale with the right to return products), see paragraphs 605-15-25-1 through 254.
460-10-60-10 Paragraph superseded by Accounting Standards Update 201409.
For guaranteed maximum reimbursable costs of construction contracts or production contracts, see Subtopic 605-35.
> Entertainment—Films
460-10-60-38 Paragraph superseded by Accounting Standards Update 201409.
For nonrefundable minimum guarantees contained in certain film licensing arrangements, see paragraphs 926-605-25-19 through 25-21.
Product Warranties
> Revenue Recognition
460-10-60-41 For recognition of {add glossary link}revenue{add glossary link}
, costs, and losses resulting from separately priced extended warranty and product maintenance contracts, see paragraphs 605-20-25-1 through 25-6.
for a warranty that is identified as a separate performance obligation, see paragraphs 606-10-55-30 through 55-35.

Amendments to Subtopic 470-40

94. The following amendment delineates the treatment between a contract that contains a repurchase agreement within the scope of Topic 606 and product financing arrangements within the scope of Subtopic 470-40, Debt—Overall, in which the entity arranges for another entity to purchase the product on the entity’s behalf and agrees to purchase the product from the other entity.
95. Amend paragraph 470-40-05-3, with a link to transition paragraph 606-1065-1, as follows:
Debt—Product Financing Arrangements
Overview and Background
470-40-05-2 Product financing arrangements include agreements in which a sponsor (the entity seeking to finance product pending its future use or resale) does any of the following:
a. Sells the product to another entity (the entity through which the financing flows), and in a related transaction agrees to repurchase the product (or a substantially identical product)
b. Arranges for another entity to purchase the product on the sponsor’s behalf and, in a related transaction, agrees to purchase the product from the other entity
c. Controls the disposition of the product that has been purchased by another entity in accordance with the arrangements described in either (a) or (b).
470-40-05-3 In all of the foregoing cases, the sponsor agrees to purchase the product, or processed goods of which the product is a component, from the other entity at specified prices over specified periods or, to the extent that it does not do so, guarantees resale prices to third parties (see paragraph 470-40-152(a)(1)). The Implementation Guidance in Section 470-40-55 illustrates
each of the types of arrangements
the arrangement described in
(a) and
(b) of the preceding paragraph. For an arrangement described in (a), see Topic 606 on revenue from contracts with customers for guidance on repurchase agreements in paragraphs 606-10-55-66 through 55-78 and an illustration on repurchase agreements in Example 62, Case A, paragraphs 606-10-55-401 through 55-404.
96. The following amendments remove guidance on product financing arrangements that are now within the scope of Topic 606. The amendment to paragraph 470-40-15-3(e) clarifies that sales or transfers of products with a right of return should be within the scope of Topic 606 (consistent with the original legacy guidance in FAS 49, which excluded from the scope of Subtopic 470-40 transactions within the scope of FAS 48). The amendment to paragraph 470-4015-3(g) excludes from the scope contracts that are repurchase agreements that should be within the scope of Topic 606 and includes specific references to the guidance on repurchase agreements and principal versus agent considerations because that guidance is likely to be applicable to those contracts.
97. Amend paragraphs 470-40-15-2 through 15-3, with a link to transition paragraph 606-10-65-1, as follows:
Scope and Scope Exceptions
> Transactions
470-40-15-2 The guidance in this Subtopic applies to product financing arrangements for products that have been
produced by or were originally purchased by the sponsor or
purchased by another entity on behalf of the sponsor and have both of the following characteristics:
a. The financing arrangement requires the sponsor to purchase the product, a substantially identical product, or processed goods of which the product is a component at specified prices. The specified prices are not subject to change except for fluctuations due to finance and holding costs. This characteristic of predetermined prices also is present if any of the following circumstances exist:
1. The specified prices in the financing arrangement are in the form of resale price guarantees under which the sponsor agrees to make up any difference between the specified price and the resale price for products sold to third parties.
2. The sponsor is not required to purchase the product but has an option to purchase the product, the economic effect of which compels the sponsor to purchase the product; for example, an option arrangement that provides for a significant penalty if the sponsor does not exercise the option to purchase.
3. The sponsor is not required by the agreement to purchase the product, but the other entity has an option whereby it can require the sponsor to purchase the product.
b. The payments that the other entity will receive on the transaction are established by the financing arrangement, and the amounts to be paid by the sponsor will be adjusted, as necessary, to cover substantially all fluctuations in costs incurred by the other entity in purchasing and holding the product (including interest). This characteristic ordinarily is not present in purchase commitments or contractor-subcontractor relationships.
470-40-15-3 The guidance in this Subtopic does not apply to the following transactions and activities:
a. Ordinary purchase commitments in which control of the good or service is
the risks and rewards of ownership are
retained by the seller (for example, a manufacturer or other supplier) until the good or service
product
is transferred to a purchaser.
b. Typical contractor-subcontractor relationships in which the contractor is not in substance the owner of product held by the subcontractor and the obligation of the contractor is contingent on substantial performance on the part of the subcontractor.
c. Long-term unconditional purchase obligations (for example, take-or-pay contracts) specified by Subtopic 440-10 on commitments. At the time a take-or-pay contract is entered into, which is an unconditional purchase obligation, either the product does not yet exist (for example, electricity) or the product exists in a form unsuitable to the purchaser (for example, unmined coal); the purchaser has a right to receive future product but is not the substantive owner of existing product.
d. Unmined or unharvested natural resources and financial instruments.
e. Contracts within the scope of Topic 606 on revenue from contracts with customers. For example, contracts that are subject to a right of return as described in paragraph 606-10-32-10 and paragraphs 606-1055-22 through 55-29 and contracts in which a sponsor (the entity seeking to finance product pending its future use or resale) sells the product to another entity (the entity through which the financing flows) and in a related transaction agrees to repurchase the product (or a substantially identical product). Such contracts are within the scope of Topic 606; see paragraphs 606-10-55-66 through 55-78 on repurchase agreements and paragraphs 606-10-55-36 through 55-40 on principal versus agent considerations.
Transactions for which sales revenue is recognized currently in accordance with the provisions of Topic 605.
f. Typical purchases by a subcontractor on behalf of a contractor. In a typical contractor-subcontractor relationship, the purchase of product by a subcontractor on behalf of a contractor ordinarily leaves a significant portion of the subcontractor’s obligation unfulfilled. The subcontractor has the risks of ownership of the product until it has met all the terms of a contract. Accordingly, the typical contractor-subcontractor relationship shall not be considered a product financing arrangement.
98. The amendments to Section 470-40-25 eliminate the recognition guidance for transactions that are now within the scope of Topic 606.
99. Amend paragraphs 470-40-25-1 through 25-3, with a link to transition paragraph 606-10-65-1, as follows:
Recognition
470-40-25-1 This Subtopic requires that a product financing arrangement within the scope of this Subtopic be accounted for as a borrowing rather than as a sale. The sponsor is in substance the owner of the product and the sponsor shall, therefore, report the product as an asset and the related obligation as a liability.
470-40-25-2 If the sponsor is a party to an arrangement whereby another entity purchases a product on the sponsor’s behalf and, in a related transaction, the sponsor agrees to purchase the product or processed goods of which the product is a component from the entity, the sponsor shall record the asset and the related liability when the product is purchased by the other entity.
Product and obligations under product financing arrangements that have both of the characteristics described in paragraphs 470-40-15-2 through 15-3 shall be accounted for by the sponsor as follows:
a.
If a sponsor sells a product to another entity and, in a related transaction, agrees to repurchase the product (or a substantially identical product) or processed goods of which the product is a component, the sponsor shall record a liability at the time the proceeds are received from the other entity to the extent that the product is covered by the financing arrangement. The sponsor shall not record the transaction as a sale and shall not remove the covered product from its balance sheet.
b.
If the sponsor is a party to an arrangement whereby another entity purchases a product on the sponsor’s behalf and, in a related transaction, the sponsor agrees to purchase the product or processed goods of which the product is a component from the entity, the sponsor shall record the asset and the related liability when the product is purchased by the other entity.
470-40-25-3 Costs of the product, excluding processing costs, in excess of
the sponsor’s original production or purchase costs or
the other entity’s purchase costs represent financing and holding costs. The sponsor shall account for such costs in accordance with the sponsor’s accounting policies applicable to financing and holding costs as those costs are incurred by the other entity. For example, if insurance costs ordinarily are accounted for as period costs by the sponsor, similar costs associated with the product covered by financing arrangements shall be expensed by the sponsor as those costs are incurred by the other entity.
100. The amendments to Section 470-40-55 eliminate the Example that previously illustrated a transaction that should be within the scope of the newly created revenue guidance on repurchase agreements. As a result, that Example (Example 1, Case A) has been superseded from the guidance and a similar transaction is now illustrated in Topic 606 in Example 62, Case A. Paragraphs 470-40-55-6 through 55-8 have not been amended but have been included to provide context for the amendments that have been made.
101. Amend paragraphs 470-40-55-1 through 55-2 and their related heading, supersede paragraphs 470-40-55-3 through 55-5 and their related heading, and amend paragraph 470-40-55-6 by superseding its related heading, with a link to transition paragraph 606-10-65-1, as follows:
Implementation Guidance and Illustrations
> Illustrations
> > Example 1: Sponsor Arranges for an Entity to Purchase Product and Sponsor Agrees to Purchase That Product
Common Product Financing Arrangements
470-40-55-1
The following Cases illustrate
This Example illustrates how the guidance in paragraphs
470-40-15-2 through 15-3
470-40-25-1 through 25-4 applies to product financing arrangements in which a sponsor arranges for another entity to purchase the product on the sponsor’s behalf and, in a related transaction, agrees to purchase the product from the other entity.
two common product financing arrangements:
a. Subparagraph superseded by Accouting Standards Update 2014-09.
Entity sells product with repurchase agreement (Case A).
b. Subparagraph superseded by Accounting Standards Update 201409.
Sponsor arranges for third party to purchase product, sponsor to repurchase (Case B).
470-40-55-2 The facts assumed in
the Cases
this Example are illustrative only and are not intended to modify or limit in any way the provisions of this Subtopic. The facts assumed in
each Case
the Example could vary in one or more respects without altering the application of the provisions of this Subtopic.
> > > Case A: Entity Sells Product with Repurchase Agreement
470-40-55-3 Paragraph superseded by Accounting Standards Update 201409.
An entity (sponsor) sells a portion of its inventory to another entity (the entity through which the financing flows), and in a related transaction agrees to repurchase the inventory.
470-40-55-4 Paragraph superseded by Accounting Standards Update 201409.
The sponsor arranges for the other entity to acquire a portion of the sponsor’s inventory. The other entity’s sole asset is the transferred inventory that is, in turn, used as collateral for bank financing. The proceeds of the bank financing are then remitted to the sponsor. The debt of the other entity is guaranteed by the sponsor. The inventory is stored in a public warehouse during the holding period. The sponsor, in connection with the sale (legal title passes to the entity), enters into a financing arrangement under which all of the following conditions are met:
a.
The sponsor agrees to pay all costs of the other entity associated with the inventory, including holding and storage costs.
b.
The sponsor agrees to pay the other entity interest on the purchase price of the inventory equivalent to the interest and fees incurred in connection with the bank financing.
c.
The sponsor agrees to repurchase the inventory from the other entity at a specified future date for the same price originally paid by the entity to purchase the inventory irrespective of changes in market prices during the holding period.
d.
The other entity agrees not to assign or otherwise encumber the inventory during its ownership period, except to the extent of providing collateral for the bank financing.
470-40-55-5 Paragraph superseded by Accounting Standards Update 2014-09.
In this product financing arrangement, both of the characteristics in paragraphs 470-40-15-2 through 15-3 are present; accordingly, the sponsor neither records the transaction as a sale of inventory nor removes the inventory from its balance sheet. The sponsor recognizes a liability when the proceeds are received from the other entity. Financing and holding costs are accrued by the sponsor as incurred by the other entity and accounted for in accordance with the sponsor’s accounting policies for such costs. Interest costs are separately identified and accounted for in accordance with Topic 835.
> > > Case B: Sponsor Arranges for Third Party to Purchase Product, Sponsor to Repurchase
470-40-55-6 A sponsor arranges for another entity to buy product on the sponsor’s behalf with a related agreement to purchase the product from the other entity.
470-40-55-7 The sponsor arranges for the other entity to purchase on its behalf an existing supply of fuel. In a related agreement, the sponsor agrees to purchase the fuel from the other entity over a specified period and at specified prices. The prices established are adequate to cover all financing and holding costs of the other entity. The other entity finances the purchase of fuel using the fuel and the agreement as collateral.
470-40-55-8 In this product financing arrangement, both of the characteristics in paragraphs 470-40-15-2 through 15-3 are present; accordingly, the sponsor reports the asset (fuel) and the related liability on its balance sheet when the fuel is acquired by the other entity. Financing and holding costs are accrued by the sponsor as incurred by the other entity and accounted for in accordance with the sponsor’s accounting policies for financing and holding costs. Interest costs are separately identified and accounted for in accordance with Topic 835.

Amendments to Subtopic 505-50

102. The following amendments to Subtopic 505-50 reflect the removal of the guidance on the accounting by the grantee (that is, the good or service provider) for share-based payment transactions. When an entity provides goods or services in exchange for noncash consideration, including equity, the entity should apply the guidance on noncash consideration in Topic 606.
103. Amend paragraphs 505-50-05-2 through 05-3 and 505-50-05-5 and add paragraph 505-50-05-2A, with a link to transition paragraph 606-10-65-1, as follows:
Equity—Equity-Based Payments to Non-Employees
Overview and Background
505-50-05-2 This Subtopic addresses the accounting and reporting for
both
the issuer (that is, the purchaser or grantor)
and recipient (that is, the goods or service provider or grantee)
for
a subset of
share-based payment
transactions.
transactions in which the recipient (that is, the goods or service provider or grantee) is not an employee (see the definition for determining which guidance to apply to a particular transaction). When the grantee is an employee in a share-based payment transaction, the grantor shall apply the guidance in Topic 718 on stock compensation.
Topic 718 also addresses a subset of these transactions.
The applicable accounting and reporting requirements for a specific transaction substantially depend on whether the grantee meets the definition of an {remove glossary link}employee{remove glossary link}
(see the definition for determining which guidance to apply to a particular transaction)
. The accounting and reporting required may differ significantly depending on whether that definition of employee is met for the grantee.
With certain exceptions, this Subtopic provides guidance when the grantee does not meet that definition of an employee.
505-50-05-2A This Subtopic does not address the accounting and reporting for the grantee of a share-based payment in a contract with a customer. The grantee (that is, the provider of goods or services) shall apply the guidance in Topic 606 on revenue from contracts with customers, specifically, the guidance on noncash consideration in paragraphs 606-10-32-21 through 32-24.
505-50-05-3 The guidance in this Subtopic addresses the transactions described in this Section in which the
grantee receives
grantor issues shares of stock, stock options, or other equity instruments in settlement of the entire transaction or, if the transaction is part cash and part equity instruments, in settlement of the portion of the transaction for which the equity instruments constitute the consideration.
505-50-05-5 For example, a fully vested stock option may be issued to a grantee that contains a provision that the exercise price will be reduced if the grantee completes a project by a specified date. In certain cases, the fair value of the equity instruments to be received may be more reliably measurable than the fair value of the goods or services to be given as consideration. The guidance in this Subtopic addresses this situation for the grantor
, including the appropriate date or dates to be used by the grantee to measure revenue under such complex transactions
.
104. Supersede paragraph 505-50-25-5, with a link to transition paragraph 60610-65-1, as follows:
Recognition
505-50-25-5 Paragraph superseded by Accounting Standards Update 2014-09.
In the situation in which an entity is the recipient (the goods or service provider or grantee) of the equity instrument, this guidance also does not address when revenue is recognized other than to require that a liability (deferred revenue) or revenue be recognized in the same period(s) and in the same manner as it would if the grantee was to receive cash for the goods or services instead of the equity instruments.
105. Amend paragraphs 505-50-30-1 and 505-50-30-9 through 30-10, supersede paragraph 505-50-30-8 and amend its related heading, and supersede paragraphs 505-50-30-18 through 30-19 and their related heading and 505-50-30-29, with a link to transition paragraph 606-10-65-1, as follows:
Initial Measurement
505-50-30-1 This Section provides measurement guidance for transactions that involve the issuance
or receipt
of equity instruments in exchange for goods or services with nonemployees. This Section identifies the measurement date for such exchange transactions and addresses issues associated with the measurement of the transactions before and as of the measurement date. Measurement issues associated with these transactions after the measurement date are addressed in Section 505-50-35.
> Determining the Fair Value of the Equity Instruments Issued
or Received
505-50-30-8 Paragraph superseded by Accounting Standards Update 201409.
As noted in paragraph 505-50-05-5 for transactions involving the receipt of equity instruments in exchange for providing goods or services, in certain cases, the fair value of the equity instruments to be received may be more reliably measurable than the fair value of the goods or services to be given as consideration.
505-50-30-9 The following guidance addresses measurement issues associated with determining the fair value of the equity instruments issued
or received
if it has been determined that the fair value of the equity instruments issued
or received
in a share-based payment transaction within the scope of this Subtopic is more reliably measurable than the fair value of the consideration received
or provided
in exchange as follows:
a. Determining the measurement date
b. Measuring before the measurement date
c. Measuring at the measurement date
d. Measuring after the measurement date.
> > Determining the Measurement Date
505-50-30-10 The following guidance identifies a measurement date, which determines some of the inputs in the determination of the fair value of equity instruments issued
or received
in a share-based payment transaction with nonemployees.
Guidance is provided separately for the grantor-purchaser and grantee-provider.
> > > Grantee-Provider
505-50-30-18 Paragraph superseded by Accounting Standards Update 2014-09.
An entity (the grantee or provider) may enter into transactions to provide goods or services in exchange for equity instruments. The grantee shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of either of the following dates referred to as the measurement date:
a.
The date the parties come to a mutual understanding of the terms of the equity-based compensation arrangement and a commitment for performance by the grantee to earn the equity instruments (a performance commitment) is reached
b.
The date at which the grantee’s performance necessary to earn the equity instruments is complete (that is, the vesting date).
505-50-30-19 Paragraph superseded by Accounting Standards Update 2014-09.
The term performance commitment as it relates to the accounting by a grantee describes the same conditions as for a grantor in paragraph 505-50-30-12. That is, a performance commitment is a commitment under which performance by the grantee to earn the equity instruments is probable because of sufficiently large disincentives for nonperformance. The disincentives must result from the relationship between the grantor and the grantee. Forfeiture of the equity instruments as the sole remedy in the event of the grantee’s nonperformance is not considered a sufficiently large disincentive for purposes of applying the guidance. In addition, the ability to sue for nonperformance, in and of itself, does not represent a sufficiently large disincentive to ensure that performance is probable. (A granting entity may always be able to sue for nonperformance but it is not always clear whether any significant damages would result.)
505-50-30-29 Paragraph superseded by Accounting Standards Update 201409.
As it relates to a grantee, if on the measurement date the quantity or any of the terms of the equity instrument are dependent on the achievement of a market condition, then the grantee shall measure revenue based on the fair value of the equity instruments inclusive of the adjustment provisions. That fair value would be calculated as the fair value of the equity instruments without regard to the market condition plus the fair value of the commitment to change the quantity or terms of the equity instruments if the market condition is met. That is, the existence of a market condition that, if achieved, results in an adjustment to an equity instrument generally affects the value of the instrument. Pricing models have been adapted to value many of those path-dependent equity instruments.
106. Amend paragraphs 505-50-35-1 and 505-50-35-3 and supersede paragraphs 505-50-35-13 through 35-16 and their related heading, with a link to transition paragraph 606-10-65-1, as follows:
Subsequent Measurement
505-50-35-1 Section 505-50-30 addresses the measurement of equity instruments issued
or received
if it has been determined that the fair value of the equity instruments issued
or received
in a share-based payment transaction within the scope of this Subtopic is more reliably measurable than the fair value of the consideration received
or provided
in exchange, including cases in which the quantity or any of the terms of the equity instruments are not known up front. The measurement guidance in that Section addresses time periods before and as of the measurement date. This Section provides guidance on the measurement of those same equity instruments after the measurement date.
> Transactions in Which Quantity or Any Terms Not Known Up Front
505-50-35-3 The following guidance addresses measurement by the grantor
and the grantee
, in periods after the measurement date, of equity instruments issued
or received
in a share-based payment transaction within the scope of this Subtopic in which the quantity or any of the terms were not known up front.
> > Grantee Accounting
505-50-35-13 Paragraph superseded by Accounting Standards Update 201409.
A grantee may be party to an arrangement in which the terms of the equity instruments are subject to adjustment after the measurement date. The following two paragraphs address transactions in which any of the terms of the equity instruments are subject to adjustment after the measurement date (that is, the terms of the equity instrument are subject to adjustment based on performance above the level committed to in a performance commitment, performance after the instrument is earned, or market conditions) and how the grantee shall account for an increase in fair value as a result of an adjustment (upon resolution of the contingency after the measurement date) as revenue.
505-50-35-14 Paragraph superseded by Accounting Standards Update 201409.
If, on the measurement date, the quantity or any of the terms of the equity instruments are dependent on the achievement of grantee performance conditions (beyond those conditions for which a performance commitment exists), then changes in fair value of the equity instrument that result from an adjustment to the instrument upon the achievement of a performance condition shall be measured as additional revenue from the transaction using a methodology consistent with modification accounting described in paragraphs 718-20-35-3 through 35-4. That is, the adjustment shall be measured at the date of the revision of the quantity or terms of the equity instrument as the difference between the then-current fair value of the revised instruments utilizing the thenknown quantity and terms and the then-current fair value of the old equity instruments immediately before the adjustment.
505-50-35-15 Paragraph superseded by Accounting Standards Update 201409.
Changes in fair value of the equity instruments after the measurement date unrelated to the achievement of performance conditions shall be accounted for in accordance with any relevant guidance on the accounting and reporting for investments in equity instruments, such as that in Topics 320, 323, 325, 825, and 855.
505-50-35-16 Paragraph superseded by Accounting Standards Update 2014-09.
Example 4, Case C (see paragraph 505-50-55-25) illustrates grantee accounting if the terms of the equity instrument are dependent on performance.
107. Supersede paragraph 505-50-50-2 and its related heading, with a link to transition paragraph 606-10-65-1, as follows:
Disclosure
> Grantee Disclosures
505-50-50-2 Paragraph superseded by Accounting Standards Update 2014-09.
In accordance with paragraphs 845-10-50-1 through 50-2, entities shall disclose, in each period’s financial statements, the amount of gross operating revenue recognized as a result of nonmonetary transactions addressed by the guidance in this Subtopic.
108. Amend paragraphs 505-50-55-17 through 55-18 and supersede paragraphs 505-50-55-25 through 55-27 and their related heading, with a link to transition paragraph 606-10-65-1, as follows:
Implementation Guidance and Illustrations
> > Example 4: Accounting After the Performance Commitment Date Through Completion of Performance
505-50-55-17 This Example illustrates the guidance in paragraph 505-50-30-30. The Cases in this Example illustrate grantor
and grantee
accounting for transactions that have a performance commitment before counterparty performance is complete. In Case A, both the quantity and all the terms of the equity instruments are known up front, whereas in
Cases
Case B
and C
they are not. The Cases illustrate the following:
a. Grantor accounting—all terms known up front (Case A)
b. Grantor accounting—terms dependent on performance (Case B)
c. Subparagraph superseded by Accounting Standards Update 2014-09.
Grantee accounting—terms dependent on performance (Case C).
505-50-55-18 Cases
A, B, and C
A and B share the assumption that a performance commitment has been achieved before the counterparty’s performance is complete.
> > > Case C: Grantee Accounting—Terms Dependent on Performance
505-50-55-25 Paragraph superseded by Accounting Standards Update 201409.
This Case illustrates the application of measurement date guidance for a transaction in which a performance commitment exists before the time that the grantee’s performance is complete and the terms of the equity instrument are subject to adjustment after the measurement date based on the achievement of specified performance conditions. This Case does not address when revenue is recognized. However, a liability (deferred revenue) or revenue would be recognized in the same period(s) and in the same manner as it would if the entity was to receive cash for the goods or services instead of the equity instruments.
505-50-55-26 Paragraph superseded by Accounting Standards Update 201409.
On January 1, X2, Entity B grants Service Provider 100,000 options with a life of 2 years. The options vest if Service Provider advertises products of Entity B on Service Provider’s website for 18 months ending June 30, X3. Entity B also agrees that if Service Provider provides 3 million hits or clickthroughs during the first year of the agreement, the life of the options will be extended from 2 years to 5 years. If Service Provider fails to provide the agreed upon minimum of 18 months of advertising through June 30, X3, Service Provider will pay Entity B specified monetary damages that, in the circumstances, constitute a sufficiently large disincentive for nonperformance.
505-50-55-27 Paragraph superseded by Accounting Standards Update 2014-09.
Service Provider would measure the 100,000 stock options for revenue recognition purposes on the performance commitment date of January 1, X2, using the 2-year option life. Assume that at the measurement date (January 1, X2) the fair value of the options is $400,000. On December 1, X2, Service Provider has provided 3 million hits and the life of the option is adjusted to 5 years. Service Provider would measure additional revenue pursuant to the achievement of the performance condition as the difference between the fair value of the adjusted instrument at December 1, X2 (that is, the option with the 5year life assumed to be $700,000), and the then fair value of the old instrument at December 1, X2 (that is, the option with the 2-year life, which is assumed to be $570,000). Accordingly, additional revenue of $130,000 would be measured. The remaining $170,000 increase in fair value of the instrument should be accounted for in accordance with the relevant guidance on the accounting and reporting for investments in equity instruments, such as that in Topics 320; 323; 325; and 815.

Amendments to Subtopic 605-10

109. Topic 605, Revenue Recognition, provided guidance for transactionspecific revenue recognition and certain matters related to revenue-generating activities that were not specifically addressed in other Topics. That guidance has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606. However, Topic 605 has been retained for two purposes:
a. For guidance retained relating to specific industries for certain contracts that are not with customers and therefore, are not within the scope of Topic 606. Those industries include:
1. 905-605, Agriculture—Revenue Recognition, guidance on cooperatives
2. 944-605, Financial Services—Insurance—Revenue Recognition, guidance on insurance contracts
3. 954-605, Health Care Entities—Revenue Recognition, guidance on contributions from related fundraising entities and charity care
4. 958-605, Not-for-Profit Entities—Revenue Recognition, guidance on contributions
5. 980-605, Regulated Operations—Revenue Recognition, guidance on alternative revenue programs.
b. For loss contract guidance (that is, an onerous contract) in the following Subtopics:
1. 605-20, Revenue Recognition—Services, with guidance on separately priced warranties
2. 605-35, Revenue Recognition—Construction-Type and ProductionType Contracts
3. 944-605, Financial Services—Insurance
4. 985-605, Software—Revenue Recognition.
Additionally, the Board utilized Topic 605 to outline the provision for loss (onerous contracts) guidance throughout the Codification. As a result, paragraph 605-10-05-4 has been added to reference the location of other provision for loss guidance that is included in the Codification but not within Topic 605 or industryspecific revenue Subtopics (that is, paragraphs within Topic 605 or Revenue Subtopics within the industry Topics).
110. Supersede paragraph 605-10-05-1 and add paragraphs 605-10-05-2 through 05-4, with a link to transition paragraph 606-10-65-1, as follows:
Revenue Recognition—Overall
Overview and Background
605-10-05-1 Paragraph superseded by Accounting Standards Update 201409.
The Revenue Recognition Topic provides guidance for transaction-specific revenue recognition and certain matters related to revenue-generating activities that are not addressed specifically in other Topics. Other Topics may contain transaction-specific revenue recognition guidance related to transactions in those Topics. This Topic includes the following Subtopics:
a.
Overall. The Overall Subtopic provides guidance on the following:
1.
Revenue and gains
2.
Installment and cost recovery methods of revenue recognition.
b.
Products. The Products Subtopic provides guidance on the following:
1.
Sales with a right of return
2.
Repurchases of product sold subject to an operating lease.
c.
Services. The Services Subtopic provides guidance on the following:
1.
Separately priced extended warranty and product maintenance contracts
2.
Commissions from certain experience-rated or retrospective insurance arrangements
3.
Certain loan guarantee fees
4.
In-transit freight service
5.
Advertising barter transactions.
d.
Multiple-Element Arrangements. The Multiple-Element Arrangements Subtopic provides guidance on arrangements under which a vendor will perform multiple revenue-generating activities (that is, provide multiple deliverables).
e.
Rights to Use.
f.
Construction-Type and Production-Type Contracts. The ConstructionType and Production-Type Contracts Subtopic provides guidance on contracts for which specifications are provided by the customer for the performance of contracts for the construction of facilities or the production of goods.
g.
Gains and Losses. The Gains and Losses Subtopic provides guidance on miscellaneous gains and losses not addressed in other Topics in the Codification.
h.
Principal-Agent Considerations. The Principal-Agent Considerations Subtopic provides guidance on reporting revenue gross or net of certain amounts paid to others.
i.
Customer Payments and Incentives. The Customer Payments and Incentives Subtopic provides guidance on accounting by vendors and customers for consideration given by a vendor to a customer.
j.
Milestone Method. The Milestone Method Subtopic provides guidance on the application of the milestone method of revenue recognition in arrangements that include research or development deliverables.
605-10-05-2 The following two Subtopics within this Topic provide guidance on provision for losses:
a. 605-20, Revenue Recognition—Provision for Losses on Separately Priced Extended Warranty and Product Maintenance Contracts
b. 605-35, Revenue Recognition—Provision for Losses on ConstructionType and Production-Type Contracts.
605-10-05-3 There is no revenue recognition guidance located in this Topic. There is revenue guidance in the following industry Subtopics for contracts that are not with customers within the scope of Topic 606 on revenue from contracts with customers. Revenue guidance is included in the following industry-specific Subtopics:
a. 905-605, Agriculture—Revenue Recognition, for guidance on cooperatives
b. 944-605, Financial Services—Insurance—Revenue Recognition, for guidance on insurance contracts
c. 954-605, Health Care Entities—Revenue Recognition, for guidance on contributions from related fundraising entities and charity care
d. 958-605, Not-for-Profit Entities—Revenue Recognition, for guidance on contributions
e. 980-605, Regulated Operations—Revenue Recognition, for guidance on alternative revenue programs.
605-10-05-4 This Topic also provides guidance and references for the recognition and measurement of a provision for losses for certain arrangements (that is, an onerous contract). The guidance on recognizing a provision for loss is located in the following Subtopics:
a. 605-20, Revenue Recognition—Provision for Losses on Separately Priced Extended Warranty and Product Maintenance Contracts
b. 605-35, Revenue Recognition—Provision for Losses on Construction-Type and Production-Type Contracts
c. 985-605, Software—Revenue Recognition, specifically paragraph 985-605-25-7
d. 944-605, Financial Services—Insurance—Revenue Recognition, specifically paragraph 944-605-35-7
e. 912-20, Contractors—Federal Government—Contract Costs, specifically paragraph 912-20-45-5
f. 954-440, Health Care Entities—Commitments, specifically on continuing care retirement communities in paragraphs 954-440-35-1 through 35-3
g. 954-450, Health Care Entities—Contingencies, specifically on prepaid health care services in paragraphs 954-450-30-3 through 30-4
h. 980-350, Regulated Operations—Intangibles—Goodwill and Other, specifically on long-term power sales contracts in paragraph 980-35035-3.
111. Supersede paragraphs 605-10-15-2 through 15-3 and their related headings, with a link to transition paragraph 606-10-65-1, as follows:
Scope and Scope Exceptions
> Entities
605-10-15-1 The guidance in this Subtopic applies to all entities.
> Transactions
605-10-15-2 Paragraph superseded by Accounting Standards Update 201409.
The guidance in this Subtopic applies to the following types of transactions and revenue recognition considerations:
a.
Revenue and gains
b.
Installment and cost recovery methods of revenue recognition
> Other Considerations
> > Contributions Received
605-10-15-3 Paragraph superseded by Accounting Standards Update 2014-09.
Paragraph 958-605-15-4 states that accounting for contributions is an issue primarily for not-for-profit entities (NFPs) because contributions are a significant source of revenues for many of those entities. However, that paragraph states that the guidance in the Contributions Received Subsections applies to all entities (NFPs and business entities) that receive contributions.
112. Supersede Section 605-10-25, with a link to transition paragraph 606-1065-1.
113. Supersede Section 605-10-60, with a link to transition paragraph 606-1065-1.

Amendments to Subtopic 605-15

114. Subtopic 605-15, Revenue Recognition—Products, provided guidance for sales of products if either the buyer has a right to return the product or the product sold is subsequently repurchased subject to an operating lease. That guidance has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606.
115. Supersede Subtopic 605-15, Revenue Recognition—Products, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 605-20

116. Subtopic 605-20, Revenue Recognition—Services, provided guidance on the accounting for revenue from service arrangements not addressed elsewhere in the Codification, specifically, separately priced extended warranty and product maintenance contracts, commissions from certain experience-rated or retrospective insurance arrangements, certain loan guarantee fees, in-transit freight service, and advertising barter transactions. The guidance on revenue recognition in this Subtopic has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606. Paragraphs in Subtopic 605-20 that have been retained provide guidance on loss provisions relating to separately priced extended warranty and product maintenance contracts. Paragraph 605-20-25-8, primarily an explanation of loan guarantee fees, has been retained and moved to Subtopic 942-825, Financial Services—Depository and Lending.
117. Amend the title of Subtopic 605-20, Revenue Recognition—Services, and add the General Note as follows:
Revenue Recognition—Provision for Losses on Separately Priced Extended Warranty and Product Maintenance Contracts
Services
General Note on Revenue Recognition—Services: Upon the effective date of Accounting Standards Update 2014-09, the title of this Subtopic will change to Revenue Recognition—Provision for Losses on Separately Priced Extended Warranty and Product Maintenance Contracts.
118. Amend paragraph 605-20-05-1 and supersede paragraphs 605-20-05-2 through 05-3 and the related heading, with a link to transition paragraph 606-1065-1, as follows:
Overview and Background
605-20-05-1 This Subtopic specifies the accounting for
revenue
the provision for losses on separately priced extended warranty and product maintenance contracts.
from service arrangements not addressed elsewhere in the
Codification, including the following:
a. Separately priced extended warranty and product maintenance contracts
b.
Commissions from certain experience-rated or retrospective insurance arrangements
c.
Certain loan guarantee fees
d.
In-transit freight service
e.
Advertising barter transactions.
605-20-05-2 Paragraph superseded by Accounting Standards Update 201409.
The guidance in this Subtopic covers these five service arrangements under separate headings throughout the Subtopic, as they are unrelated and the accounting is specific to the particular service or service arrangement.
> Other Service-Related Guidance
605-20-05-3 Paragraph superseded by Accounting Standards Update 201409.
Other locations in the Codification provide guidance that may relate to services, for example:
a.
For recognition of revenue from the sale of franchises, see Subtopic 952-605.
b.
For guidance regarding revenue from lending and financing activities, see Subtopics 860-50 and 942-605.
c.
Subtopic 605-25 specifies the allocation and recognition of revenue from arrangements under which a vendor will perform multiple revenuegenerating activities (multiple-element arrangements).
d.
For consideration (including sales incentives) given by a service vendor to a customer, see Subtopic 605-50.
e.
For transactions in which nonmonetary assets are exchanged for barter credits, see Topic 845.
f.
For the reporting of revenue gross as a principal versus net as an agent, see Subtopic 605-45.
g.
For the reporting of revenue regarding construction-type contracts, see Subtopic 605-35.
h.
For incremental guidance on revenue recognition by government contractors, see Subtopic 912-605.
119. Amend paragraphs 605-20-15-2 through 15-3, with a link to transition paragraph 606-10-65-1, as follows:
Scope and Scope Exceptions
> Entities
605-20-15-1 The guidance in this Subtopic applies to all entities.
> Transactions
605-20-15-2 The guidance in this Subtopic applies to the following service activities and arrangements:
a. Separately priced extended warranty and product maintenance contracts.
b. Subparagraph superseded by Accounting Standards Update 201409.
Commissions from certain experience-rated or retrospective insurance arrangements.
c. Subparagraph superseded by Accounting Standards Update 201409.
Fees for guaranteeing a loan (see Topic 460 for guidance on recognizing a liability for guarantees covered by this Subtopic). This Subtopic provides guidance regarding the recognition of guarantee fee income subsequent to the initial recognition of the liability.
d. Subparagraph superseded by Accounting Standards Update 2014-09.
Services for freight-in-transit at the end of a reporting period.
e. Subparagraph is superseded by Accounting Standards Update 201409.
Advertising barter transactions, whereby entities exchange rights to place advertisements with each other.
605-20-15-3 The guidance in this Subtopic does not apply to the following service activities and arrangements:
a. Guarantees accounted for as derivatives in accordance with Section 815-10-15
b. Product warranties, except
that paragraph 605-20-25-3 provides guidance on revenue recognition by sellers of
extended warranty or product maintenance contracts. See paragraph 605-20-25-6.
c. Guarantees required to be accounted for as financial guarantee insurance contracts in accordance with Topic 944 on insurance.
120. Paragraphs 605-20-25-1 and 605-20-25-6 have been retained for the purpose of loss provision guidance. Paragraph 605-20-25-8, which provides background information, has been retained and moved to Subtopic 942-825, Financial Services—Depository and Lending—Financial Instruments.
121. Amend paragraphs 605-20-25-1 and 605-20-25-6 and supersede paragraphs 605-20-25-2 through 25-5 and 605-20-25-7 through 25-19 and their related headings, with a link to transition paragraph 606-10-65-1, as follows: [Paragraph 605-20-25-8 moved to paragraph 942-825-50-2]
[For ease of readability, the superseded paragraphs are not shown here.]
Recognition
> Separately Priced Extended Warranty and Product Maintenance Contracts
605-20-25-1
Some products include warranty obligations that are incurred in connection with the sale of the product, that is, obligations that are not separately priced or sold but are included in the sale of the product. The accounting for these is described in Topic 450.
Separately priced contracts for extended warranty and product maintenance contracts provide warranty protection or product services and the contract price of these contracts is not included in the original price of the product covered by the contracts.
605-20-25-6 A loss shall be recognized on extended warranty or product maintenance contracts if the sum of the expected costs of providing services under the contracts and
unamortized acquisition costs
any asset recognized for the incremental cost of obtaining a contract exceeds the related unearned revenue (contract liability). Extended warranty or product maintenance contracts shall be grouped in a consistent manner to determine if a loss exists. A loss shall be recognized first by charging to expense any
unamortized acquisition costs
recognized asset for the incremental costs of obtaining a contract, determined in accordance with the guidance in paragraphs 340-40-25-1 through 25-4 for contracts within scope of Topic 606 on revenue from contracts with customers
to expense
. If the loss is greater than the
unamortized acquisition costs
recognized asset for the incremental costs of obtaining a contract, a liability shall be recognized for the excess.
122. Supersede Section 605-20-50, with a link to transition paragraph 606-1065-1.

Amendments to Subtopic 605-25

123. Subtopic 605-25, Revenue Recognition—Multiple-Element Arrangements, addressed some aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. That guidance has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606.
124. Supersede Subtopic 605-25, Revenue Recognition—Multiple-Element Arrangements, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 605-28

125. Subtopic 605-28, Revenue Recognition—Milestone Method, provided guidance on the accounting for research or development deliverables or units of accounting that include milestones that are accounted for under the milestone method of revenue recognition. That guidance has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606.
126. Supersede Subtopic 605-28, Revenue Recognition—Milestone Method, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 605-30

127. Subtopic 605-30, Revenue Recognition—Rights to Use, provided links to guidance on rights to use. That guidance has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606.
128. Supersede Subtopic 605-30, Revenue Recognition—Rights to Use, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 605-35

129. Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts, provided guidance on the accounting for the performance of contracts for which specifications are provided by the customer for the construction of facilities or the production of goods or for the provision of related services. That guidance has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606. However, certain paragraphs in Subtopic 605-35 have been retained to provide guidance on loss provisions for construction-type and production-type contracts.
130. Amend the title of Subtopic 605-35 and add the General Note as follows:
Revenue Recognition—Provision for Losses on ConstructionType and Production-Type Contracts
General Note on Revenue Recognition—Construction-Type and Production-Type Contracts: Upon the effective date of Accounting Standards Update 2014-09, the title of this Subtopic will change to Revenue Recognition— Provision for Losses on Construction-Type and Production-Type Contracts.
131. Amend paragraph 605-35-05-1 and supersede paragraphs 605-35-05-2 through 05-13 and their related headings, with a link to transition paragraph 60610-65-1, as follows:
[For ease of readability, the superseded paragraphs are not shown here.]
Overview and Background
605-35-05-1 This Subtopic provides guidance on the accounting for a provision for losses on a contract
the performance of contracts
for which specifications are provided by the {add glossary link}customer{add glossary link} for the construction of facilities or the production of goods or for the provision of related services.
132. Amend paragraphs 605-35-15-2 through 15-3 and 605-35-15-6, with a link to transition paragraph 606-10-65-1, as follows:
Scope and Scope Exceptions
> Entities
605-35-15-1 The guidance in this Subtopic applies to all contractors.
> Types of Contracts
605-35-15-2 The guidance in this Subtopic applies to:
a. The performance of {add glossary link}contracts{add glossary link} for which specifications are provided by the {add glossary link}customer{add glossary link} for the construction of facilities or the production of goods or the provision of related services. However, it applies to separate contracts to provide services essential to the construction or production of tangible property, such as design, engineering, procurement, and construction management (see paragraph 605-35-15-3 for examples). Contracts covered by this Subtopic are binding agreements between buyers and sellers in which the seller agrees, for compensation, to perform a service to the buyer’s specifications. Specifications imposed on the buyer by a third party (for example, a government or regulatory agency or a financial institution) or by conditions in the marketplace are deemed to be buyer’s specifications.
> > Contracts Covered
605-35-15-3 Contracts covered by this Subtopic include, but are not limited to, the following:
a. Contracts in the construction industry, such as those of general building, heavy earth moving, dredging, demolition, design-build contractors, and specialty contractors (for example, mechanical, electrical, or paving). In general the type of contract here under consideration is for construction of a specific project. While such contracts are generally carried on at the job site, this Subtopic also would be applicable in appropriate cases to the manufacturing or building of special items on a contract basis in a contractor’s own plant.
b. Contracts to design and build ships and transport vessels.
c. Contracts to design, develop, manufacture, or modify complex aerospace or electronic equipment to a buyer’s specification or to provide services related to the performance of such contracts.
d. Contracts for construction consulting service, such as under agency contracts or construction management agreements.
e. Contracts for services performed by architects, engineers, or architectural or engineering design firms.
f. Arrangements to deliver software or a software system, either alone or together with other products or services, requiring significant production, modification, or customization of software.
The entire arrangement should be accounted for in conformity with this Subtopic. Nevertheless, transactions that normally are accounted for as products sales should not be accounted for as long-term contracts merely to avoid the delivery requirements normally associated with product sales for revenue recognition. See paragraphs 985-605-25-88 through 25-107 regarding the application of this Subtopic to software contracts.
605-35-15-4 Contracts covered by this Subtopic may be classified into four broad types based on methods of pricing:
a. A fixed-price contract is an agreement to perform all acts under the contract for a stated price.
b. A cost-type (including cost-plus) contract is an agreement to perform under a contract for a price determined on the basis of a defined relationship to the costs to be incurred, for example, the costs of all acts required plus a fee, which may be a fixed amount or a fixed percentage of the costs incurred.
c. A time-and-material contract is an agreement to perform all acts required under the contract for a price based on fixed hourly rates for some measure of the labor hours required (for example, direct labor hours) and the cost of materials.
d. A unit-price contract is an agreement to perform all acts required under the contract for a specified price for each unit of output.
605-35-15-5 Each of the various types of contracts may have incentive, penalty, or other provisions that modify their basic pricing terms. The glossary definitions for each of the contract types listed in the preceding paragraph contain greater detail about the pricing features.
> > Types of Contracts Not Covered
605-35-15-6 Contracts not covered by this Subtopic include, but are not limited to, the following:
a. Sales by a manufacturer of goods produced in a standard manufacturing operation, even if produced to buyers’ specifications, and sold in the ordinary course of business through the manufacturer’s regular marketing channels, if such sales are normally recognized as the sale of goods
revenue in accordance with the realization principle for sales of products
and if their costs are accounted for in accordance with generally accepted principles of inventory costing.
b. Sales or supply contracts to provide goods from inventory or from homogeneous continuing production over a period of time.
c. Contracts included in a program and accounted for under the program method of accounting. For accounting purposes, a program consists of a specified number of units of a basic product expected to be produced over a long period in a continuing production effort under a series of existing and anticipated contracts.
d. Service contracts of health clubs, correspondence schools, and similar consumer-oriented entities that provide their services to their clients over an extended period.
e. Magazine subscriptions.
f. Contracts of not-for-profit entities (NFPs) to provide benefits to their members over a period of time in return for membership dues.
g. Contracts
such as leases and real estate agreements,
for which other Topics in the Codification provide special methods of accounting, such as leases.
h. Cost-plus-fixed-fee government contracts, which are discussed in Topic 912, other types of cost-plus-fee contracts, or contracts such as those for products or services customarily billed as shipped or rendered.
i. Federal government contracts within the scope of that Topic.
j. Service transactions between a seller and a purchaser in which, for a mutually agreed price, the seller performs, agrees to perform at a later date, or agrees to maintain readiness to perform an act or acts, including permitting others to use entity resources that do not alone produce a tangible commodity or product as the principal intended result (for example, services, not plans, are usually the principal intended result in a transaction between an architect and the customer of an architect).
133. Section 605-35-25, Revenue Recognition—Construction-Type and Production-Type Contracts—Recognition, provided accounting guidance on revenue and cost recognition for contracts within its scope, including provision for losses on contracts. A majority of that guidance has been superseded by the guidance in Topic 606 and Subtopic 340-40. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606. However, the provision for loss contracts guidance has been retained consistent with the Board’s decisions on onerous contracts. Additionally, amendments have been made to update the guidance on determining when and how to combine or segment a contract in accordance with Topic 606 rather than the guidance that was contained in this Section on combining and segmenting contracts.
134. Amend paragraphs 605-35-25-7 (which includes adding a heading before that paragraph), 605-35-25-10 and its related heading, and 605-35-25-45 through 25-49, add paragraph 605-35-25-46A, and supersede the remaining paragraphs and their related headings, with a link to transition paragraph 606-10-65-1, as follows:
[For ease of readability, the superseded paragraphs are not shown here.]
Recognition
> > > Combining Contracts
> Combining Contracts
605-35-25-7 {add glossary link}Contracts{add glossary link}
may
shall be combined
for accounting purposes
to determine the need for a provision for losses in accordance with paragraphs 605-35-25-45 through 25-49 only if they meet the criteria in Topic 606 on revenue from contracts with customers, specifically paragraph 606-10-25-9.
paragraphs 605-35-25-8 through 25-9.
> Identifying Performance Obligations
> > > Segmenting a Contract or Group of Contracts
605-35-25-10 A single contract or a group of contracts that otherwise meet the criteria for combining (see paragraph 605-35-25-7) may include
several
more than one performance obligation, identified in accordance with Topic 606 on revenue from contracts with customers, specifically paragraphs 606-10-25-14 through 25-22.
elements or phases, each of which the contractor negotiated separately with the same customer and agreed to perform without regard to the performance of the others. If those activities are accounted for as a single profit center, the reported income may differ from that contemplated in the negotiations for reasons other than differences in performance. If the project is segmented, revenues can be assigned to the different elements or phases to achieve different rates of profitability based on the relative value of each element or phase to the estimated total contract revenue.
> Provisions for Losses on Contracts
605-35-25-45 For a contract on which a loss is anticipated, an entity shall recognize
GAAP requires recognition of
the entire anticipated loss as soon as the loss becomes evident.
An entity without the ability to update and revise estimates continually with a degree of confidence could not meet that essential requirement of GAAP.
605-35-25-46 When the current estimates of
total contract revenue
the amount of consideration that an entity expects to receive in exchange for transferring promised goods or services to the customer, determined in accordance with Topic 606, and contract cost indicate a loss, a provision for the entire loss on the contract shall be made. Provisions for losses shall be made in the period in which they become evident
under either the percentage-of-completion method or the completed-contract method
.
605-35-25-46A For the purpose of determining the amount that an entity expects to receive in accordance with paragraph 605-35-25-46, the entity shall use the principles for determining the transaction price in paragraphs 606-10-32-2 through 32-27 (except for the guidance in paragraphs 606-10-32-11 through 3213 on constraining estimates of variable consideration) and allocating the transaction price in paragraphs 606-10-32-28 through 32-41. In addition, the entity shall adjust that amount to reflect the effects of the customer’s credit risk.
605-35-25-47 If a group of contracts are combined based on the guidance
criteria
in paragraph 606-10-25-9
paragraphs 605-35-25-8 through 25-9
, they shall be treated as a unit in determining the necessity for a provision for a loss.
If contracts are segmented based on the criteria in paragraphs 605-35-25-12 through 25-14 the individual segments
Performance obligations identified in accordance with paragraphs 606-10-25-14 through 25-22 shall be considered separately in determining the need for a provision for a loss.
605-35-25-48 Losses on cost-type contracts
, although less frequent,
may arise if, for example, a contract provides for guaranteed maximum reimbursable costs or target penalties. In recognizing losses for accounting purposes, the contractor’s normal cost accounting methods shall be used in determining the total cost overrun on the contract, and losses shall include provisions for performance penalties.
605-35-25-49 The costs used in arriving at the estimated loss on a contract shall include all costs of the type allocable to contracts under
paragraph 605-35-25-37
paragraphs 340-40-25-5 through 25-8. Other factors that should be considered in arriving at the projected loss on a contract include all of the following:
a. Variable consideration, (for example, target
Target
penalties and rewards and potential price redeterminations)
b. Nonreimbursable costs on cost-plus contracts
c. Change orders that meet the guidance to be accounted for as contract modifications in accordance with Topic 606 on revenue from contracts with customers, specifically paragraphs 606-10-25-10 through 25-13.
d. Subparagraph superseded by Accounting Standards Update 2014-09.
Potential price redeterminations.
135. Industry-specific guidance on presentation for the percentage-ofcompletion and completed-contract methods has been superseded. The presentation guidance on provisions for anticipated losses in Section 605-35-45 has been retained and is presented below for informational purposes only.
136. Supersede paragraphs 605-35-45-3 through 45-5 and their related headings, with a link to transition paragraph 606-10-65-1.
Other Presentation Matters
> Provisions for Anticipated Losses on Contracts
605-35-45-1 The provision for loss arises because estimated cost for the contract exceeds estimated revenue. Consequently, the provision for loss shall be accounted for in the income statement as an additional contract cost rather than as a reduction of contract revenue, which is a function of contract price, not cost. Unless the provision is material in amount or unusual or infrequent in nature, the provision shall be included in contract cost and shall not be shown separately in the income statement. If it is shown separately, it shall be shown as a component of the cost included in the computation of gross profit.
605-35-45-2 Provisions for losses on contracts shall be shown separately as liabilities on the balance sheet, if significant, except in circumstances in which related costs are accumulated on the balance sheet, in which case the provisions may be deducted from the related accumulated costs. In a classified balance sheet, a provision shown as a liability shall be shown as a current liability.
> Percentage-of-Completion Method
605-35-45-3 Paragraph superseded by Accounting Standards Update 2014-09.
Under the percentage-of-completion method current assets may include costs and recognized income not yet billed, with respect to certain contracts. Liabilities, in most cases current liabilities, may include billings in excess of costs and recognized income with respect to other contracts.
> Completed-Contract Method
605-35-45-4 Paragraph superseded by Accounting Standards Update 2014-09.
When the completed-contract method is used, an excess of accumulated costs over related billings shall be shown in the balance sheet as a current asset, and an excess of accumulated billings over related costs shall be shown among the liabilities, in most cases as a current liability. If costs exceed billings on some contracts, and billings exceed costs on others, the contracts shall be segregated so that the figures on the asset side include only those contracts on which costs exceed billings, and those on the liability side include only those on which billings exceed costs.
605-35-45-5 Paragraph superseded by Accounting Standards Update 2014-09.
It is suggested that the asset item be described as costs of uncompleted contracts in excess of related billings rather than as inventory or work in process, and that the item on the liability side be described as billings on uncompleted contracts in excess of related costs.
137. Supersede Section 605-35-50 and their related headings, with a link to transition paragraph 606-10-65-1.
138. Supersede Section 605-35-55 and their related headings, with a link to transition paragraph 606-10-65-1.

Amendments to 605-40

139. Subtopic 605-40, Revenue Recognition—Gains and Losses, clarified the accounting for involuntary conversions of nonmonetary assets to monetary assets. That guidance has been moved to Subtopic 610-30, Other Income— Gains and Losses from an Involuntary Conversion, consistent with the nature of those transactions that result in gains or losses, not revenue.
140. Supersede Subtopic 605-40, with a link to transition paragraph 606-10-65-1. [Content moved to Subtopic 610-30]

Amendments to Subtopic 605-45

141. Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, provided guidance on whether an entity should report revenue gross or net of certain amounts paid to others. That guidance has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606.
142. Supersede Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 605-50

143. Subtopic 605-50, Revenue Recognition—Customer Payments and Incentives, provided guidance for consideration given by a vendor to a customer from two different perspectives: (a) the vendor’s accounting and (b) the customer’s accounting. The guidance from the perspective of the vendor has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606. The guidance from the customer’s perspective has been moved to Subtopic 705-20, Cost of Sales and Services—Accounting for Consideration Received from a Vendor. See the basis paragraph for Subtopic 705-20 for a summary of the guidance that has been moved.
144. Supersede Subtopic 605-50, with a link to transition paragraph 606-1065-1. [Paragraphs 605-50-45-16 through 45-17 and 605-50-45-19 moved to paragraphs 705-20-25-4 through 25-5 and 705-20-25-7; paragraphs 605-5045-15, 605-50-45-18, and 605-50-45-20 through 45-21 amended and moved to paragraphs 705-20-25-3, 705-20-25-6, and 705-20-25-8 through 25-9; and paragraphs 605-50-25-10 through 25-12 amended and moved to paragraphs 705-20-25-10 through 25-12]

Addition of Topic 606

145. For the newly created Topic 606, Revenue from Contracts with Customers, see paragraph 4 in Section A of the Codification amendments.

Addition of Subtopic 610-10

146. Topic 610, Other Income, has been added to provide guidance on the recognition of other income (that is, a gain or loss), rather than revenue, in an entity’s financial statements. Specifically, Subtopic 610-10 has been created to codify the new guidance on the sale or transfer of nonfinancial assets that are outside the scope of Topic 606 because the contract to sell or transfer is not with a customer. The addition of Subtopic 610-10 is consistent with the Board’s decision that an entity should apply the existence of a contract, the control and measurement requirements (including the constraint on revenue recognized) of Topic 606 for the purposes of determining when the nonfinancial asset should be derecognized and the amount of consideration to be included in the gain or loss recognized on the sale or transfer.
147. Add Subtopic 610-10, with a link to transition paragraph 606-10-65-1, as follows:
[For ease of readability, the new Subtopic is not underlined.]
Other Income—Overall
Overview and Background
General
610-10-05-1 The Other Income Topic specifies standards of financial accounting and reporting for income recognized that is not in a contract with a customer within the scope of Topic 606 on revenue from contracts with customers, other Topics (such as Topic 840 on leases and Topic 944 on insurance), or in accordance with other revenue or income recognition guidance.
610-10-05-2 This Topic includes the following Subtopics:
a. Overall
b. Gains and Losses from the Derecognition of Nonfinancial Assets
c. Gains and Losses on Involuntary Conversions.
Scope and Scope Exceptions
General
> Overall Guidance
610-10-15-1 The scope Section of the Overall Subtopic establishes the pervasive scope for the Other Income Topic.
> Entities
610-10-15-2 The guidance in this Topic applies to all entities.
Glossary
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
Revenue
Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

Addition of Subtopic 610-20

148. Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, provides guidance on the recognition of other income upon the derecognition through the sale or transfer of a nonfinancial asset (including in substance nonfinancial assets) that is not a business or nonprofit activity as long as the sale or transfer is not in a contract with a customer. (Also see the amendments to Sections 350-10-40 and 360-1040 on the derecognition of nonfinancial assets.) In addition, this Subtopic excludes from its scope a transaction in which an entity (Entity A) transfers a nonfinancial asset (or assets) to another entity (Entity B) in exchange for a noncontrolling ownership interest in that other entity (Entity B). Those transactions should be accounted for in accordance with Section 845-10-30 on exchanges of a nonfinancial asset for a noncontrolling ownership interest.
149. Add Subtopic 610-20, with a link to transition paragraph 606-10-65-1, as follows:
[For ease of readability, the new Subtopic is not underlined.]
Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets
Overview and Background
General
610-20-05-1 This Subtopic provides guidance on a gain or loss recognized upon the derecognition of a nonfinancial asset within the scope of Topic 350 on intangibles and Topic 360 on property, plant, and equipment (including in substance nonfinancial assets) if those assets are not in a contract with a customer within the scope of Topic 606 on revenue from contracts with customers.
Scope and Scope Exceptions
General
> Entities
610-20-15-1 The guidance in this Subtopic applies to all entities.
> Transactions
610-20-15-2 The guidance in this Subtopic applies to the following events and transactions:
a. The gain or loss recognized upon the derecognition of a nonfinancial asset within the scope of Topic 350 on intangibles or Topic 360 on property, plant, and equipment, unless the entity sells or transfers the nonfinancial asset in a contract with a customer
b. The gain or loss recognized upon the transfer of financial assets that are in substance nonfinancial assets within the scope of Topic 350 or Topic 360 (for example, the sale of a subsidiary that only consists of an asset [for example, a machine or piece of equipment]).
> Other Considerations
610-20-15-3 The guidance in this Subtopic does not apply to the following:
a. The derecognition of a nonfinancial asset, including an in substance nonfinancial asset, in a contract with a customer, see Topic 606 on revenue from contracts with customers
b. The derecognition of a subsidiary or group of assets that constitutes a business or nonprofit activity (excluding an in substance nonfinancial asset), see Section 810-10-40 on consolidation
c. Real estate sale-leaseback transactions, see Subtopics 360-20, on sale-leaseback accounting and 840-40 on leases
d. A conveyance of oil and gas mineral rights, see Subtopic 932-360 on extractive activities
e. A transfer of a nonfinancial asset to another entity in exchange for a noncontrolling ownership interest in that entity, see the guidance on exchanges of a nonfinancial asset for a noncontrolling ownership interest in Section 845-10-30.
Glossary
Business
An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. Additional guidance on what a business consists of is presented in paragraphs 805-10-55-4 through 55-9.
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
Disposal Group
A disposal group for a long-lived asset or assets to be disposed of by sale or otherwise represents assets to be disposed of together as a group in a single transaction and liabilities directly associated with those assets that will be transferred in the transaction.
Nonprofit Activity
An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing benefits, other than goods or services at a profit or profit equivalent, as a fulfillment of an entity’s purpose or mission (for example, goods or services to beneficiaries, customers, or members). As with a not-for-profit entity, a nonprofit activity possesses characteristics that distinguish it from a business or a for-profit business entity.
Performance Obligation
A promise in a contract with a customer to transfer to the customer either:
a. A good or service (or a bundle of goods or services) that is distinct
b. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
Revenue
Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
Transaction Price
The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
Initial Recognition
General
610-20-25-1 An entity shall recognize a gain or loss in accordance with the derecognition guidance in Section 610-20-40.
Measurement
General
610-20-32-1 To determine the amount of consideration to be included in the calculation of a gain or loss recognized upon the derecognition of a nonfinancial asset, an entity shall apply the following paragraphs in Topic 606 on revenue from contracts with customers:
a. Paragraphs 606-10-32-2 through 32-27 on determining the transaction price, including all of the following:
1. Estimating variable consideration
2. Constraining estimates of variable consideration
3. The existence of a significant financing component
4. Noncash consideration
5. Consideration payable to a customer.
b. Paragraphs 606-10-32-42 through 32-45 on accounting for changes in the transaction price.
Derecognition
General
610-20-40-1 To determine when a nonfinancial asset shall be derecognized, an entity shall apply the following paragraphs in Topic 606 on revenue from contracts with customers:
a. Paragraphs 606-10-25-1 through 25-8 on the existence of a contract
b. Paragraph 606-10-25-30 on when an entity satisfies a performance obligation by transferring control of an asset.
610-20-40-2 When the guidance in paragraph 610-20-40-1 is met, an entity shall derecognize the nonfinancial asset and recognize as a gain or loss the difference between the amount of consideration measured in accordance with paragraph 610-20-32-1 and the carrying amount of the nonfinancial asset. When the guidance in paragraph 610-20-40-1 is not met, an entity shall apply the guidance in paragraphs 350-10-40-3 to intangible assets and 360-10-40-3C to property, plant, and equipment.
Other Presentation Matters
General
610-20-45-1 See paragraph 360-10-45-5 for guidance on presentation of a gain or loss recognized on the sale of a long-lived asset (disposal group).
Implementation Guidance and Illustrations
> Illustrations
> > Sale of a Nonfinancial Asset
610-20-55-1 The following Example illustrates the guidance in this Subtopic.
> > > Example 1—Sale of a Nonfinancial Asset for Variable Consideration
610-20-55-2 An entity sells the rights to in-process research and development that it recently acquired in a business combination and measured at fair value of $50 million in accordance with Topic 805 on business combinations. The buyer of the in-process research and development agrees to pay a nonrefundable amount of $5 million at inception plus 2 percent of sales of any products derived from the in-process research and development over the next 20 years. The entity concludes that the sale of in-process research and development is not a good or service that is an output of the entity’s ordinary activities.
610-20-55-3 Topic 350 on goodwill and other intangibles requires the entity to apply the guidance on existence of a contract, control, and measurement in Topic 606 on revenue from contracts with customers to determine the amount and timing of income to be recognized as follows:
a. The entity concludes that the criteria for identifying a contract in paragraph 606-10-25-1 are met.
b. The entity also concludes that on the basis of the guidance in paragraph 606-10-25-30, it has transferred control of the in-process research and development asset to the buyer as of contract inception. This is because as of contract inception the buyer can use the in-process research and development’s records, patents, and supporting documentation to develop potential products and the entity has relinquished all substantive rights to the in-process research and development asset.
c. In estimating the consideration received, the entity applies the guidance in Topic 606 on determining the transaction price, including estimating and constraining variable consideration. The entity estimates that the amount of consideration that it will receive from the sales-based royalty is $100 million over the 20-year royalty period. However, the entity cannot assert that it is probable that recognizing all of the estimated variable consideration in other income would not result in a significant reversal of that consideration. The entity reaches this conclusion on the basis of its assessment of factors in paragraph 606-10-32-12. In particular, the entity is aware that the variable consideration is highly susceptible to the actions and judgments of third parties, because it is based on the buyer completing the in-process research and development asset, obtaining regulatory approval for the output of the in-process research and development asset, and marketing and selling the output. For the same reasons, the entity also concludes that it could not include any amount, even a minimum amount, in the estimate of the consideration. Consequently, the entity concludes that the estimate of the consideration to be used in the calculation of the gain or loss upon the derecognition of the in-process research and development asset is limited to the $5 million fixed upfront payment.
610-20-55-4 At inception of the contract, the entity recognizes a net loss of $45 million ($5 million of consideration, less the in-process research and development asset of $50 million). The entity reassesses the transaction price at each reporting period to determine whether it is probable that a significant reversal would not occur from recognizing the estimate as other income and, if so, recognizes that amount as other income in accordance with paragraphs 60610-32-14 and 606-10-32-42 through 32-45.

Addition of Subtopic 610-30

150. The guidance in Subtopic 610-30, Other Income—Gains and Losses on Involuntary Conversions, has been moved from Subtopic 605-40, Revenue Recognition—Gains and Losses. Subtopic 610-30 clarifies the accounting for involuntary conversions of nonmonetary assets to monetary assets. The guidance has been moved to be consistent with the nature of those transactions that result in gains or losses, not revenue.
151. Add Subtopic 610-30, with a link to transition paragraph 606-10-65-1, as follows:
Other Income—Gains and Losses on Involuntary Conversions
Overview and Background
General
610-30-05-1This Subtopic clarifies the accounting for involuntary conversions of nonmonetary assets (such as property or equipment) to monetary assets (such as insurance proceeds). Examples of such conversions are total or partial destruction or theft of insured nonmonetary assets and the condemnation of property in eminent domain proceedings. [Content moved from paragraph 60540-05-1]
610-30-05-2The terms nonmonetary and monetary as used in this Subtopic have the same meaning as those terms have in Topic 845. [Content moved from paragraph 605-40-05-2]
610-30-05-3Although this Subtopic provides specific guidance for gains and losses resulting from involuntary conversions, the majority of the guidance for gains and losses is included in the Derecognition Section of the relevant asset or liability Topic. [Content moved from paragraph 605-40-05-3]
Scope and Scope Exceptions
General Note for Financial Instruments: Some of the items subject to the guidance in this Subtopic are financial instruments. For guidance on matters related broadly to all financial instruments, (including the fair value option, accounting for registration payment arrangements, and broad financial instrument disclosure requirements), see Topic 825. See Section 825-10-15 for guidance on the scope of the Financial Instruments Topic. [Content moved from Section 605-40-15]
General
> Entities
610-30-15-1The guidance in this Subtopic applies to all entities. [Content moved from paragraph 605-40-15-1]
> Transactions
610-30-15-2The guidance in this Subtopic applies to the following events and transactions:
a. Those in which nonmonetary assets are involuntarily converted (for example, as a result of total or partial destruction, theft, seizure, or condemnation) to monetary assets that are then reinvested in other nonmonetary assets. [Content moved from paragraph 605-40-15-2]
Recognition
General Note for Fair Value Option: Some of the items subject to the guidance in this Subtopic may qualify for application of the Fair Value Option Subsections of Subtopic 825-10. Those Subsections (see paragraph 825-10-05-5) address circumstances in which entities may choose, at specified election dates, to measure eligible items at fair value (the fair value option). See Section 825-10-15 for guidance on the scope of the Fair Value Option Subsections of the Financial Instruments Topic. [Content moved from Section 605-40-25]
General
610-30-25-1As used in this Subtopic, the term cost refers to the cost of a nonmonetary asset or to its carrying amount, if different. [Content moved from paragraph 605-40-25-1]
610-30-25-2An involuntary conversion of a nonmonetary asset to monetary assets and the subsequent reinvestment of the monetary assets is not equivalent to an exchange transaction between an entity and another entity. The conversion of a nonmonetary asset to monetary assets is a monetary transaction, whether the conversion is voluntary or involuntary, and such a conversion differs from exchange transactions that involve only nonmonetary assets. To the extent the cost of a nonmonetary asset differs from the amount of monetary assets received, the transaction results in the realization of a gain or loss that shall be recognized. [Content moved from paragraph 605-40-25-2]
610-30-25-3Involuntary conversions of nonmonetary assets to monetary assets are monetary transactions for which gain or loss shall be recognized even though an entity reinvests or is obligated to reinvest the monetary assets in replacement nonmonetary assets. However, the requirement of this Subtopic with respect to gain recognition does not apply to an involuntary conversion of a last-in, first-out (LIFO) inventory for which replacement is intended but not made by year-end and the taxpayer does not recognize gain for income tax reporting purposes. Paragraph 270-10-45-6(b) provides an exception for the liquidation of a LIFO inventory at an interim date if replacement is expected by year-end. Accordingly, that exception applies to an involuntary conversion of a LIFO inventory if replacement is expected by year-end. [Content moved from paragraph 605-4025-3]
610-30-25-4In some cases, a nonmonetary asset may be destroyed or damaged in one accounting period, and the amount of monetary assets to be received is not determinable until a subsequent accounting period. In those cases, gain or loss shall be recognized in accordance with Topic 450. [Content moved from paragraph 605-40-25-4]
Initial Measurement
General
610-30-30-1The cost of subsequently acquired nonmonetary assets shall be measured by the consideration paid and not be affected by a previous transaction. [Content moved from paragraph 605-40-30-1]
Other Presentation Matters
General
610-30-45-1Gain or loss resulting from an involuntary conversion of a nonmonetary asset to monetary assets shall be classified in accordance with the provisions of Subtopic 225-20. [Content moved from paragraph 605-40-45-1]
Relationships
General
> Income Taxes
610-30-60-1For guidance on temporary differences resulting from involuntary conversions, see paragraph 740-10-55-66. [Content moved from paragraph 605-40-60-1]

Amendments to Subtopic 705-10

152. The following amendments reflect the restructuring of Topic 705, Cost of Sales and Services, to include two Subtopics 705-10, Overall, and 705-20, Accounting for Consideration Received from a Vendor. The Overall Subtopic is consistent with the prior guidance, which only provides links to other guidance rather than providing explicit guidance. Subtopic 705-20 has been created to include the relocated guidance from Subtopic 605-50 on customer accounting for consideration received from a vendor.
153. Amend paragraphs 705-10-05-1 through 05-2 and add paragraph 705-1005-1A, with a link to transition paragraph 606-10-65-1, as follows:
Cost of Sales and Services—Overall
Overview and Background
705-10-05-1 The Cost of Sales and Services Topic includes the following Subtopics:
only provides links to guidance on accounting for the cost of sales and services in other applicable Subtopics as the asset liability model used in the Codification generally results in the inclusion of that guidance in other Topics. For example, as assets are sold or remeasured (or liabilities incurred), the guidance related to the transactions is included in applicable Derecognition and Subsequent Measurement Sections of Topic 330 and Topic 360 rather than in this Topic.
[Content amended and moved to paragraph 705-10-05-1A]
a. Overall
b. Accounting for Consideration Received from a Vendor.
705-10-05-1A
The Cost of Sales and Services Topic only
The Overall Subtopic only provides links to guidance on accounting for the cost of sales and services in other applicable Subtopics
as
because the asset liability model used in the Codification generally results in the inclusion of that guidance in other Topics. For example,
as
because assets are sold or remeasured (or liabilities are incurred), the guidance related to the transactions is included in the applicable Derecognition and Subsequent Measurement Sections of
Topics
Topic 330 on inventory and Topic 360 on plant, property, and equipment rather than in this Topic. [Content amended as shown and moved from paragraph 705-10-05-1]
705-10-05-2 Included in Section 705-10-25 are links to certain other Subtopics containing guidance applicable to the recognition of cost of sales and services.
Included in Section 705-10-45 are links to certain other Subtopics containing guidance applicable to the presentation of cost of sales and services.
154. The following amendments update links to new guidance that generally supersedes the guidance in Subtopics 360-20, Property, Plant, and Equipment— Real Estate Sales; 605-15, Revenue Recognition—Products; 605-20, Revenue Recognition—Services; and 605-50, Revenue Recognition—Customer Payments and Incentives.
155. Amend paragraphs 705-10-25-4 and 705-10-25-8 through 25-9 and the related heading, add paragraph 705-10-25-4A and its related heading, and supersede paragraphs 705-10-25-6 and its related heading and 705-10-25-10 through 25-12, with a link to transition paragraph 606-10-65-1, as follows:
Recognition
705-10-25-1 This Section consists solely of links to other Subtopics because the asset liability model used in the Codification requires that applicable guidance be included in other Topics. In addition, the following may not represent a complete list of other Topics containing cost of sales and services guidance.
> Inventory
705-10-25-2 See paragraphs 330-10-35-1 through 35-11 for adjustments affecting cost of sales and services resulting from remeasuring inventory to the lower of cost or market.
705-10-25-3 See paragraphs 330-10-30-1 through 30-13 for adjustments affecting cost of sales and services resulting from establishing the cost basis and the use of inventory pricing methods.
705-10-25-4 See Topic 606 on revenue from contracts with customers, specifically paragraph 606-10-32-10 and paragraphs 606-10-55-22 through 5529 for the accounting for a sale with a right of return.
For a discussion of the criteria for the recognition of revenue and the related cost of sales when the right of return exists, see the guidance beginning in paragraph 605-15-25-1.
> Other Assets and Deferred Costs—Contracts with Customers
705-10-25-4A See Subtopic 340-40 for guidance on the following costs related to a contract with a customer within the scope of Topic 606 on revenue from contracts with customers:
a. Incremental costs of obtaining a contract with a customer
b. Costs incurred in fulfilling a contract with a customer that are not within the scope of another Topic.
> Property, Plant, and Equipment
> > Real Estate Sales
705-10-25-6 Paragraph superseded by Accounting Standards Update 201409.
See Subtopic 360-20 for discussion of the conditions resulting in the full or partial recognition of profit and their relationship to the applicable cost of sales to be recognized.
> Interim Financial Reporting
705-10-25-7 See paragraphs 270-10-45-4 through 45-6 for a discussion of recognition principles used for cost of sales and services used in reporting on an interim basis.
> Extended Warranty and Product Maintenance Contracts
705-10-25-8 See paragraph 605-20-25-6
paragraphs 605-20-25-1 through 25-6
for guidance on recognizing a loss on
a discussion of the costs of providing services under
separately priced extended warranty and product maintenance contracts.
> Consideration Received from a Vendor
Given to a Customer or Reseller
705-10-25-9 See Subtopic 705-20
605-50
for a discussion of consideration received from a vendor by a customer.
given by a vendor to a customer, including both a reseller of the vendor’s products and an entity that purchases the vendor’s products from a reseller.
705-10-25-10 Paragraph superseded by Accounting Standards Update 201409.
See paragraphs 605-50-25-10 through 25-12 and 605-50-45-12 through 4515 for a discussion of the accounting for cash consideration given to a reseller of a vendor’s products.
705-10-25-11 Paragraph superseded by Accounting Standards Update 201409.
See paragraphs 605-50-45-16 through 45-22 for a discussion of the applicability to resellers of sales incentives offered to customers by manufacturers.
705-10-25-12 Paragraph superseded by Accounting Standards Update 201409.
See paragraphs 605-50-25-13 through 25-18 for a discussion of the accounting for consideration given by a service provider to a manufacturer or reseller of equipment necessary for an end-customer to receive service from the service provider.
156. Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, provided guidance on whether an entity should report revenue gross or net of certain amounts paid to others. That guidance has been superseded consistent with the Board’s overall objective in its revenue recognition project and the addition of Topic 606. Therefore, Section 705-10-45 has been superseded because it consisted solely of links to Subtopic 605-45.
157. Supersede Section 705-10-45, with a link to transition paragraph 606-10-65-1.

Addition of Subtopic 705-20

158. The guidance in Subtopic 605-50 on accounting by a customer (including a reseller) for certain consideration received from a vendor (formerly EITF 02-16) and a reseller’s characterization of sales incentives offered to customers by manufacturers (formerly EITF 03-10) has been moved to Subtopic 705-20, Costs of Sales and Services—Accounting for Consideration Received from a Vendor. The customer is referred to as the entity in the amended guidance. The accounting for consideration given by a vendor to a customer (including a reseller of the vendor’s products) is included in the scope of Topic 606 and, therefore, the guidance in Subtopic 605-50 (formerly EITF 01-9) has been superseded. Specifically, the guidance on customer accounting in Subtopic 605-50 has been rewritten and/or amended and moved to Subtopic 705-20 as follows:
Original Location of Guidance
New Location of Guidance
> Customer’s Characterization of Certain Consideration Received from a Vendor
> Accounting for Consideration Received from a Vendor (Supplier)
605-50-45-12
705-20-25-1
605-50-45-13
705-20-25-1
> > Consideration Is Payment for Assets or Services Delivered to Vendor
> > Consideration in Exchange for a Distinct Good or Service
605-50-45-14
705-20-25-2
> > Consideration Is Reimbursement of Costs Incurred by the Customer
> > Consideration Is a Reimbursement for Costs Incurred to Sell the Vendor’s Products
605-50-45-15
705-20-25-3
> > Reseller’s Characterization of Sales Incentives Offered to Customers by Manufacturers
> > Consideration for Sales Incentives Offered to Customers by Manufacturers
605-50-45-16
705-20-25-4
605-50-45-17
705-20-25-5
605-50-45-18
705-20-25-6
605-50-45-19
705-20-25-7
605-50-45-20
705-20-25-8
605-50-45-21
705-20-25-9
> Customer’s Accounting for Certain Consideration Received from a Vendor
> Accounting for Certain Consideration Received from a Vendor
605-50-25-10
705-20-25-10
605-50-25-11
705-20-25-11
605-50-25-12
705-20-25-12
159. Add Subtopic 705-20, with a link to transition paragraph 606-10-65-1, as follows:
[For ease of readability, the new Subtopic is not underlined.]
Cost of Sales and Services—Accounting for Consideration Received from a Vendor
Overview and Background
General
705-20-05-1 This Subtopic provides guidance on accounting for consideration received by an entity from a vendor.
Glossary
Cash Consideration
Cash payments and credits that the customer can apply against trade amounts owed to the vendor. In addition, as indicated in Section 505-50-25, consideration in the form of equity instruments is recognized in the same period or periods and in the same manner (that is, capitalize versus expense) as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with or using the equity instruments. Accordingly, guidance with respect to cash consideration is applicable to consideration that consists of equity instruments (regardless of whether a measurement date has been reached).
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
Probable
The future event or events are likely to occur.
Reseller
Any entity that purchases another vendor’s products for resale, regardless of whether that entity is a distributor or wholesaler, a retailer, or other type of reseller.
Revenue
Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
Standalone Selling Price
The price at which an entity would sell a promised good or service separately to a customer.
Vendor
A service provider or product seller, such as a manufacturer, distributor, or reseller.
Recognition
General
> Accounting for Consideration Received from a Vendor (Supplier)
705-20-25-1 Consideration from a vendor includes cash amounts that an entity receives or expects to receive from a vendor (or from other parties that sell the goods or services to the vendor). Consideration from a vendor also includes credit or other items (for example, a coupon or voucher) that the entity can apply against amounts owed to the vendor (or to other parties that sell the goods or services to the vendor). The entity shall account for consideration from a vendor as a reduction of the purchase price of the goods or services acquired from the vendor unless the consideration from the vendor is one of the following:
a. In exchange for a distinct good or service (as described in paragraphs 606-10-25-19 through 25-22) that the entity transfers to the vendor
b. A reimbursement of costs incurred by the entity to sell the vendor’s products
c. Consideration for sales incentives offered to customers by manufacturers.
> > Consideration in Exchange for a Distinct Good or Service
705-20-25-2 If the consideration from a vendor is in exchange for a distinct good or service (see paragraphs 606-10-25-19 through 25-22) that an entity transfers to the vendor, then the entity shall account for the sale of the good or service in the same way that it accounts for other sales to customers in accordance with Topic 606 on revenue from contracts with customers. If the amount of consideration from the vendor exceeds the standalone selling price of the distinct good or service that the entity transfers to the vendor, then the entity shall account for such excess as a reduction of the purchase price of any goods or services acquired from the vendor. If the standalone selling price is not directly observable, the entity shall estimate it in accordance with paragraphs 606-10-3233 through 32-35.
> > Consideration Is a Reimbursement of Costs Incurred to Sell the Vendor’s Products
by the Customer
705-20-25-3 {Add glossary link}Cash consideration{add glossary link} represents a reimbursement of costs incurred by the
customer
entity to sell the vendor’s products and shall be characterized as a reduction of that cost when recognized in the
customer’s
entity’s income statement if the cash consideration represents a reimbursement of a specific, incremental, identifiable cost incurred by the
customer
entity in selling the vendor’s products or services. If the amount of cash consideration paid by the vendor exceeds the cost being reimbursed, that excess amount shall be characterized in the
customer’s
entity’s income statement as a reduction of cost of sales when recognized in the
customer’s
entity’s income statement. [Content amended as shown and moved from paragraph 605-5045-15]
> >
Reseller’s Characterization of
Consideration for Sales Incentives Offered to Customers by Manufacturers
705-20-25-4Manufacturers often sell their products to {add glossary link}resellers{add glossary link} who then sell those products to consumers or other end users. In some cases, manufacturers will offer sales discounts and incentives directly to consumers—for example, rebates or coupons—in order to stimulate consumer demand for their products. Because the {remove glossary link}reseller{remove glossary link} has direct contact with the consumer, the reseller may agree to accept, at the point of sale to the consumer, the manufacturer’s incentives that are tendered by the consumer (for example, honoring manufacturer’s coupons as a reduction to the price paid by consumers and then seeking reimbursement from the manufacturer). In other instances, the consumer purchases the product from the reseller but deals directly with the manufacturer related to the manufacturer’s incentive or discount (for example, a mail-in rebate). [Content amended as shown and moved from paragraph 605-50-45-16]
705-20-25-5Although the reseller often benefits from the vendor’s direct-toconsumer incentives as a result of increased sales volume, the reseller generally has no control over which consumers or consumer groups participate in the incentive programs. Because the manufacturer reimburses the reseller for the value of the discount provided to the consumer, the reseller’s gross margin on the product is the same regardless of whether or not the consumer purchases the product with the manufacturer’s incentive. [Content moved from paragraph 605-50-45-17]
705-20-25-6The issue is whether consideration received by a reseller from a vendor that is a reimbursement by the vendor for honoring the vendor’s sales incentives offered directly to consumers shall be recorded as a reduction of the cost of the reseller’s purchases from the vendor and, therefore, characterized as a reduction of cost of sales under the guidance in paragraph 705-20-251
paragraphs 605-50-45-12 through 45-14
. [Content amended as shown and moved from paragraph 605-50-45-18]
705-20-25-7For purposes of this guidance, the term vendor’s sales incentive offered directly to consumers is limited to a vendor’s incentive that meets all the following criteria:
a. The incentive can be tendered by a consumer at any reseller in partial payment of the price charged by the reseller for the vendor’s product.
b. The reseller receives a direct reimbursement from the vendor (or a clearinghouse authorized by the vendor) based on the face amount of the incentive.
c. Terms of reimbursement to the reseller for the vendor’s sales incentive offered to the consumer must not be influenced by or negotiated in conjunction with any other incentive arrangements between the vendor and the reseller but, rather, may be determined only by the terms of the incentive offered to consumers.
d. The reseller is subject to an agency relationship with the vendor, whether expressed or implied, in the sales incentive transaction between the vendor and the consumer. [Content moved from paragraph 605-50-45-19]
705-20-25-8An entity with sales
Sales
incentive arrangements that meet all of the criteria described in
the preceding
paragraph 705-20-25-7 shall
are
not account for consideration received from a vendor as a reduction of the purchase price of the goods or services acquired from the vendor and shall consider the guidance in Topic 606 on revenue from contracts with customers
subject to the guidance in paragraphs 605-50-45-12 through 45-14
. Sales incentives that do not meet all of the criteria in
the preceding
paragraph 705-20-25-7 shall be accounted for as a reduction of the purchase price of the goods or services acquired from the vendor.
are subject to the guidance in paragraphs 605-50-45-2 through 45-3, and 605-50-45-12 through 45-14, as applicable. Example 26 (see paragraph 605-5055-124) illustrates the application of this guidance.
[Content amended as shown and moved from paragraph 605-50-45-20]
705-20-25-9See paragraphs 705-20-25-10 through 25-11
605-50-25-10 through 25-11
for guidance on the presentation of a rebate pursuant to a binding agreement. [Content amended as shown and moved from paragraph 605-5045-21]
>
Customer’s
Accounting for Certain Consideration Received from a Vendor
705-20-25-10A rebate or refund of a specified amount of cash consideration that is payable pursuant to a binding arrangement only if the
customer
entity completes a specified cumulative level of purchases or remains a customer for a specified time period shall be recognized as a reduction of the cost of sales based on a systematic and rational allocation of the cash consideration offered to each of the underlying transactions that results in progress by the
customer
entity toward earning the rebate or refund provided the amounts are {add glossary link to 2nd definition}probable{add glossary link to 2nd definition} and can be reasonably estimated
estimable
. If the rebate or refund is not probable and cannot be reasonably estimated
estimable
, it shall be recognized as the milestones are achieved. [Content amended as shown and moved from paragraph 605-50-25-10]
705-20-25-11The ability to make a reasonable estimate of the amount of future cash rebates or refunds depends on many factors and circumstances that will vary from case to case. However, any of the following factors may impair
a
an
customer’s
entity’s ability to determine whether the rebate or refund is probable and can be reasonably estimated
estimable
:
a. The rebate or refund relates to purchases that will occur over a relatively long period.
b. There is an absence of historical experience with similar products or the inability to apply such experience because of changing circumstances.
c. Significant adjustments to expected cash rebates or refunds have been necessary in the past.
d. The product is susceptible to significant external factors (for example, technological obsolescence or changes in demand). [Content amended as shown and moved from paragraph 605-50-25-11]
705-20-25-12Changes in the estimated amount of cash rebates or refunds and retroactive changes by a vendor to a previous offer (an increase or a decrease in the rebate amount that is applied retroactively) are changes in estimate that shall be recognized using a cumulative catch-up adjustment. That is, the
customer
entity would adjust the cumulative balance of its rebate recognized to the revised cumulative estimate immediately. Entities shall consider whether any portion of the cumulative effect adjustment affects other accounts (inventory, for example), in which case only a portion of that adjustment would be reflected in the income statement. [Content amended and moved from paragraph 605-5025-12]

Amendments to Subtopic 720-15

160. The following amendment reflects the removal of cost guidance from Subtopic 605-35, Revenue Recognition—Construction-Type and ProductionType Contracts (specifically, industry-specific guidance on revenue and cost recognition has been superseded), and the addition of Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers.
161. Amend paragraph 720-15-15-4, with a link to transition paragraph 606-1065-1, as follows:
Other Expenses—Start-Up Costs
Scope and Scope Exceptions
720-15-15-4 Certain costs that may be incurred in conjunction with start-up activities are outside the scope of this Subtopic. Such costs should be accounted for in accordance with other existing authoritative accounting literature. The guidance in this Subtopic does not apply to the following transactions and activities:
a. Ongoing customer acquisition costs, such as policy acquisition costs (see Subtopic 944-30)
b. Loan origination costs (see Subtopic 310-20)
c. Activities related to routine, ongoing efforts to refine, enrich, or otherwise improve upon the qualities of an existing product, service, process, or facility
d. Activities related to mergers or acquisitions
e. Business process reengineering and information technology transformation costs addressed in Subtopic 720-45
f. Costs of acquiring or constructing long-lived assets and getting them ready for their intended uses (however, the costs of using long-lived assets that are allocated to start-up activities [for example, depreciation of computers] are within the scope of this Subtopic)
g. Costs of acquiring or producing inventory
h. Costs of acquiring intangible assets (however, the costs of using intangible assets that are allocated to start-up activities [for example, amortization of a purchased patent] are within the scope of this Subtopic)
i. Costs related to internally developed assets (for example, internal-use computer software costs) (however, the costs of using those assets that are allocated to start-up activities are within the scope of this Subtopic)
j. Research and development costs that are within the scope of Section 730-10-15
k. Regulatory costs that are within the scope of Section 980-10-15
l. Costs of fundraising incurred by NFPs
m. Costs of raising capital
n. Costs of advertising
o. Learning or start-up costs incurred in connection with existing contractswith customers and in anticipation of follow-on or future contracts for the same goods or services (see Subtopic 340-40 on other assets and deferred costs).
Costs incurred in connection with existing contracts as stated in paragraph 605-35-25-41(d).
p. Costs incurred in connection with acquiring a contract with a customer (see Subtopic 340-40).
162. The following amendment reflects the removal of Subtopic 605-50, Revenue Recognition—Customer Payments and Incentives, and references comparable guidance on consideration payable to a customer in Topic 606.
163. Amend paragraph 720-15-55-7, with a link to transition paragraph 606-1065-1, as follows:
Implementation Guidance and Illustrations
> > Example 2: Costs Incurred to Construct New Stores—One in New Territory
720-15-55-7 The following costs that might be incurred in conjunction with startup activities are outside the scope of this Subtopic:
a. Store advertising costs
b. Coupon giveaways within the scope of Topic 606 on revenue from contracts with customers (see paragraphs 606-10-32-25 through 3227 for guidance on consideration payable to a customer)
(see Subtopic 605-50 for guidance on coupon incentives)
c. Costs of uniforms
d. Costs of furniture and cash registers
e. Costs to obtain licenses, if any
f. Security, property taxes, insurance, and utilities costs related to construction activities
g. Deferred financing costs (see Subtopic 835-30).

Amendments to Subtopic 720-25

164. The following amendment updates the reference (formerly paragraph 60510-15-3, which has been superseded) to directly link to the contributions received guidance for all entities, not just not-for-profit entities, to the guidance in Subtopic 958-605, Not-for-Profit—Revenue Recognition.
165. Amend paragraph 720-25-15-2, with a link to transition paragraph 606-1065-1, as follows:
Other Expenses—Contributions Made
Scope and Scope Exceptions
> Transactions
720-25-15-2 The guidance in this Subtopic applies to contributions of cash and other assets, including promises to give. For all entities that receive contributions
received
, see the contributions received guidance in paragraphs 958-605-15-3 through 15-4
paragraph 605-10-15-3
.

Amendments to Subtopic 720-35

166. The following amendments to Subtopic 720-35, Other Expenses—Advertising Costs, reflect the removal of Subtopic 340-20, Other Assets and Deferred Costs—Capitalized Advertising Costs. That guidance has been superseded consistent with the Board’s decisions on incremental costs of obtaining a contract as codified in Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers. Additionally, a portion of this guidance remains relevant for insurance contracts and, therefore, the relevant paragraphs (paragraphs 340-20-25-4 through 25-11) previously referenced in Topic 944 on insurance have been retained and moved to that industry-specific guidance. See amendments to Subtopic 944-30 because those contracts are outside the scope of Topic 606.
167. Supersede paragraph 720-35-05-2, with a link to transition paragraph 60610-65-1, as follows:
Other Expenses—Advertising Costs
Overview and Background
720-35-05-2 Paragraph superseded by Accounting Standards Update 2014-09.
This Subtopic does not provide guidance for direct-response advertising (see Subtopic 340-20) whose primary purpose is to elicit sales to customers who can be shown to have responded specifically to the advertising and that results in probable future benefits. If future economic benefits do result from advertising, they generally would be in the form of revenue. New technology, sources of information, and measurement techniques have given some entities the ability to better estimate the future economic benefits that could result from certain kinds of advertising.
168. The following amendments reflect the removal of Subtopic 340-20, Other Assets and Deferred Costs—Capitalized Advertising Costs.
169. Amend paragraphs 720-35-15-2 through 15-3, with a link to transition paragraph 606-10-65-1, as follows:
Scope and Scope Exceptions
> Transactions
720-35-15-2 The guidance in this Subtopic applies to all advertising transactions and activities, including direct-response advertising, with specific exceptions noted below.
720-35-15-3 The guidance in this Subtopic does not apply to the following transactions and activities:
a. Direct-response advertising costs of an insurance entity (for guidance, see Subtopic 944-30 on insurance)
340-20)
.
b. Advertising costs in interim periods (for guidance, see paragraph 27010-45-7).
c. Costs of advertising conducted for others under contractual arrangements.
d. Indirect costs that are specifically reimbursable under the terms of a contract.
e. Fundraising by NFPs (however, this Subtopic does apply to advertising activities of NFPs).
f. Customer acquisition activities, other than advertising.
g. The costs of premiums, contest prizes, gifts, and similar promotions, as well as discounts or rebates, including those resulting from the redemption of coupons. (Other costs of coupons and similar items, such as costs of newspaper advertising space, are considered advertising costs.)
170. The following amendment reflects the removal of Subtopic 340-20, Other Assets and Deferred Costs—Capitalized Advertising Costs.
171. Amend paragraph 720-35-25-5, with a link to transition paragraph 606-1065-1, as follows:
Recognition
> Communicating Advertising
720-35-25-5 Costs of communicating advertising are not incurred until the item or service has been received and shall not be reported as expenses before the item or service has been received.
received, except as discussed in paragraph 34020-25-2.
For example:
a. The costs of television airtime shall not be reported as advertising expense before the airtime is used. Once it is used, the costs shall be expensed.
expensed, unless the airtime was used for direct-response advertising activities that meet the criteria for capitalization under paragraph 340-20-25-4.
b. The costs of magazine, directory, or other print media advertising space shall not be reported as advertising expense before the space is used. Once it is used, the costs shall be expensed.
expensed, unless the space was used for direct-response advertising activities that meet the criteria for capitalization under paragraph 340-20-25-4.
172. The following amendment reflects the removal of Subtopic 340-20, Other Assets and Deferred Costs—Capitalized Advertising Costs.
173. Amend paragraph 720-35-35-1, with a link to transition paragraph 606-1065-1, as follows:
Subsequent Measurement
720-35-35-1
As indicated in paragraph 340-20-35-6, depreciation
Depreciation or amortization of a tangible asset may be a cost of advertising if the tangible asset is used for advertising.

Amendments to Subtopic 730-10

174. The following amendment updates the references to paragraphs 985-60525-86 through 25-87, which have been moved to paragraphs 730-20-15-1A and 985-20-25-12, respectively.
175. Amend paragraph 730-10-60-5, with a link to transition paragraph 606-1065-1, as follows:
Research and Development—Overall
Relationships
730-10-60-5 For guidance related to a funded software-development arrangement, see paragraphs
985-605-25-86 through 25-87.
730-20-15-1A and 985-20-25-12.

Amendments to Subtopic 730-20

176. The following amendment to paragraph 730-20-15-1A includes the guidance moved from paragraph 985-605-25-86. Subtopic 985-605 has been superseded because it provided software industry-specific guidance on revenue recognition. The following amendment to paragraph 730-20-15-4 clarifies when arrangements are not within the scope of Subtopic 730-20, Research and Development—Research and Development Arrangements.
177. Add paragraph 730-20-15-1A and amend paragraph 730-20-15-4, with a link to transition paragraph 606-10-65-1, as follows:
Research and Development—Research and Development Arrangements
Scope and Scope Exceptions
> Overall Guidance
> > > Funded Software—Developments Arrangements
730-20-15-1A This Subtopic also applies to
Software-development
softwaredevelopment arrangements that are fully or partially funded by a party other than the vendor that is developing the software and for which technological feasibility of the computer software product in accordance with the provisions of Subtopic 985-20 on software has not been established before entering into the arrangement. Those arrangements typically provide the funding party with some or all of the following benefits:
a. Royalties payable to the funding party based solely on future sales of the product by the software vendor (that is, reverse royalties)
b. Discounts on future purchases by the funding party of products produced under the arrangement
c. A nonexclusive sublicense to the funding party, at no additional charge, for the use of any product developed (a prepaid or paid-up nonexclusive sublicense). [Content amended as shown and moved from paragraph 985-605-25-86]
> Transactions
730-20-15-4 The guidance in this Subtopic does not apply to the following transactions and activities:
a. Government-sponsored research and development.
b. Funded software-development arrangements in which the technological feasibility of the computer software product, in accordance with the provisions of Subtopic 985-20 on software, has been established before the arrangement has been entered into (see paragraph 985-20-25-12).

Amendments to Subtopic 740-10

178. The following amendments to Subtopic 740-10 reflect the removal of references to the percentage-of-completion method and completed-contract method and add language consistent with Topic 606.
179. Amend paragraph 740-10-25-25, with a link to transition paragraph 60610-65-1, as follows:
Income Taxes—Overall
Recognition
740-10-25-25 That occurs, for example, when revenue on a long-term {add glossary link}contract{add glossary link} with a customer is recognized over time using a measure of progress to depict performance over time in accordance with the guidance in Subtopic 606-10, for financial reporting that is different from the recognition pattern used for tax purposes (for example, when the contract is completed).
is accounted for by the percentage-of-completion method for financial reporting and by the completed-contract method for tax purposes.
The temporary difference (income on the contract) is deferred income for tax purposes that becomes taxable when the contract is completed. Another example is organizational costs that are recognized as expenses when incurred for financial reporting and are deferred and deducted in a later year for tax purposes.
180. Amend paragraph 740-10-55-78, with a link to transition paragraph 60610-65-1, as follows:
Implementation Guidance and Illustrations
> > > Method of Reporting Construction Contracts Differs for Tax and Book
740-10-55-78 An entity reports
profits
revenue on
construction
{add glossary link}contracts{add glossary link} with customers using a measure of progress to depict performance over time in accordance with the guidance in paragraphs 606-10-25-31 through 25-37 and paragraphs 606-10-55-16 through 55-21 for financial reporting that is different from the recognition pattern used for tax purposes (for example, when the contract is completed)
on the completed contract method for tax purposes and the percentage-of-completion method for financial reporting purposes
. The temporary differences do not relate to an asset or liability that appears on the entity’s statement of financial position; the temporary differences will only reverse when the contracts are completed. Receivables or contract assets that result from progress billings can be collected with no effect on the temporary differences; likewise, contract retentions can be collected with no effect on the temporary differences, and the temporary differences will reverse when the contracts are deemed to be complete even if there is a waiting period before retentions will be received. Accordingly, the entity would classify the deferred tax liability based on the estimated reversal of the related temporary differences. Deferred tax liabilities related to temporary differences that will reverse within the same time period used in classifying other contract-related assets and liabilities as current (for example, an operating cycle) would be classified as current.

Amendments to Subtopic 805-20

181. The following amendment reflects the removal of guidance in Subtopic 605-20, Revenue Recognition—Services.
182. Amend paragraph 805-20-35-7, with a link to transition paragraph 606-1065-1, as follows:
Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest
Subsequent Measurement
805-20-35-7 Topic 944 on insurance
and Subtopic 605-20 provide
provides guidance on the subsequent accounting for an insurance or reinsurance contract acquired in a business combination.

Amendments to Subtopic 808-10

183. The following amendments to Subtopic 808-10 reflect the removal of guidance in Subtopic 605-45, Revenue Recognition—Principal Agent Considerations, because it has been replaced with the new guidance in Topic 606, specifically implementation guidance on principal versus agent considerations.
184. Amend paragraphs 808-10-45-1 through 45-2, with a link to transition paragraph 606-10-65-1, as follows:
Collaborative Arrangements—Overall
Other Presentation Matters
808-10-45-1 Participants in a collaborative arrangement shall report costs incurred and revenue generated from transactions with third parties (that is, parties that do not participate in the arrangement) in each entity’s respective income statement pursuant to the guidance on principal versus agent considerations in
Subtopic 605-45
paragraphs 606-10-55-36 through 55-40. An entity shall not apply the equity method of accounting under Subtopics 323-10 and 323-30 to activities of collaborative arrangements.
808-10-45-2 For costs incurred and revenue generated from third parties, the participant in a collaborative arrangement that is deemed to be the principal
participant
for a given transaction under
Subtopic 605-45
paragraphs 606-10-5536 through 55-40 shall record that transaction on a gross basis in its financial statements.
185. The following amendments have been made to Section 808-10-55:
a. Paragraphs 808-10-55-6, 808-10-55-10, 808-10-55-14, and 808-10-5519. These paragraphs have been amended to update terminology consistent with that in Topic 606.
b. Paragraph 808-10-55-9. This paragraph has been amended to change the reference from the guidance in Subtopic 605-50, Revenue Recognition—Customer Payments and Incentives, to the replacement guidance on consideration payable to a customer in Topic 606.
c. Paragraph 808-10-55-16. This paragraph has been amended to update the reference to industry-specific guidance in Topic 926, Entertainment—Films, which has been moved from Subtopic 926-605 to Subtopic 926-20.
d. Paragraphs 808-10-55-17 through 55-18. These paragraphs have been amended to change the reference from the guidance in Subtopic 60545, Revenue Recognition—Principal Agent Considerations, to the replacement guidance on principal versus agent considerations in Topic 606.
186. Amend paragraphs 808-10-55-6, 808-10-55-9 through 55-10, 808-10-5514, and 808-10-55-16 through 55-19, with a link to transition paragraph 606-1065-1, as follows:
Implementation Guidance and Illustrations
> Example 1: Equal Participation in Results of Research, Development, and Commercialization Arrangement, Participants Perform Different Activities
808-10-55-6 This evaluation is not intended to illustrate the appropriate revenue recognition requirements for any of the transactions described in this Example. Such an analysis would include, at a minimum, a determination of the applicable authoritative accounting literature, including whether or not the guidance in Topic 606 on revenue from contracts with customers, is applicable.
the identification of the deliverables in the arrangement, a determination of the units of accounting in the arrangement, and the appropriate revenue recognition requirements for those units of accounting.
> Example 2: Equal Participation in Results of Research, Development, and Commercialization Arrangement, Participants Perform Some of the Same Activities
808-10-55-9 Biotech records research and development expense ($10 million) for its research and development activities. Biotech will characterize the portion of the net receivable from Pharma related to commercialization activities ($16.25 million) as revenue, based on the fact that licensing intellectual property is part of Biotech’s ongoing major or central operations. Biotech also considers performing research and development services to be part of its ongoing major or central operations. Biotech analyzes its specific facts and circumstances under
Subtopic 605-50
the guidance on consideration payable to a customer in paragraphs 60610-32-25 through 32-27 and determines that the portion of the net receivable that relates to a reimbursement of Pharma’s research and development costs ($2.5 million) should be characterized as a reduction of revenue. Biotech will not present sales, cost of sales, or marketing expenses related to the sales transactions with third parties because it is not the principal on those transactions. Biotech presents the following information in its financial statements with respect to this collaborative arrangement (in thousands):
808-10-55-10 This evaluation is not intended to illustrate the appropriate revenue recognition requirements for any of the transactions described in this Example. Such an analysis would include, at a minimum, a determination of the applicable authoritative accounting literature, including whether or not the guidance in Topic 606 is applicable.
the identification of the deliverables in the arrangement, a determination of the units of accounting in the arrangement, and the appropriate revenue recognition requirements for those units of accounting.
> Example 3: Unequal Participation in Results of Research, Development, and Commercialization Arrangement, Participants Perform Some of the Same Activities
808-10-55-14 This evaluation is not intended to illustrate the appropriate revenue recognition requirements for any of the transactions described in this Example. Such an analysis would include, at a minimum, a determination of the applicable authoritative accounting literature, including whether or not the guidance in Topic 606 is applicable.
the identification of the deliverables in the arrangement, a determination of the units of accounting in the arrangement, and the appropriate revenue recognition requirements for those units of accounting.
> Example 4: Equal Participation in Results of Production and Distribution of Major Motion Picture, Participants Perform Some of the Same Activities
808-10-55-16 Assume that Studio A and Studio B have the same estimates of ultimate revenue and ultimate participation costs. Both studios estimate that Studio A will owe Studio B net ultimate participation costs of $45 million. Based on the individual-film-forecast-computation method in accordance with Section 926-20-35
Subtopic 926-605
, Studio A’s current period participation cost expense (and Studio B’s current period participation income) is $7 million in Year 1 following the film’s initial release.
808-10-55-17 Based on an evaluation of the facts and circumstances, during (or at the completion of) production, Studio A records a receivable from Studio B for production costs and a corresponding reduction of its capitalized film costs. Studio A has determined that, considering the guidance on principal versus agent considerations in
Subtopic 605-45
paragraphs 606-10-55-36 through 55-40, it is the principal for the revenue generated in the United States. Accordingly, it characterizes all of the gross revenue generated in the United States as revenue in its income statement and likewise records all of the associated distribution costs for distribution in the United States. Studio A concludes that other authoritative accounting literature does not apply, either directly or by analogy, regarding the income statement classification of net participation costs owed to Studio B. Studio A’s accounting policy with respect to participation costs due from and to its production partners is to record net amounts due from production partners as additional revenue and net amounts due to production partners as a cost of sales. Accordingly, Studio A characterizes its Year 1 participation cost expense of $7 million as cost of sales.
808-10-55-18 During production, Studio B records amounts payable to Studio A for production costs and a corresponding amount as capitalized film costs. Studio B has determined that, after considering the guidance on principal versus agent considerations in
Subtopic 605-45
paragraphs 606-10-55-36 through 55-40, it is the principal for the revenue generated in Europe and Asia. Accordingly, it characterizes all of the gross revenue generated in Europe and Asia as revenue in its income statement and likewise records all of the associated distribution costs for distribution in Europe and Asia. Studio B concludes that other authoritative accounting literature does not apply, either directly or by analogy, regarding the income statement classification of net ultimate participation costs due from Studio A. Studio B’s accounting policy for profit sharing amounts due from and to its production partners is to record those amounts on a net basis in cost of sales. It views those amounts either as additional costs for production and distribution or as a reimbursement of such costs. Accordingly, Studio B characterizes its Year 1 participation cost income of $7 million as a reduction of cost of sales.
808-10-55-19 This evaluation is not intended to illustrate the appropriate revenue recognition requirements for any of the transactions described in this Example. Such an analysis would include, at a minimum, a determination of the applicable authoritative accounting literature, including whether or not the guidance in Topic 606 is applicable.
the identification of the deliverables in the arrangement, a determination of the units of accounting in the arrangement, and the appropriate revenue recognition requirements for those units of accounting.

Amendments to Subtopic 810-10

187. The following amendments to Subtopic 810-10 reflect the Board’s decision that certain guidance in Topic 606, specifically the guidance on (a) existence of a contract, (b) satisfaction of performance obligations, and (c) determining the transaction price, should apply to sales or transfers of nonfinancial assets in a contract with a counterparty that does not meet the definition of a customer. The Board’s decision for nonfinancial assets also includes in substance nonfinancial assets (held directly or in a subsidiary). As a result, the following amendments require an entity to use the guidance in Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, for the sale or transfer of an in substance nonfinancial asset. Finally, these amendments clarify that the revenue guidance in Topic 606 would be applicable for all contracts with customers.
188. Amend paragraphs 810-10-40-3A through 40-3B, with a link to transition paragraph 606-10-65-1, as follows:
Consolidation—Overall
Derecognition
> Deconsolidation of a Subsidiary or Derecognition of a Group of Assets
810-10-40-3A The deconsolidation and derecognition guidance in this Section applies to the following:
a. A subsidiary that is a nonprofit activity or a business, except for either of the following:
1. A transfer
sale
of in substance nonfinancial assets
real estate
(for guidance on transfers
a sale
of in substance nonfinancial assets
real estate
, see Subtopic 610-20)
360-20 or 976-605)
2. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360).
3. A transfer of a good or service in a contract with a customer within the scope of Topic 606.
b. A group of assets that is a nonprofit activity or a business, except for either of the following:
1. A transfer
sale
of in substance nonfinancial assets
real estate
(for guidance on transfers
a sale
of in substance nonfinancial assets
real estate
, see Subtopic 610-20)
360-20 or 976-605)
2. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360).
3. A transfer of a good or service in a contract with a customer within the scope of Topic 606.
c. A subsidiary that is not a nonprofit activity or a business if the substance of the transaction is not addressed directly by guidance in other Topics that include, but are not limited to, all of the following:
1.
Topic 605
Topic 606 on {add glossary link}revenue{add glossary link} from contracts with customers
recognition
2. Topic 845 on exchanges of nonmonetary assets
3. Topic 860 on transferring and servicing financial assets
4. Topic 932 on conveyances of mineral rights and related transactions.
5. Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets within the scope of Topic 350 on intangibles or Topic 360 on property, plant, and equipment
Topic 360 or 976 on sales of in substance real estate
.
810-10-40-3B The deconsolidation and derecognition guidance in this Section does not apply to a parent that ceases to have a controlling financial interest (as described in this Subtopic) in a subsidiary that is an in substance nonfinancial asset (for example, in substance real estate)
estate
as a result of default on the subsidiary’s nonrecourse debt. See also paragraph 610-20-15-2(b).
For guidance in these circumstances, see Subtopic 360-20, including the related implementation guidance in paragraphs 360-20-55-68 through 55-77
.
189. Amend paragraph 810-10-45-21A, with a link to transition paragraph 60610-65-1, as follows:
Other Presentation Matters
> Changes in a Parent’s Ownership Interest in a Subsidiary
810-10-45-21A The guidance in paragraphs 810-10-45-22 through 45-24 applies to the following:
a. Transactions that result in an increase in ownership of a subsidiary
b. Transactions that result in a decrease in ownership of either of the following while the parent retains a controlling financial interest in the subsidiary:
1. A subsidiary that is a business or a nonprofit activity, except for either of the following:
i. A transfer
sale
of in substance nonfinancial assets
real estate
(for guidance on transfers
a sale
of in substance nonfinancial assets
real estate
, see Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets)
360-20 or 976-
605)
ii. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights and related transactions, see Subtopic 932-360).
iii. A transfer of a good or service in a contract with a customer within the scope of Topic 606.
2. A subsidiary that is not a business or a nonprofit activity if the substance of the transaction is not addressed directly by guidance in other Topics that include, but are not limited to, all of the following:
i. Topic 606
605
on revenue
recognition
from contracts with customers
ii. Topic 845 on exchanges of nonmonetary assets
iii. Topic 860 on transferring and servicing financial assets
iv. Topic 932 on conveyances of mineral rights and related transactions.
v. Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets within the scope of Topic 350 on intangibles or Topic 360 on property, plant, and equipment.
Topic 360 or 976 on sales of in substance real estate.

Amendments to Subtopic 815-10

190. The following amendments reflect the removal of Subtopic 605-45, Revenue Recognition—Principal Agent Considerations.
191. Amend paragraph 815-10-55-62, with a link to transition paragraph 60610-65-1, as follows:
Derivatives and Hedging—Overall
Implementation Guidance and Illustrations
> > Other Presentation Matters
> > > Income Statement Presentation of Realized Gains And Losses
815-10-55-62 Determining whether realized gains and losses on physically settled derivative instruments not held for trading purposes should be reported in the income statement on a gross or net basis is a matter of judgment that depends on the relevant facts and circumstances. Consideration of the facts and circumstances should be made in the context of the various activities of the entity rather than based solely on the terms of the individual contracts. In evaluating the facts and circumstances for purposes of determining whether an arrangement should be reported on a gross or net basis, all of the following may be considered:
a. The economic substance of the transaction
b. The guidance set forth in Topic 845 relative to nonmonetary exchanges
c. The
gross versus net reporting
principal versus agent considerations
indicators
provided in paragraphs 606-10-55-36 through 55-40
Subtopic 605-45
.

Amendments to Subtopic 815-30

192. The following amendments reflect the change in terminology from earned to recognized because earned is not a criterion for recognizing revenue in Topic 606.
193. Amend paragraphs 815-30-55-71 through 55-72, with a link to transition paragraph 606-10-65-1, as follows:
Derivatives and Hedging—Cash Flow Hedges
Implementation Guidance and Illustrations
815-30-55-71 Those two changes will exactly offset because the currency and the notional amount of the forward contract match the currency and the total of the expected foreign currency amounts of the forecasted transactions. Thus, if Entity DEF dedesignates a proportion of the forward contract each time a royalty is recognized
earned
(as described in the following paragraph), the hedging relationship will meet the highly effective criterion.
815-30-55-72 As each royalty is recognized
earned
, Entity DEF recognizes a receivable and royalty income. The forecasted transaction (the recognition
earning
of royalty income) has occurred. The receivable is an asset, not a forecasted transaction, and would separately be eligible to be designated as a fair value hedge of foreign exchange risk or continue to be eligible as a cash flow hedge of foreign exchange risk. Consequently, if the variability of the functional currency cash flows related to the royalty receivable is not being hedged, Entity DEF will dedesignate a proportion of the hedging instrument in the original hedge relationship with respect to the proportion of the forward contract corresponding to the recognized
earned
royalty. As the royalty is recognized in earnings and each proportion of the derivative instrument is dedesignated, the related derivative instrument gain or loss in accumulated other comprehensive income is reclassified into earnings. After that date, any gain or loss on the dedesignated proportion of the derivative instrument and any transaction loss or gain on the royalty receivable will be recognized in earnings and may substantially offset each other.

Amendments to Subtopic 820-10

194. The following amendment to paragraph 820-10-15-2 reflects the removal of industry-specific guidance on revenue recognition in Subtopics 605-25, Revenue Recognition—Multiple-Element Arrangements, and 985-605, Software—Revenue Recognition, and references to those Subtopics. The following amendment to paragraph 820-10-15-3 reflects the removal of guidance in Subtopic 605-20, Revenue Recognition—Services, and updates the reference to Topic 606.
195. Amend paragraphs 820-10-15-2 through 15-3, with a link to transition paragraph 606-10-65-1, as follows:
Fair Value Measurement—Overall
Scope and Scope Exceptions
> Other Considerations
> > Topics and Subtopics Not within Scope
820-10-15-2 The Fair Value Measurement Topic does not apply as follows:
a. To accounting principles that address share-based payment transactions (this includes Subtopic 505-50 and all Subtopics in Topic 718 except for 718-40, which is within the scope of Topic 820)
b. To Sections, Subtopics, or Topics that require or permit measurements that are similar to fair value but that are not intended to measure fair value, including both of the following:
1. Sections, Subtopics, or Topics that permit measurements that are determined on the basis of, or otherwise use, standalone selling price
vendor-specific objective evidence of fair value
2. Topic 330.
c. To accounting principles that address fair value measurements for purposes of lease classification or measurement in accordance with Topic 840. This scope exception does not apply to assets acquired and liabilities assumed in a business combination or an acquisition by a not-for-profit entity that are required to be measured at fair value in accordance with Topic 805, regardless of whether those assets and liabilities are related to leases.
d. To the recognition and measurement of revenue from contracts with customers in accordance with Topic 606
e. To the recognition and measurement of gains and losses upon the derecognition of nonfinancial assets in accordance with Subtopic 61020.
> Practicability Exceptions to This Topic
820-10-15-3 The Fair Value Measurement Topic does not eliminate the practicability exceptions to fair value measurements within the scope of this Topic. Those practicability exceptions to fair value measurements in specified circumstances include, among others, those stated in the following:
a. The use of a transaction price (an entry price) to measure fair value (an exit price) at initial recognition, including the following:
1. Guarantees in accordance with Topic 460
2. Subparagraph superseded by Accounting Standards Update No. 2009-16
b. An exemption to the requirement to measure fair value if it is not practicable to do so, including the following:
1. Financial instruments in accordance with Subtopic 825-10
2. Subparagraph superseded by Accounting Standards Update No. 2009-16
c. An exemption to the requirement to measure fair value if fair value is not reasonably determinable, such as all of the following:
1. Nonmonetary assets in accordance with Topic 845 and Sections 605-20-25 and 605-20-50
2. Asset retirement obligations in accordance with Subtopic 410-20 and Sections 440-10-50 and 440-10-55
3. Restructuring obligations in accordance with Topic 420
4. Participation rights in accordance with Subtopics 715-30 and 71560.
d. An exemption to the requirement to measure fair value if fair value cannot be measured with sufficient reliability (such as contributions in accordance with Topic 958 and Subtopic 720-25).
e. The use of particular measurement methods referred to in paragraph 805-20-30-10 that allow measurements other than fair value for specified assets acquired and liabilities assumed in a business combination.
f. An exemption to the requirement to measure fair value if fair value cannot be reasonably estimated, such as the following:
1. Noncash consideration promised in a contract in accordance with the guidance in paragraphs 606-10-32-21 through 32-24.

Amendments to Subtopic 835-30

196. The following amendments reflect the new guidance on identification of a significant financing component in Topic 606.
197. Amend paragraph 835-30-15-3, with a link to transition paragraph 606-1065-1, as follows:
Interest—Imputation of Interest
Scope and Scope Exceptions
835-30-15-3 With the exception of guidance in paragraphs 835-30-45-1A through 45-3 addressing the presentation of discount and premium in the financial statements, which is applicable in all circumstances, and the guidance in paragraphs 835-30-55-2 through 55-3 regarding the application of the interest method, the guidance in this Subtopic does not apply to the following:
a.
Receivables and payables
Payables arising from transactions with
customers or
suppliers in the normal course of business that are due in customary trade terms not exceeding approximately one year
b. Amounts that do not require repayment in the future, but rather will be applied to the purchase price of the property, goods, or service involved; for example, deposits or progress payments on construction contracts, advance payments for acquisition of resources and raw materials, advances to encourage exploration in the extractive industries (see paragraph 932-835-25-2), except for amounts promised in a contract with a customer (see paragraphs 606-10-32-15 through 32-20 for guidance on identifying a significant financing component in a contract with a customer).
c. Amounts intended to provide security for one party to an agreement (for example, security deposits, retainages on contracts)
d. The customary cash lending activities and demand or savings deposit activities of financial institutions whose primary business is lending money
e. Transactions where interest rates are affected by the tax attributes or legal restrictions prescribed by a governmental agency (for example, industrial revenue bonds, tax exempt obligations, government guaranteed obligations, income tax settlements)
f. Transactions between parent and subsidiary entities and between subsidiaries of a common parent
g. The application of the present value measurement (valuation) technique to estimates of contractual or other obligations assumed in connection with sales of property, goods, or service, for example, a warranty for product performance.
h. Receivables, contract assets, and contract liabilities in contracts with customers, see paragraphs 606-10-32-15 through 32-20 for guidance on identifying a significant financing component in a contract with a customer.

Amendments to Subtopic 840-10

198. The following amendment removes the reference to the guidance in Subtopic 605-25, Revenue Recognition—Multiple-Element Arrangements, because industry-specific guidance on revenue recognition in Subtopic 605-25 has been superseded. The amendment also updates the guidance to refer to the term standalone selling price.
199. Amend paragraph 840-10-15-19, with a link to transition paragraph 60610-65-1, as follows:
Leases—Overall
Scope and Scope Exceptions
840-10-15-19 For purposes of applying this Topic, payments and other consideration called for by the arrangement shall be separated at the inception of the arrangement or upon a reassessment of the arrangement into:
a. Those for the lease, including the related executory costs and profits thereon
b. Those for other services on a relative standalone selling price
fair value
basis, consistent with the guidance in paragraph 606-10-15-4 and paragraphs 606-10-32-28 through 32-41
paragraph 605-25-15-3A(b)
.
200. The following amendments address the relationship between Subtopic 360-20 (formerly FAS 66) and Topic 840.
a. The amendments to paragraphs 840-10-25-46 through 25-47 change the reference that defines real estate by including integral equipment within the definition of real estate. This guidance on integral equipment was originally included in Subtopic 360-20 and has been moved to Topic 978 on time-sharing activities because the scope of Subtopic 36020 has been narrowed and is only applicable for sale-leaseback transactions. As a result, those paragraphs have been updated to reference the guidance in Topic 978 rather than the limited scope guidance in Subtopic 360-20.
b. The amendments in paragraphs 840-10-25-55 and 840-10-25-61 reflect the removal of guidance in Subtopic 360-20 for sale transactions other than real estate sale-leaseback transactions because those transactions are no longer subject to industry-specific guidance. Therefore, these transactions are within the scope of Topic 606 if they are in a contract with a customer and Subtopic 610-20 if they are not in a contract with a customer.
201. Amend paragraphs 840-10-25-46 through 25-47, 840-10-25-55, and 84010-25-61, with a link to transition paragraph 606-10-65-1, as follows:
Recognition
Lessors
> Transfer-of-Ownership Criterion—Lease Involving Integral Equipment
840-10-25-46 To maintain conformity between the guidance in this Subtopic and Subtopic 840-40, integral equipment shall be evaluated by the lessor as real estate for purposes of this Topic (because paragraph 978-10-15-7
Subtopic 36020
defines integral equipment as real estate for purposes of that Subtopic).
840-10-25-47 For guidance on determining whether equipment is integral equipment, see paragraphs 978-10-15-8 through 15-12
paragraph 360-20-15-7
.
> > Lease Involving Land Only
840-10-25-55 If the lease gives rise to manufacturer’s or dealer’s profit (or loss) and the transfer-of-ownership criterion in paragraph 840-10-25-1(a) is met, the lessor shall classify the lease as a sales-type lease and apply the guidance in Topic 606 on revenue from contracts with customers or Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets
account for the transaction under the guidance in Subtopic 360-20
in the same manner as a seller of the same property.
> > > Lease Meets Transfer-of-Ownership Criterion
840-10-25-61 If the lease meets the transfer-of-ownership criterion in paragraph 840-10-25-1(a), the lessor shall classify and account for the lease as follows:
a. If the lease gives rise to manufacturer’s or dealer’s profit (or loss), the lessor shall classify the lease as a sales-type lease as appropriate under paragraph 840-10-25-43(a) and account for the lease as a single unit under the guidance
in Subtopic 360-20
in Topic 606 on revenue from contracts with customers or Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets in the same manner as a seller of the same property.
b. If the lease does not give rise to manufacturer’s or dealer’s profit (or loss), the lessor shall classify and account for the lease as follows:
1. If the lease meets both criteria in paragraph 840-10-25-42, the lessor shall account for the lease as a direct financing lease or a leveraged lease as appropriate under paragraph 840-10-25-43(b) or 840-10-25-43(c).
2. If the lease does not meet both criteria in paragraph 840-10-25-42, the lessor shall account for the lease as an operating lease.
202. The following amendments clarify that contractually guaranteed resale values (formerly EITF 95-1) should not always be accounted for as leases. In some instances, the contract is subject to the repurchase guidance in Topic 606 if the entity has the right or the option to repurchase the asset. In other instances, a guarantee of a minimum amount of proceeds upon resale may not preclude the recognition of revenue but may require a guarantee measured in accordance with Topic 460.
203. Amend paragraph 840-10-55-14 and add paragraph 840-10-55-14A, with a link to transition paragraph 606-10-65-1, as follows:
Implementation Guidance and Illustrations
> > Sales of Equipment with Guaranteed Minimum Resale Amount
840-10-55-12 This implementation guidance addresses the application of the General Subsections of this Subtopic in the following circumstances. A manufacturer sells equipment with an expected useful life of several years to end users (purchasers) utilizing various sales incentive programs. Under one such sales incentive program, the manufacturer contractually guarantees that the purchaser will receive a minimum resale amount at the time the equipment is disposed of, contingent on certain requirements.
840-10-55-13 The manufacturer provides the guarantee by agreeing to do either of the following:
a. Reacquire the equipment at a guaranteed price at specified time periods as a means to facilitate its resale
b. Pay the purchaser for the deficiency, if any, between the sales proceeds received for the equipment and the guaranteed minimum resale value.
There may be dealer involvement in these types of transactions, but the minimum resale guarantee is the responsibility of the manufacturer.
840-10-55-14 A sales incentive program in which an entity (for example, a manufacturer) contractually guarantees that the entity has either a right or an obligation to reacquire the equipment at a guaranteed price (or prices) at a specified time (or specified time periods) as a means to facilitate its resale should be evaluated in accordance with the guidance on satisfaction of performance obligations in paragraph 606-10-25-30 and the guidance on repurchase agreements in paragraphs 606-10-55-66 through 55-78. If that evaluation results in a lease,
A manufacturer is precluded from recognizing a sale of equipment if the manufacturer guarantees the resale value of the equipment to the purchaser. Rather,
the manufacturer should account for the transaction as a
lease,
lease using the principles of lease accounting in this Subtopic.
840-10-55-14A A sales incentive program in which an entity (for example, a manufacturer) contractually guarantees that it will pay a purchaser for the deficiency, if any, between the sales proceeds received for the equipment and the guaranteed minimum resale value should be accounted for in accordance with Topic 460 on guarantees and Topic 606 on revenue from contracts with customers.
204. The following amendment removes the relationship to revenue recognition for when manufacturers recognize a sale of a product to a dealer if the customer subsequently enters into an operating lease. This paragraph has been superseded because the relationship is for Subtopic 605-15, which has been superseded.
205. Supersede paragraph 840-10-60-3 and its related heading, with a link to transition paragraph 606-10-65-1, as follows:
Relationships
> Revenue Recognition
840-10-60-3 Paragraph superseded by Accounting Standards Update 201409.
For guidance on whether a manufacturer is precluded from recognizing a sale of a product to a dealer if the customer subsequently enters into an operating lease with the manufacturer or its finance affiliate that acquires the product subject to the lease, see paragraph 605-15-25-5.

Amendments to Subtopic 840-20

206. Paragraphs 840-20-40-3 through 40-4 on sales of leased property have been superseded because their risks-and-rewards notion was inconsistent with the Board’s control-based model developed in Topic 606. The amendment to paragraph 840-20-40-5 adds guidance that is consistent with Topic 606.
207. Supersede paragraphs 840-20-40-3 through 40-4 and amend paragraph 840-20-40-5, with a link to transition paragraph 606-10-65-1, as follows:
Leases—Operating Leases
Derecognition
Lessors
> Transfer of Leased Property
840-20-40-3 Paragraph superseded by Accounting Standards Update 2014-09.
The sale of property subject to an operating lease (or of property that is leased by or intended to be leased by the third-party purchaser to another party) shall not be treated as a sale if the seller or any party related to the seller retains substantial risks of ownership in the leased property. A seller may by various arrangements assure recovery of the investment by the third-party purchaser in some operating lease transactions and thus retain substantial risks in connection with the property. For example, in the circumstance of default by the lessee or termination of the lease, the arrangements may involve a formal or informal commitment by the seller to do any of the following:
a.
Acquire the lease or the property
b.
Substitute an existing lease
c.
Secure a replacement lessee or a buyer for the property under a remarketing agreement.
840-20-40-4
Paragraph superseded by Accounting Standards Update 2014-09.
However, a remarketing agreement by itself shall not disqualify accounting for the transaction as a sale if both of the following conditions are met:
a.
The seller will receive a reasonable fee commensurate with the effort involved at the time of securing a replacement lessee or buyer for the property.
b.
The seller is not required to give priority to the re-leasing or disposition of the property owned by the third-party purchaser over similar property owned or produced by the seller. (For example, a first-in, first-out [FIFO] remarketing arrangement is considered to be a priority.)
840-20-40-5 If a transfer to a third party of property subject to an operating lease (or of property that is leased by or intended to be leased by the third-party purchaser to another party) is not to be recorded as a sale because
of the guidance in paragraph 840-20-40-3
the entity has not transferred control over the promised asset to the third party in accordance with paragraph 606-10-25-30, the transaction shall be accounted for as a borrowing in accordance with the guidance in paragraph 840-20-35-4. (Transactions of these types are in effect collateralized borrowings.)

Amendments to Subtopic 840-30

208. The following amendments reflect the removal of the reference to Subtopic 360-20. The sale of real estate is no longer subject to industry-specific guidance; therefore, it is within the scope of Topic 606 if the transaction is in a contract with a customer.
209. Amend paragraphs 840-30-25-4 and 840-30-25-6 and supersede paragraph 840-30-25-5, with a link to transition paragraph 606-10-65-1, as follows:
Leases—Capital Leases
Recognition
Lessors
> > Supply Arrangement Is a Sales-Type Lease upon Reassessment
840-30-25-4 If a supply arrangement (or a portion of a supply arrangement) becomes a sales-type lease due to a modification to the arrangement or other change, the following guidance shall be applied by the lessor to account for the revised categorization of the arrangement:
a. If the criteria for sale treatment in paragraph 840-10-25-42
(or other applicable guidance, such as Subtopic 360-20)
are met, the lessor shall do both of the following:
1. Derecognize the property, plant, or equipment
2. Recognize in earnings any recognized asset or liability for the supply arrangement as an adjustment of the minimum lease payments.
b. If the criteria for sale treatment are not met, the lessor shall do both of the following:
1. Consider any recognized asset or liability for the supply arrangement a reduction of (or part of) the minimum lease payments
2. Follow the guidance in the Leases Topic with respect to recognition of the lease.
> Sales-Type Leases
840-30-25-5 Paragraph superseded by Accounting Standards Update 2014-09.
If a sales-type lease involves real estate, the lessor shall account for the transaction under the guidance in Subtopic 360-20 in the same manner as a seller of the same property.
840-30-25-6 The lessor in a sales-type lease
that does not involve real estate
shall recognize its gross investment in the lease, unearned income, and the sales price. The cost or carrying amount, if different, of the leased property, plus any initial direct costs minus the present value of the unguaranteed residual value accruing to the benefit of the lessor, shall be charged by the lessor against income in the same period.
210. Consistent with the Board’s decision to eliminate industry-specific guidance on sales of real estate, the following amendments eliminate the distinction between transactions involving the sale of real estate and transactions involving the sale of other assets, such as equipment. In each of the paragraphs below, an arrangement or contract was originally a lease and circumstances changed such that the arrangement or contract is no longer a lease and the formerly leased asset is required to be derecognized. That derecognition should be subject to the guidance in either Topic 606 or Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets.
211. Amend paragraphs 840-30-40-2 and 840-30-40-5, with a link to transition paragraph 606-10-65-1, as follows:
Derecognition
Lessees
> Supply Arrangement That Ceases to Be a Lease upon Reassessment
840-30-40-2 If a supply arrangement (or a portion of a supply arrangement) ceases to be a lease due to a modification to the arrangement
it shall be accounted for by the lessee as follows:
, the lessee shall derecognize the leased asset in accordance with Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets. The related lease obligation also shall be derecognized.
a. Subparagraph superseded by Accounting Standards Update 2014-09.
If the leased asset is other than real estate (including integral equipment), the property, plant, or equipment and related lease obligation shall be derecognized.
b. Subparagraph superseded by Accounting Standards Update 2014-09.
If the leased asset is real estate (including integral equipment), derecognition of the property, plant, or equipment and related capital lease obligation is subject to the guidance in Subtopic 360-20.
> Subleases
840-30-40-5 Subleases in which the original lessee is not relieved of the primary obligation under the original capital lease are addressed in paragraph 840-30-3512. If, under the guidance in paragraph 840-10-40-2, a sublease is a termination of the original capital lease,
it shall be accounted for by the lessee as follows:
the asset and obligation representing the original lease shall be derecognized, a gain or loss shall be recognized for the difference, and if the original lessee is secondarily liable, the guarantee obligation shall be recognized in accordance with the guidance in paragraph 405-20-40-2. Any consideration paid or received upon termination shall be included in the determination of gain or loss to be recognized.
a. Subparagraph superseded by Accounting Standards Update 2014-09.
If the original lease was a capital lease of property other than real estate (including integral equipment), the asset and obligation representing the original lease shall be removed from the accounts, a gain or loss shall be recognized for the difference, and, if the original lessee is secondarily liable, the guarantee obligation shall be recognized in accordance with the guidance in paragraph 405-20-40-2. Any consideration paid or received upon termination shall be included in the determination of gain or loss to be recognized.
b. Subparagraph superseded by Accounting Standards Update 2014-09.
If the original lease was a capital lease of real estate (including integral equipment), the determination as to whether the asset held under the capital lease and the related obligation may be removed from the balance sheet shall be made in accordance with the guidance in Subtopic 360-20. If the criteria for recognition of a sale in that Subtopic are met, the asset and obligation representing the original lease shall be removed from the accounts and any consideration paid or received upon termination and any guarantee obligation shall be recognized in accordance with the guidance in (a) for property other than real estate. If the transaction results in a gain, that gain may be recognized by the lessee if the criteria in Subtopic 360-20 for recognition of profit by the full accrual method are met. Otherwise, the gain shall be recognized by the lessee in accordance with one of the other profit recognition methods discussed in that Subtopic. Any loss on the transaction shall be recognized by the lessee immediately.

Amendments to Subtopic 845-10

212. The following amendments reflect the removal of industry-specific revenue guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales. See Subtopic 360-20 for an explanation of the changes to that Subtopic.
The amendments also reflect the removal of Subtopic 976-605, Real Estate— Retail Land—Revenue Recognition, which has been superseded because it provided industry-specific guidance on revenue recognition.
213. Amend paragraph 845-10-05-11, with a link to transition paragraph 60610-65-1, as follows:
Nonmonetary Transactions—Overall
Exchanges Involving Monetary Consideration
845-10-05-11 The Exchanges Involving Monetary Consideration Subsections provide guidance on all of the following:
a. The level of monetary consideration in a nonmonetary exchange that causes the transaction to be considered monetary in its entirety and, therefore, outside the scope of this Subtopic
b. Whether full or partial gain recognition is appropriate in a monetary exchange (required to be accounted for at fair value), if an entity transfers a nonfinancial asset (or assets) to another entity in exchange for a noncontrolling ownership interest in the other entity
c. Subparagraph superseded by Accounting Standards Update 2014-09.
Whether Subtopic 976-605 and Section 360-20-40 applies to exchanges of similar real estate when significant boot causes the exchange to be considered monetary
.
214. The amendments to Section 845-10-15 were made for the following reasons:
a. Paragraph 845-10-15-4(i). The amendment updates the reference to the involuntary conversion guidance that has been moved from Subtopic 605-40, Revenue Recognition—Gains and Losses, to Subtopic 610-30, Other Income—Gains and Losses from an Involuntary Conversion.
b. Paragraph 845-10-15-4(j) and (k). The amendments reflect the Board’s decision to provide guidance in Topic 606 for determining the transaction price when the contract includes noncash consideration. Consequently, contracts within the scope of Topic 606 or Subtopic 61020 have been excluded from the general nonmonetary transaction guidance within Topic 845. However, if a contract is not within the scope of Topic 606 because of the scope exclusion in paragraph 606-10-15-2(e), that contract should be accounted for in accordance with Topic 845. Additionally, both Topic 845 and Topic 606 (see paragraph 606-1025-1(d)) require a contract to have commercial substance.
c. Paragraph 845-10-15-4(k). In addition, this Subtopic (not Subtopic 61020) includes transactions in which an entity (Entity A) transfers a nonfinancial asset (or assets) to another entity (Entity B) in exchange for a noncontrolling ownership interest in that entity (Entity B), see Section 845-10-30 on exchanges of a nonfinancial asset for a noncontrolling ownership interest. The guidance in paragraph 845-10-30-26 differentiates the accounting between an equity method investment and a cost method investment.
d. Paragraph 845-10-15-8. The amendments delete the scope exception for exchanges of software and exchanges of real estate. For exchanges of software and real estate, the industry-specific guidance is no longer necessary because those transactions should be accounted for in accordance with the guidance on noncash consideration for contracts with customers in Topic 606 (contracts subject to the guidance in Subtopic 610-10 should also be accounted for in accordance with the guidance in Topic 606). For nonmonetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers outside the scope of Topic 606 (see paragraph 606-10-152(e)), an entity should generally follow the guidance in Topic 845.
e. Paragraphs 845-10-15-14 through 15-17 and 845-10-15-20. These paragraphs are superseded or amended as they contain industryspecific guidance on real estate and software that is no longer necessary.
f. Paragraphs 845-10-15-18 through 15-19. These paragraphs are unamended and included only for context purposes.
215. Amend paragraphs 845-10-15-4, 845-10-15-8, 845-10-15-14, and 845-1015-20 and supersede paragraphs 845-10-15-15 through 15-17 and their related heading, with a link to transition paragraph 606-10-65-1, as follows:
Scope and Scope Exceptions
General
845-10-15-4 The guidance in the Nonmonetary Transactions Topic does not apply to the following transactions:
a. A business combination accounted for by an entity according to the provisions of Topic 805 or a combination accounted for by a not-forprofit entity according to the provisions of Subtopic 958-805
b. A transfer of nonmonetary assets solely between entities or persons under common control, such as between a parent and its subsidiaries or between two subsidiaries of the same parent, or between a corporate joint venture and its owners
c. Acquisition of nonmonetary assets or services on issuance of the capital stock of an entity under Subtopics 718-10 and 505-50
d. Stock issued or received in stock dividends and stock splits that are accounted for in accordance with Subtopic 505-20
e. A transfer of assets to an entity in exchange for an equity interest in that entity (except for certain exchanges of a nonfinancial asset for a noncontrolling ownership interest, see paragraph 845-10-15-18)
f. A pooling of assets in a joint undertaking intended to find, develop, or produce oil or gas from a particular property or group of properties, as described in paragraph 932-360-40-7
g. The exchange of a part of an operating interest owned for a part of an operating interest owned by another party that is subject to paragraph 932-360-55-6
h. The transfer of a financial asset within the scope of Section 860-10-15
i. Involuntary conversions specified in paragraph 610-30-15-2
605-40-15-2.
j. The transfer of goods or services in a contract with a customer within the scope of Topic 606 on revenue from contracts with customers in exchange for noncash consideration (see paragraphs 606-10-32-21 through 32-24)
k. The transfer of a nonfinancial asset within the scope of Subtopic 610-20 in exchange for noncash consideration (see paragraph 610-20-32-1, which requires measurement consistent with paragraphs 606-10-32-21 through 32-24). However, if the noncash consideration promised in exchange for the nonfinancial asset is a noncontrolling ownership interest, that transaction is within the scope of this Topic.
Purchases and Sales of Inventory with the Same Counterparty
845-10-15-8 The guidance in the Purchases and Sales of Inventory with the Same Counterparty Subsections does not apply to inventory purchases and sales arrangements that are accounted for as derivatives in accordance with Topic 815 on derivatives and hedging.
the following transactions:
a. Subparagraph superseded by Accounting Standards Update 2014-09.
Inventory purchase and sales arrangements that meet either of the following criteria:
1.
They are accounted for as derivatives under Topic 815.
2.
They involve exchanges of software or exchanges of real estate.
Exchanges Involving Monetary Consideration
845-10-15-14 The guidance in these Subsections does not apply to transfers between a joint venture and its owners.
the following transactions and activities:
a. Subparagraph superseded by Accounting Standards Update 2014-09.
Transfers between a joint venture and its owners
b. Subparagraph superseded by Accounting Standards Update 2014-09.
Transfers of real estate (for guidance with respect to transfers of real estate in exchanges involving monetary consideration see Subtopics 360-20 and 976-605 and the Exchanges Involving Monetary Considerations Subsection of Section 845-10-30).
> > Exchanges of Real Estate Involving Monetary Consideration
845-10-15-15 Paragraph superseded by Accounting Standards Update 2014-09.
Paragraph 360-20-15-10(c) indicates that the accounting for exchanges of real estate is covered by this Topic and not by Subtopic 360-20. However, under paragraph 845-10-25-6, an exchange of nonmonetary assets that would otherwise be based on recorded amounts under paragraph 845-10-30-3 but that involves boot shall be considered a monetary (rather than nonmonetary) transaction if the boot is at least 25 percent of the fair value of the exchange. As a result, the guidance is different for exchanges of real estate held for sale in the ordinary course of business for real estate to be sold in the same line of business when the boot is at least 25 percent of the fair value of the exchange (referred to as exchanges of similar real estate).
845-10-15-16 Paragraph superseded by Accounting Standards Update 2014-09.
For the receiver of boot, the monetary portion shall be accounted for under Subtopics 360-20 and 976-605 as the equivalent of a sale of an interest in the underlying real estate, and the nonmonetary portion shall be accounted for in accordance with this Subtopic.
845-10-15-17 Paragraph superseded by Accounting Standards Update 2014-09.
For the payer of boot, the monetary portion shall be accounted for as an acquisition of real estate, and the nonmonetary portion shall be accounted for pursuant to this Subtopic.
Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest
> Overall Guidance
845-10-15-18 The Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest Subsections follow the same Scope and Scope Exceptions as outlined in the General Subsection of this Subtopic, see paragraph 845-10-151, with specific transaction exceptions noted below.
> Transactions
845-10-15-19 The guidance in the Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest Subsections applies to nonmonetary transfers of a nonfinancial asset (or assets) for a noncontrolling ownership interest.
845-10-15-20 The guidance in these Subsections does not apply to the following types of transfers:
a. Transfers between a joint venture and its owners
b. Capital contributions of real estate in return for an unconsolidated real estate investment (for guidance, see Subtopic 970-323)
c. Subparagraph superseded by Accounting Standards Update 2014-09
Transfers of real estate in exchange for nonmonetary assets other than real estate (for guidance on the recognition of profit from the exchange, see Subtopic 976-605 and Section 360-20-40)
d. Subparagraph superseded by Accounting Standards Update No. 2010-08
e. A deconsolidation of a subsidiary that is a business or nonprofit activity that is within the scope of Subtopic 810-10 (see paragraph 810-10-40-3A)
f. A derecognition of a group of assets that constitutes a business or nonprofit activity that is within the scope of Subtopic 810-10 (see paragraph 810-10-40-3A).
216. The following amendments reflect the removal of industry-specific guidance in Subtopics 360-20, Property, Plant, and Equipment—Real Estate Sales, and 976-605, Real Estate—Retail Land—Revenue Recognition.
217. Supersede paragraphs 845-10-25-7 through 25-8, with a link to transition paragraph 606-10-65-1, as follows:
Recognition
Exchanges Involving Monetary Consideration
845-10-25-7 Paragraph superseded by Accounting Standards Update 2014-09.
A transaction involving an exchange of similar real estate that is considered a monetary transaction because boot is at least 25 percent of the fair value of the exchange shall be allocated between two components: a monetary portion and a nonmonetary portion.
845-10-25-8 Paragraph superseded by Accounting Standards Update 201409.
See Section 360-20-15 for guidance on when an asset is considered real estate.
218. The following amendments to Section 845-10-30 reflect the following three changes:
a. Paragraphs 845-10-30-17 through 30-18. These paragraphs on barter credit transactions have been superseded. The removal of this guidance is consistent with the Board’s decision to include the receipt of noncash consideration (including barter credits) within the scope of Topic 606 or Subtopic 610-20.
b. Paragraph 845-10-30-23. The amendment to this paragraph reflects the removal of guidance on exchanges of real estate involving monetary consideration if there is a monetary component and a nonmonetary component. These exchanges should be accounted for in accordance with Topic 606 if in a contract with a customer or Subtopic 610-20 if not with a customer.
c. Paragraph 845-10-30-25. The amendment to this paragraph reflects the removal of guidance in Subtopics 360-20 and 976-605. The amendment also updates the reference for the transfer of an in substance nonfinancial asset, which should be accounted for in accordance with Subtopic 610-20, Other Income—Gain and Losses from the
Derecognition of Nonfinancial Assets.
219. Supersede paragraphs 845-10-30-17 through 30-18, 845-10-30-23 and its related heading, and 845-10-30-25A, amend paragraph 845-10-30-25, and add paragraphs 845-10-30-25B through 30-25C, with a link to transition paragraph 606-10-65-1, as follows:
Initial Measurement
Barter Credit Transactions
845-10-30-17 Paragraph superseded by Accounting Standards Update 201409.
In reporting the exchange of a nonmonetary asset for barter credits, it shall be presumed that the fair value of the nonmonetary asset exchanged is more clearly evident than the fair value of the barter credits received and that the barter credits shall be reported at the fair value of the nonmonetary asset exchanged.
845-10-30-18 Paragraph superseded by Accounting Standards Update 2014-09.
However, that presumption might be overcome if an entity can convert the barter credits into cash in the near term, as evidenced by a historical practice of converting barter credits into cash shortly after receipt, or if independent quoted market prices exist for items to be received upon exchange of the barter credits. It also shall be presumed that the fair value of the nonmonetary asset does not exceed its carrying amount unless there is persuasive evidence supporting a higher value.
Exchanges Involving Monetary Consideration
> Exchanges of Real Estate Involving Monetary Consideration
845-10-30-23 Paragraph superseded by Accounting Standards Update 2014-09.
Paragraph 845-10-25-7 addresses allocation of certain transactions between two components: a monetary portion and a nonmonetary portion. The allocation between the monetary and nonmonetary portions of the transaction shall be based on their relative fair values at the time of the transaction.
Exchanges of a Nonfinancial Asset for a Noncontrolling Ownership Interest
845-10-30-24 An entity (Entity A) transfers a nonfinancial asset (or assets) to another entity (Entity B) in exchange for a noncontrolling ownership interest in that entity (Entity B).
845-10-30-25 Except for the transactions identified in paragraph 845-10-30-25B, the
The
following transactions shall be accounted for as a deconsolidation in accordance with paragraphs 810-10-40-3A through 40-5
, except if the transaction is the sale of in substance real estate (for guidance on a sale of in substance real estate, see Subtopic 360-20 or 976-605) or is a conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights, see Subtopic 932-360)
:
a. An entity transfers a subsidiary that is a {add glossary link}business{add glossary link} or nonprofit activity (excluding an in substance nonfinancial asset) to a second entity in exchange for a noncontrolling interest in that second entity
b. An entity transfers a group of assets that constitute a business or nonprofit activity (excluding an in substance nonfinancial asset) to a second entity in exchange for a noncontrolling interest in that second entity.
845-10-30-25A Paragraph superseded by Accounting Standards Update 201409.
Except for exchanges described in the preceding paragraph, if an exchange of a nonmonetary asset for a noncontrolling ownership interest in a second entity is accounted for at fair value, full or partial gain recognition is required. Paragraphs 845-10-30-26 through 30-27 provide guidance on how the gain or loss is to be determined.
[Content amended and moved to paragraph 845-10-30-25C]
845-10-30-25B The following transactions shall be accounted for in accordance with the following Subtopics:
a. The transfer of a nonfinancial asset, including an in substance nonfinancial asset (see Subtopic 610-20). However, if the noncash consideration promised in exchange for the nonfinancial asset (or in substance nonfinancial asset) to a second entity is a noncontrolling ownership interest in that second entity, see paragraphs 845-10-30-25C through 30-27.
b. A conveyance of oil and gas mineral rights (for guidance on conveyances of oil and gas mineral rights, see Subtopic 932-360).
845-10-30-25C Except for exchanges or transactions described in paragraphs 845-10-30-25 and 845-10-30-25B
the preceding paragraph
, if an exchange of a nonmonetary asset for a noncontrolling ownership interest in a second entity is accounted for at fair value, full or partial gain recognition is required. Paragraphs 845-10-30-26 through 30-27 provide guidance on how the gain or loss is to be determined. [Content amended as shown and moved from paragraph 84510-30-25A]
220. The following amendment reflects the removal of disclosure guidance that has been replaced by the disclosure requirements in Topic 606.
221. Supersede paragraph 845-10-50-2, with a link to transition paragraph 60610-65-1, as follows:
Disclosure
845-10-50-2 Paragraph superseded by Accounting Standards Update 2014-09.
In accordance with paragraph 845-10-50-1, entities shall disclose, in each period’s financial statements, the amount of gross operating revenue recognized as a result of nonmonetary transactions. See Subtopic 505-50.
222. The amendments to Section 845-10-55 reflect the following:
a. Updates to the table in paragraph 845-10-55-2 to provide references to guidance
b. The removal of industry-specific guidance in Subtopic 360-20.
223. Amend paragraph 845-10-55-2 and supersede paragraphs 845-10-55-29 through 55-37 and their related heading, with a link to transition paragraph 60610-65-1, as follows:
Implementation Guidance and Illustrations
> > Summary of Guidance
845-10-55-2 The following table summarizes the guidance contained in this Subtopic.
ASSET RECEIVED
Investment accounted for by the equity method
Controlled asset or group of assets that does not meet the definition of a business
Controlled group of assets that meets the definition of a business
A
S S E T
G
I V E N
U
P
Investment accounted for by the equity method
A transfer of an equity method investment should be accounted for under the provisions of Topic 860.
A transfer of an equity method investment should be accounted for under the provisions of Topic 860.
Fair value (Topic 805)
Controlled asset or group of assets that does not meet the definition of a business
If the transfer is accounted for at fair value, see paragraph
845-10-30-25A
845-10-30-25C.
If the contract is with a customer and within the scope of Topic 606, apply Topic 606.
If the contract is not within the scope of Topic 606, evaluate if the transaction is within the scope of Subtopic 610-20. If so, apply Subtopic 610-20.
If the contract is not within the scope of Subtopic 610-20 and is within the scope of Topic 845, apply Topic 845.
Otherwise, apply other GAAP.
Carryover basis if any of the following conditions are met:
a. The fair value of neither the asset(s) received nor the asset(s) relinquished is determinable within reasonable limits.
b. Assets exchanged are a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than parties to the exchange.
c.The exchange lacks commercial substance.
Otherwise, fair value
Fair value (Topic 805)
Controlled group of assets that meets the definition of a business
This Subtopic does not provide guidance for this circumstance (see paragraph 845-10-30-25).
This Subtopic does not provide guidance for this circumstance (see paragraph 845-10-30-25).
Fair value (Topic 805)
If the controlled group of assets that meets the definition of a business is (1) a conveyance of oil and gas mineral rights, apply Subtopic 932-360, or (2) an in substance nonfinancial asset, apply Subtopic 610-20. Otherwise, apply Subtopic 810-10.
Exchanges Involving Monetary Consideration
> > Example 2: Exchanges of Real Estate Involving Monetary Consideration
845-10-55-29 Paragraph superseded by Accounting Standards Update 201409.
This Example illustrates the guidance in Section 360-20-40.
845-10-55-30 Paragraph superseded by Accounting Standards Update 2014-09.
Entity A transfers real estate with a fair value of $2,000,000 (Entity A’s net book value of $1,500,000) to Entity B and receives $400,000 cash, a $400,000 note from Entity B payable to Entity A, and real estate with a fair value of $1,200,000 (Entity B’s net book value of $800,000). The specifics of the transaction are as follows:
a.
The initial investment requirement for full accrual profit recognition under paragraph 360-20-40-18 is 20 percent.
b.
The terms of the note from Entity B to Entity A would satisfy the continuing investment provisions necessary for application of the full accrual method. The interest rate on the note from Entity B is a market rate, and the note is considered fully collectible.
c.
The values of the real estate transferred by both parties are readily determinable and clearly realizable at the exchange date.
d.
Neither party has any continuing involvement with the real estate transferred to the other.
845-10-55-31 Paragraph superseded by Accounting Standards Update 201409.
The computation of allocation by both Entity A and Entity B is as follows:
a.
The monetary portion of the transaction is as follows.
Total monetary consideration divided
by total fair value of exchange $800,000 ÷ $2,000,000 = 40%
For this example, the monetary portion of the transaction is the exchange of $400,000 cash and a $400,000 note for real estate with a fair value of $800,000 ($2,000,000 x 40%).
b.
The nonmonetary portion of the transaction is as follows.
Fair value of real estate exchanged divided
by total fair value of exchange $1.200,000 ÷ $2,000,000 = 60%
For this Example, the nonmonetary portion of the transaction is the exchange of real estate with a fair value of $1,200,000 for similar real estate with a fair value of $1,200,000 ($2,000,000 x 60%).
845-10-55-32 Paragraph superseded by Accounting Standards Update 201409.
The accounting by Entity A (the receiver of monetary consideration) is as follows.
845-10-55-33 Paragraph superseded by Accounting Standards Update 201409.
The nonmonetary portion of the transaction does not qualify for gain recognition because the exchange involves similar real estate. The accounting basis of the new property equals $900,000 ($1,500,000 total net book value of the real estate exchanged less the $600,000 pro rata portion of net book value sold).
845-10-55-34 Paragraph superseded by Accounting Standards Update 201409.
The monetary portion of the transaction qualifies for full accrual profit recognition because the cash down payment of $400,000 and the $400,000 note meet the criteria in paragraphs 360-20-40-10 through 40-12 for a buyer’s initial and continuing investment when applied to the monetary portion of the transaction. Accordingly, a gain of $200,000 ($800,000 total monetary consideration less $600,000 [$1,500,000 total net book value x 40%] pro rata portion of net book value) would be recorded at the date of sale.
845-10-55-35 Paragraph superseded by Accounting Standards Update 201409.
The accounting by Entity B (the payer of monetary consideration) is as follows.
845-10-55-36 Paragraph superseded by Accounting Standards Update 201409.
The nonmonetary portion of the transaction does not qualify for gain recognition because the exchange involves similar real estate. The accounting basis of the new property equals $1,600,000 ($800,000 net book value of the real estate exchanged plus $800,000 total monetary consideration paid).
845-10-55-37 Paragraph superseded by Accounting Standards Update 201409.
The monetary portion of the transaction represents an acquisition of real estate for the monetary consideration paid of $800,000.
224. The following amendments update the guidance referred to for barter credit transactions from Subtopic 605-20 to Topic 606 and reflects the removal of industry-specific guidance in Subtopic 360-20.
225. Amend paragraph 845-10-60-2, supersede paragraph 845-10-60-3 and its related Subsection title and heading, with a link to transition paragraph 606-1065-1, and add the General Note as follows:
Relationships
Barter Transactions
> Revenue Recognition
845-10-60-2 For guidance on accounting for advertising barter transactions, see the guidance on noncash consideration in paragraphs 606-10-32-21 through 3224
Subtopic 605-20
.
Note on Subsection Exchanges Involving Monetary Consideration: Upon the effective date of Accounting Standards Update 2014-09, the Subsection below, Exchanges Involving Monetary Consideration, will be superseded.
Exchanges Involving Monetary Consideration
> Property, Plant, and Equipment
845-10-60-3 Paragraph superseded by Accounting Standards Update 201409.
For guidance on the accounting for the monetary portion of boot received, see Subtopic 360-20-40.

Amendments to Subtopic 850-10

226. The following amendment updates the reference from Subtopic 952-605, Franchisors—Revenue Recognition, to Subtopic 952-10, Franchisors—Overall. Subtopic 952-605 has been superseded because it provided industry-specific revenue guidance. Paragraph 952-605-45-1, which provides guidance on the presentation of costs related to franchisor-outlets, has been retained and moved to paragraph 952-720-45-1. Similarly, paragraph 952-605-50-3, which provides disclosure guidance on nonrevenue franchise information (such as franchises sold and franchises purchased during the year), has been retained and moved to paragraph 952-10-50-1.
227. Amend paragraph 850-10-60-8, with a link to transition paragraph 606-1065-1, as follows:
Related Party Disclosures—Overall
Relationships
> Franchisors
850-10-60-8 For guidance on franchisors disclosing certain information about franchisor-owned outlets, see paragraphs 952-10-50-1 and 952-720-45-1
952605-45-1 and 952-605-50-3
.

Amendments to Subtopic 855-10

228. The following amendment reflects the removal of industry-specific guidance in Subtopic 985-605, Software—Revenue Recognition.
229. Supersede paragraph 855-10-60-4 and its related heading, with a link to transition paragraph 606-10-65-1, as follows:
Subsequent Events—Overall
Relationships
> Software
855-10-60-4 Paragraph superseded by Accounting Standards Update 201409.
For guidance on the effect on the timing of revenue recognition when vendorspecific objective evidence of fair value is established by management after the balance sheet date but before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), see paragraphs 985605-55-93 through 55-95.

Amendments to Subtopic 860-10

230. The following amendments update the reference from Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales, to Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets. Guidance in Subtopic 360-20 has been superseded, and guidance on the transfer of an in substance nonfinancial asset has been moved to Subtopic 61020.
231. Amend paragraph 860-10-15-4, with a link to transition paragraph 606-1065-1, as follows:
Transfers and Servicing—Overall
Scope and Scope Exceptions
860-10-15-4 The guidance in this Topic does not apply to the following transactions and activities:
a. Except for transfers of servicing assets (see Section 860-50-40) and for the transfers noted in the following paragraph, transfers of nonfinancial assets
b. Transfers of unrecognized financial assets, for example, minimum lease payments to be received under operating leases
c. Transfers of custody of financial assets for safekeeping
d. Contributions (for guidance on accounting for contributions, see Subtopic 958-605)
e. Transfers of ownership interests that are in substance sales of
real estate
nonfinancial assets (For guidance related to transfers of investments that are in substance a sale of
real estate
a nonfinancial asset, see Subtopic 610-20
Topics 845 and 976
. For guidance related to sale-leaseback transactions involving real estate, including real estate with equipment, such as manufacturing facilities, power plants, and office buildings with furniture and fixtures, see Subtopic 840-40.)
f. Investments by owners or distributions to owners of a business entity
g. Employee benefits subject to the provisions of Topic 712
h. Leveraged leases subject to Topic 840
i. Money-over-money and wrap lease transactions involving nonrecourse debt subject to Topic 840.
232. Amend paragraph 860-10-55-3, with a link to transition paragraph 606-1065-1, as follows:
Implementation Guidance and Illustrations
> > > Examples of Transactions and Activities That Are Included in the Scope
860-10-55-3 The guidance in this Topic applies to the following transactions and activities, among others:
a. All loan participations
b. Transfers of equity method investments, unless the transfer is of an in substance nonfinancial asset (see Subtopic 610-20)
investment that is in substance a sale of real estate, as defined in Subtopic 360-20
c. Transfers of cost-method investments
d. With respect to the guidance in paragraph 860-10-40-5 only, transfers of financial assets in desecuritization transactions.

Amendments to Subtopic 860-50

233. The following amendment reflects the change in terminology from earned to recognized because earned is not a criterion for recognizing revenue in Topic 606.
234. Amend paragraph 860-50-50-2, with a link to transition paragraph 606-1065-1, as follows:
Transfers and Servicing—Servicing Assets and Liabilities
Disclosure
> > All Servicing Assets and Servicing Liabilities
860-50-50-2 For all servicing assets and servicing liabilities, all of the following shall be disclosed:
a. Management’s basis for determining its classes of servicing assets and servicing liabilities.
b. A description of the risks inherent in servicing assets and servicing liabilities and, if applicable, the instruments used to mitigate the income statement effect of changes in fair value of the servicing assets and servicing liabilities.
c. The amount of contractually specified servicing fees, late fees, and ancillary fees recognized
earned
for each period for which results of operations are presented, including a description of where each amount is reported in the statement of income.
d. Quantitative and qualitative information about the assumptions used to estimate fair value (for example, discount rates, anticipated credit losses, and prepayment speeds).
Disclosure of quantitative information about the instruments used to manage the risks inherent in servicing assets and servicing liabilities, including the fair value of those instruments at the beginning and end of the period, is encouraged but not required. An entity that provides such quantitative information is also encouraged, but not required, to disclose quantitative and qualitative information about the assumptions used to estimate the fair value of those instruments. Section 235-10-50 provides guidance on disclosures of accounting policies.

Amendments to Subtopic 905-10

235. The following amendments reflect the removal of industry-specific guidance for revenue recognition. However, a portion of Subtopic 905-605 has been retained to provide guidance for cooperative arrangements because the Board determined that those arrangements are not contracts with customers within the scope of Topic 606.
236. Amend paragraph 905-10-05-1, with a link to transition paragraph 606-1065-1, as follows:
Agriculture—Overall
Overview and Background
905-10-05-1 The Agriculture Topic includes the following Subtopics relating to agricultural producers, agricultural cooperatives, and patrons of such cooperatives:
a. Overall
b. Presentation of Financial Statements
c. Receivables
d. Investments—Other
e. Inventory
f. Property, Plant, and Equipment
g. Liabilities
h. Equity
i. Revenue Recognition—Cooperatives
j. Cost of Sales and Services.
Each Subtopic provides background on the guidance provided.

Amendments to Subtopic 905-310

237. The following amendments reflect the removal of industry-specific guidance in Subtopic 905-605, Agriculture—Revenue Recognition. The paragraphs in Subtopic 905-310 on receivables have been superseded because the corresponding paragraphs in Subtopic 905-605 have been superseded.
238. Supersede paragraphs 905-310-25-1 through 25-2 and their related heading and amend paragraph 905-310-25-3, with a link to transition paragraph 606-10-65-1, as follows:
Agriculture—Receivables
Recognition
Cooperatives—Patrons
> Products Delivered to Pooling Cooperatives
905-310-25-1 Paragraph superseded by Accounting Standards Update 201409.
Paragraphs 905-605-25-7 through 25-8 address recognition of unbilled receivables on products delivered to pooling agricultural cooperatives.
905-310-25-2 Paragraph superseded by Accounting Standards Update 201409.
For other accounting guidance for patrons delivering products to pooling cooperatives, see also paragraphs 905-330-40-1 and 905-605-25-5 through 25-8.
> Patronage Refunds
905-310-25-3 Patrons shall recognize patronage refunds on either of the following occasions:
a. When the related patronage occurs if all of the following are probable:
1. A patronage refund applicable to the period will be declared.
2. One or more future events confirming the receipt of a patronage refund are expected to occur.
3. The amount of the refund can be reasonably estimated.
4. The accrual can be consistently made from year to year.
b. On notification by the distributing {add glossary link}agricultural cooperative{add glossary link}.
The accrual shall be based on the latest available reliable information.

Amendments to Subtopic 905-330

239. The following amendments reflect the removal of guidance in Subtopic 905-605.
240. Supersede paragraph 905-330-30-3 and amend paragraph 905-330-30-4, with a link to transition paragraph 606-10-65-1, as follows:
Agriculture—Inventory
Initial Measurement
Cooperatives
905-330-30-3 Paragraph superseded by Accounting Standards Update 201409.
Section 905-605-25 addresses bases for recording transfers of products between agricultural cooperatives and their patrons.
905-330-30-4
However, cooperatives
Agricultural cooperatives operating on a pooling basis may receive products from their patrons without paying a fixed price to the patrons. A cooperative may assign amounts to products
based
on the basis of current prices paid by other buyers or on amounts established by the cooperative’s board of directors, or it may assign no amount.
241. The following amendment reflects the removal of industry-specific guidance.
242. Supersede Section 905-330-40, with a link to transition paragraph 606-1065-1, and add the General Note as follows:
Derecognition
Note on Subsection Cooperatives—Patrons: Upon the effective date of Accounting Standards Update 2014-09, the Subsection below, Cooperatives— Patrons, will be superseded.
Cooperatives—Patrons
905-330-40-1 Paragraph superseded by Accounting Standards Update 2014-09.
For products delivered by patrons to pooling agricultural cooperatives, if title has not passed, the identity of the individual patron’s product is maintained by the cooperative, and the price to the patron is to be based on the identified product’s sale, the transaction is not complete, and the product shall be included in the patron’s inventory until it is sold by the cooperative, at which time the patron shall record the sale.

Amendments to Subtopic 905-605

243. The following amendments reflect the removal of industry-specific guidance for revenue recognition. However, a portion of Subtopic 905-605 has been retained to provide guidance for cooperative arrangements because the Board determined that those arrangements are not contracts with customers within the scope of Topic 606. Paragraphs 905-605-05-2 through 05-3 have not been amended and have been included to provide context for the other amendments.
244. Amend the title of Subtopic 905-605 and add the General Note as follows:
Agriculture—Revenue Recognition—Cooperatives
General Note on Revenue Recognition: Upon the effective date of Accounting Standards Update 2014-09, the title of this Subtopic will change to Agriculture— Revenue Recognition—Cooperatives.
245. Amend paragraph 905-605-05-1, supersede paragraph 905-605-05-4 and its related Subsection title, with a link to transition paragraph 606-10-65-1, and add the General Note as follows:
Overview and Background
General
905-605-05-1 This Subtopic addresses revenue recognition for entities in the agricultural industry. The guidance for accounting by different entities is presented in the following two
three
Subsections:
a. General
b. Cooperatives
c. Subparagraph superseded by Accounting Standards Update 2014-09.
Cooperatives—Patrons.
905-605-05-2 The General Subsections provide guidance for all entities in the agricultural industry.
Cooperatives
905-605-05-3 The Cooperative Subsections address revenue recognition for cooperatives in the agricultural industry.
Note on Subsection Cooperatives—Patrons: Upon the effective date of Accounting Standards Update 2014-09, the Subsection below, Cooperatives— Patrons, will be superseded.
Cooperatives—Patrons
905-605-05-4 Paragraph superseded by Accounting Standards Update 201409.
The Cooperative—Patrons Subsections address revenue recognition for patrons of agricultural cooperatives.
246. The following amendments reflect the removal of industry-specific guidance on revenue recognition. Paragraphs 905-605-15-1 through 15-2 have not been amended and have been included to provide context for the other amendments.
247. Supersede paragraph 905-605-15-3 and its related Subsection title and heading, with a link to transition paragraph 606-10-65-1, and add the General Note as follows:
Scope and Scope Exceptions
General
> Overall Guidance
905-605-15-1 This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see the General Subsection of Section 905-1015.
Cooperatives
> Overall Guidance
905-605-15-2 The Cooperatives Subsections follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see the Cooperatives Subsection of Section 905-10-15.
Note on Subsection Cooperatives—Patrons: Upon the effective date of Accounting Standards Update 2014-09, the Subsection below, Cooperatives— Patrons, will be superseded.
Cooperatives—Patrons
> Overall Guidance
905-605-15-3 Paragraph superseded by Accounting Standards Update 201409.
The Cooperatives—Patrons Subsections follow the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see the Cooperatives—Patrons Subsection of Section 905-10-15.
248. The following amendments reflect the removal of industry-specific guidance on revenue recognition. Paragraphs 905-605-25-1 through 25-4 have not been amended and have been included to provide context for the other amendments.
249. Supersede paragraphs 905-605-25-5 and 906-605-25-7 through 25-9 and their related Subsection title, with a link to transition paragraph 606-10-65-1, and add the General Note as follows:
Recognition
General
> Income Replacement and Subsidy Programs
905-605-25-1 Income replacement and subsidy programs are designed to bring income from commodities to certain predetermined levels and include:
a. Deficiency payments, which are subsidy payments resulting from low prices for designated commodities.
b. Disaster payments, which may be made to producers when disasters prevent planting or reduce yields on crops.
c. Other programs, which are available to producers to encourage production, provide indemnity for certain types of losses, and reimburse producers for withholding land from production.
All of the above payments, while different in nature, constitute additional income and should be recorded when the amount of and right to receive the payment can be reasonably determined.
Cooperatives
905-605-25-2 A cooperative may incur an overall loss in a given year. The disposition of losses may be made based on bylaws or the board of directors’ action. Agricultural cooperatives use a number of different methods for disposing of an overall loss, including the following:
a. Allocating the loss to patrons on the basis of current patronage. The loss may offset the patrons’ equities, future patronage allocations, or future cash contributions.
b. Allocating the loss to all equities without considering current patronage. However, patrons with substantial equities and decreasing patronage may be treated inequitably if this method is used.
c. Charging the loss to unallocated retained earnings. This method is equitable when the loss is attributable to nonpatronage business.
d. Offsetting the loss against amounts available for patronage allocation in subsequent years before making any such allocation to patrons. This method may be acceptable if the patrons are substantially the same from year to year.
> Departmental and Functional Accounting
905-605-25-3 Cooperatives operating on a functional or departmental basis may have net earnings from one function or department and operating losses from another. It is a common practice for losses from one function or department to be absorbed by profits from another function or department before earnings to patrons are allocated. Some cooperatives distribute departmental earnings to patrons and charge departmental losses to unallocated retained earnings.
905-605-25-4 To allocate earnings to patrons equitably, cooperatives usually account for revenues and costs by function (supply or marketing) or departments within the function. Expenses common to one or more functions or departments shall be allocated on a reasonable and consistent basis. In addition, one department of a cooperative may handle several commodities, and departmental revenues and expenses may have to be allocated among them. Cooperatives may incur a loss in one department or function and realize earnings in another. Methods of accounting for these departmental and functional losses include the following:
a. Offsetting the losses of unprofitable departments against profitable ones, and allocating the remaining profit to the patrons of the profitable departments by using the allocation method adopted by the cooperative.
b. Recovering the loss from the patrons of that department or function on the basis of bylaw provisions or a marketing agreement.
c. Subtracting the loss from net nonpatronage income. Offsetting patronage losses against nonpatronage income may not eliminate the income tax due on the nonpatronage income of a nonexempt cooperative.
d. Charging the loss to unallocated retained earnings, and allocating income from profitable departments or functions to patrons on the basis of the cooperative’s allocation methods.
e. Offsetting the losses against patronage allocation for subsequent years before making departmental and functional allocations to patrons.
Note on Subsection Cooperatives—Patrons: Upon the effective date of Accounting Standards Update 2014-09, the Subsection below, Cooperatives— Patrons, will be superseded.
Cooperatives—Patrons
905-605-25-5 Paragraph superseded by Accounting Standards Update 201409.
This guidance addresses transactions between patrons and marketing cooperatives; specifically, the timing and method of recording the sale of products delivered.
905-605-25-6 [Not used]
905-605-25-7 Paragraph superseded by Accounting Standards Update 201409.
If control over the future economic benefits relating to the product has passed, which ordinarily is evidenced by the transfer of title, and if a price is available by reference to contemporaneous transactions in the market, or if the cooperative establishes an assigned amount, a delivery to the cooperative shall be recorded as a sale by the patron at that amount on the date of delivery. If there is a reasonable indication that the proceeds from the cooperative will be less than the market price or the assigned amount, the lower amount shall be used.
905-605-25-8 Paragraph superseded by Accounting Standards Update 201409.
If control over the future economic benefits relating to the product has passed, which ordinarily is evidenced by the transfer of title, and there are neither prices determined by other market buyers nor amounts assigned by the cooperative, or if such amounts are erratic, unstable, or volatile, the patron shall record the delivery to the cooperative as a sale at the recorded amount of the inventory and shall record an unbilled receivable. If there is a reasonable indication that the proceeds from the cooperative will be less than the receivable, the lower amount shall be used.
905-605-25-9 Paragraph superseded by Accounting Standards Update 201409.
See also paragraph 905-310-25-3.
250. The following amendments reflect the change in terminology from earned to recognized because earned is not a criterion for recognizing revenue in Topic 606. The following amendments also reflect the removal of guidance in Topic 605.
251. Amend paragraph 905-605-45-1 and supersede paragraph 905-605-45-2 and its related Subsection title, with a link to transition paragraph 606-10-65-1, as follows:
Other Presentation Matters
Cooperatives
905-605-45-1 As indicated in paragraph 905-505-45-1, the earnings of agricultural cooperatives are classified as either patronage or nonpatronage. The excess of revenues over costs resulting from transactions for or with patrons is patronage source earnings. As indicated in that paragraph, nonpatronage earnings result from transactions other than those with or for patrons. Examples are nonpatronage income from investments in securities, rental income from nonpatronage activities, and income recognized
earned
on sales or earned on purchases made on a nonpatronage basis.
Cooperatives—Patrons
905-605-45-2 Paragraph superseded by Accounting Standards Update 201409.
A cooperative patron shall record the allocation of patronage refunds in either of the followings ways:
a.
The classification of the allocations to patrons in their financial statements shall follow the recording of the costs or proceeds.
b.
The allocations shall be presented separately.

Amendments to Subtopic 908-10

252. The following amendment to paragraph 908-10-05-1 reflects the removal of industry-specific guidance on revenue recognition. The following amendment to paragraph 908-10-05-3 reflects the change in terminology from earned to recognized because earned is not a criterion for recognizing revenue in Topic 606. Paragraph 908-10-05-2 has not been amended and has been included to provide context for the other amendments.
253. Amend paragraphs 908-10-05-1 and 908-10-05-3, with a link to transition paragraph 606-10-65-1, as follows:
Airlines—Overall
Overview and Background
908-10-05-1 The Airlines Topic includes the following Subtopics relating specifically to entities in the airline industry:
a. Overall
b. Segment Reporting
c. Inventory
d. Intangibles—Takeoff and Landing Slots
e. Property, Plant, and Equipment
f. Subparagraph superseded by Accounting Standards Update 2014-09.
Revenue Recognition
g. Compensation—General
h. Other Expenses
i. Nonmonetary Transactions.
Each Subtopic provides background on the guidance provided.
908-10-05-2 Entities in the airline industry primarily provide carrier services for passengers and cargo, frequently as joint operations. Other services, such as maintenance or food service for other carriers, may also be provided.
908-10-05-3 The most unusual characteristic of the airline industry is its revenue cycle. Sales may be made at numerous locations by either the carrier or third parties (travel agents or other carriers); for some carriers, third parties handle a substantial portion of the ticket transactions. Paper tickets and electronic tickets usually are sold in advance of the transportation date, and the ticket sales date usually does not coincide with the revenue recognition date (the date that service is provided). Tickets sold are not necessarily used, in whole or in part, on the carrier making the sale, and some tickets are refundable if not used by the customer for up to one year after the sales date. Other tickets are nonrefundable but exchangeable with payment of a fee, and other tickets are nonrefundable and nonexchangeable. The determination of revenue recognized
earned
may be complex.

Amendments to Subtopic 908-360

254. The following amendment reflects the relocation of guidance in Subtopic 605-50, Revenue Recognition—Customer Payments and Incentives, to Subtopic 705-20, Cost of Sales and Services—Accounting for Consideration Received from a Vendor. Guidance on consideration payable to a customer falls within the scope of Topic 606, and Subtopic 705-20 has been created to codify the guidance on consideration received from a vendor.
255. Amend paragraph 908-360-55-1, with a link to transition paragraph 60610-65-1, as follows:
Airlines—Property, Plant, and Equipment
Implementation Guidance and Illustrations
> Implementation Guidance
> > Purchase Incentives
908-360-55-1
Paragraph 605-50-45-2 states, in part, that cash consideration (including a sales incentive) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services. Accordingly, the credit
Credit received as a purchase incentive from an aircraft manufacturer to induce a purchase of that manufacturer’s aircraft should be accounted for in accordance with paragraphs 705-20-25-1 through 25-5
shall be applied as a reduction of the purchase price
for the aircraft that is owned or under a capital lease, or, in the case of an aircraft under an operating lease, amortized over the life of the related aircraft.

Amendments to Subtopic 908-605

256. The following amendment reflects the removal of industry-specific guidance on revenue recognition relating to on-line and off-line air travel tickets for entities in the airline industry on revenue recognition. This guidance has been superseded consistent with the Board’s overall objective in Topic 606. See the basis for conclusions for further discussion and rationale for decisions reached in Topic 606.
257. Supersede Subtopic 908-605, Airlines—Revenue Recognition, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 908-720

258. The following amendment reflects the removal of guidance on advertising costs in Subtopic 340-20, Other Assets and Deferred Costs—Capitalized Advertising Costs, because that guidance is no longer relevant for airlines.
259. Amend paragraph 908-720-25-1, with a link to transition paragraph 60610-65-1, as follows:
Airlines—Other Expenses
Recognition
> Developmental Costs
908-720-25-1 Because of the current deregulated environment and the uncertainty regarding the recoverability of route developmental costs, such costs
, other than advertising costs,
related to the preparation of operations of new routes shall not be capitalized.
(For guidance on accounting for advertising costs, see Subtopics 340-20 and 720-35.)
Route expansion or alteration has become a recurring activity among the airlines, and any related cost shall be considered a normal and recurring cost of conducting business.

Amendments to Subtopic 910-10

260. The following amendment reflects the removal of industry-specific guidance on revenue recognition.
261. Amend paragraph 910-10-05-2, with a link to transition paragraph 606-1065-1, as follows:
Contractors—Construction—Overall
Overview and Background
910-10-05-2 This Topic includes the following Subtopics:
a. Overall
b. Contract Costs
c. Notes to Financial Statements
d. Receivables
e. Inventory
f. Other Assets and Deferred Costs
g. Property, Plant, and Equipment
h. Liabilities
i. Subparagraph superseded by Accounting Standards Update 2014-09.
Revenue Recognition
j. Consolidation.
262. The following amendment updates the reference to specific paragraphs in Subtopic 605-35, Revenue Recognition—Construction-Type and ProductionType Contracts.
263. Amend paragraph 910-10-15-4, with a link to transition paragraph 606-1065-1, as follows:
Scope and Scope Exceptions
910-10-15-4 Other characteristics common to contractors and significant to accountants and users of financial statements include the following:
a. A contractor normally obtains the contracts that generate revenue or sales by bidding or negotiating for specific projects.
b. A contractor bids for or negotiates the initial contract price based on an estimate of the cost to complete the project and the desired profit margin, although the initial price may be changed or renegotiated.
c. A contractor may be exposed to significant risks in the performance of a contract, particularly a fixed-price contract.
d. Customers (usually referred to as owners) frequently require a contractor to post a performance and a payment bond as protection against the contractor’s failure to meet performance and payment requirements.
e. The costs and revenues of a contractor are typically accumulated and accounted for by individual contracts or contract commitments extending beyond one accounting period, which complicates the management, accounting, and auditing processes.
f. The nature of a contractor’s risk exposure varies with the type of contract. The several types of contracts used in the construction industry are described in paragraphs 605-35-15-2 through 15-5
Subtopic 605-35
. The four basic types of contracts used based on their pricing arrangements are {add glossary link}fixed-price{add glossary link} or lump-sum contracts, {add glossary link}unit-price contracts{add glossary link}, {add glossary link}cost-type contracts{add glossary link}, and {add glossary link}time-and-materials contracts{add glossary link}.
264. The following amendment reflects the removal of industry-specific guidance and updates the references and the terminology to Topic 606.
265. Amend paragraph 910-10-60-1, with a link to transition paragraph 606-1065-1, as follows:
Relationships
> Revenue Recognition
910-10-60-1 For guidance on accounting for {add glossary link}revenue{add glossary link}recognition of construction-type {add glossary link}contracts{add glossary link},see Topic 606
Subtopic 605-35
.

Amendments to Subtopic 910-20

266. The following amendment reflects the removal of reference to industryspecific guidance on revenue recognition.
267. Supersede paragraph 910-20-25-5 and its related heading, with a link to transition paragraph 606-10-65-1, as follows:
Contractors—Construction—Contract Costs
Recognition
> General and Administrative Costs
910-20-25-5 Paragraph superseded by Accounting Standards Update 201409.
General and administrative costs may be accounted for by entities within the scope of this Subtopic as contract costs under the completed-contract method of accounting (see paragraph 605-35-25-37(c)).

Amendments to Subtopic 910-310

268. The following amendment reflects the removal of industry-specific guidance.
269. Supersede paragraph 910-310-45-2, with a link to transition paragraph 606-10-65-1, as follows:
Contractors—Construction—Receivables
Other Presentation Matters
910-310-45-2 Paragraph superseded by Accounting Standards Update 2014-09.
For guidance on the presentation of advances on cost-plus contracts, see Section 910-405-45.
270. The following amendment reflects the removal of industry-specific guidance.
271. Supersede paragraphs 910-310-50-1 through 50-2 with a link to transition paragraph 606-10-65-1, as follows:
Disclosure
910-310-50-1 Paragraph superseded by Accounting Standards Update 2014-09.
For billed or unbilled amounts under contracts representing unapproved change orders, claims, or similar items subject to uncertainty concerning their determination or ultimate realization, the balance sheet, or a note to the financial statements, shall disclose all of the following:
a.
The amount
b.
A description of the nature and status of the principal items comprising the amount
c.
The portion, if any, expected to be collected after one year.
910-310-50-2 Paragraph superseded by Accounting Standards Update 2014-09.
For amounts representing the recognized sales value of performance under contracts that have not been billed and were not billable at the date of the balance sheet, all of the following shall be disclosed:
a.
The amounts
b.
A general description of the prerequisites for billings
c.
The portion, if any, expected to be collected after one year,

Amendments to Subtopic 910-340

272. The following amendment reflects the removal of industry-specific guidance on accounting for other assets and deferred costs. This Subtopic previously provided the guidance on disclosures for the costs deferred either in anticipation of future sales or as a result of an approved change order. Those costs will now be accounted for and disclosed in accordance with the guidance in Subtopic 340-40.
273. Supersede Subtopic 910-340, Contractors—Construction—Other Assets and Deferred Costs, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 910-405

274. The following amendment reflects the removal of industry-specific guidance.
275. Supersede Subtopic 910-405, Contractors—Construction—Liabilities, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 910-605

276. The following amendment reflects the removal of industry-specific guidance on revenue recognition for the construction industry. That guidance has been superseded consistent with the Board’s overall objective in Topic 606.
277. Supersede Subtopic 910-605, Contractors—Construction—Revenue
Recognition, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 912-10

278. The following amendments reflect the removal of references to industryspecific guidance for the balance sheet, notes to the financial statements, and revenue recognition.
279. Amend paragraph 912-10-05-2, with a link to transition paragraph 606-1065-1, as follows:
Contractors—Federal Government—Overall
Overview and Background
912-10-05-2 This Topic includes the following Subtopics:
a. Overall
b. Contract Costs
c. Subparagraph superseded by Accounting Standards Update 2014-09.
Balance Sheet
d. Income Statement
e. Subparagraph superseded by Accounting Standards Update 2014-09.
Notes to Financial Statements
f. Changing Prices
g. Risks and Uncertainties
h. Receivables
i. Inventory
j. Liabilities
k. Contingencies
l. Subparagraph superseded by Accounting Standards Update 2014-09.
Revenue Recognition
m. Cost of Sales and Services
n. Compensation—Retirement Benefits
o. Research and Development
p. Interest.
280. The following amendment reflects the removal of industry-specific guidance, specifically, the guidance on contracts subject to renegotiation.
281. Amend paragraph 912-10-15-3, with a link to transition paragraph 606-1065-1, as follows:
Scope and Scope Exceptions
> Transactions
912-10-15-3 The guidance in this Topic applies to all of the following transactions and activities:
a. Cost-plus-fixed-fee contracts
b. Subparagraph superseded by Accounting Standards Update 201409.
Certain aspects of those government contracts and subcontracts that are subject to renegotiation. This guidance is applicable also to price redetermination estimated to result in retroactive price reduction.
c. Fixed-price war and defense supply contracts terminated, in whole or in part, for the convenience of the government.

Amendments to Subtopic 912-20

282. The following amendments reflect the removal of industry-specific guidance, specifically, Subtopic 912-210, Contractors—Federal Government— Balance Sheet, which provided guidance on presentation (for example, billed and unbilled costs) that will be within the scope of Topic 606 or Subtopic 340-40 for presentation and disclosure.
283. Supersede paragraph 912-20-45-1 and its related heading and amend paragraph 912-20-45-4, with a link to transition paragraph 606-10-65-1, as follows:
Contractors—Federal Government—Contract Costs
Other Presentation Matters
> Balance Sheet
912-20-45-1 Paragraph superseded by Accounting Standards Update 201409.
For guidance on offsetting and presentation of billed and unbilled costs, current assets and liabilities, and contract-related assets and liabilities, see Section 912-210-45.
> Income Statement
912-20-45-4 For guidance on presentation of
renegotiation refunds and
terminated contracts, see Section 912-225-45.

Amendments to Subtopic 912-210

284. The following amendment reflects the removal of guidance for government contractors related to the presentation of contract-related assets and liabilities in the financial statements. Those industry-specific presentation requirements have been superseded and the appropriate disclosure requirements are in accordance with Topic 606.
285. Supersede Subtopic 912-210, Contractors—Federal Government—
Balance Sheet, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 912-225

286. The following amendment reflects the removal of industry-specific guidance, specifically, guidance on contracts subject to renegotiation.
287. Amend paragraph 912-225-05-1, with a link to transition paragraph 60610-65-1, as follows:
Contractors—Federal Government—Income Statement
Overview and Background
912-225-05-1 This Subtopic provides guidance on presentation in the income statement for amounts relating to
contracts subject to renegotiation and
terminated contracts.
288. The following amendments to paragraphs 912-225-45-1 through 45-2 reflect the removal of industry-specific guidance because the presentation requirements are now in Topic 606.
289. Supersede paragraphs 912-225-45-1 through 45-2 and their related heading and paragraph 912-225-45-4, with a link to transition paragraph 606-1065-1, as follows:
Other Presentation Matters
> Contracts Subject to Renegotiation
912-225-45-1 Paragraph superseded by Accounting Standards Update 201409.
Renegotiation refunds are commonly referred to as involving a refund of excessive profits, however, renegotiation involves an adjustment of the original contract or selling price. Because a provision for renegotiation refund indicates that the collection, or retention, of the selling price is not reasonably assured, the provision should preferably be treated in the income statement as a deduction from sales.
912-225-45-2 Paragraph superseded by Accounting Standards Update 201409.
If a renegotiation refund applicable to a particular year is materially different from the provision made in the financial statements originally issued for such year, the difference between the renegotiation refund and the provision shall be shown as a separate item in the current income statement.
> Terminated Contracts
912-225-45-3 Any items the contractor retains without claim for cost or loss shall remain as inventory or deferred charges in the contractor’s accounts.
912-225-45-4 Paragraph superseded by Accounting Standards Update 2014-09.
Sales related to terminated contracts shall be separately presented in the income statement.

Amendments to Subtopic 912-235

290. The guidance in this Subtopic has been superseded because the disclosure requirements (generally consistent with accounting policies for various former SOP 81-1 type assumptions and determinations) are industry-specific. The guidance in Topic 606 and Subtopic 340-40, Other Assets and Deferred Costs—Contracts with Customers, will require disclosures.
291. Supersede Subtopic 912-235, Contractors—Federal Government—Notes to Financial Statements, with a link to transition paragraph 606-10-65-1.

Amendments to Subtopic 912-275

292. The following amendment reflects the removal of the guidance on contracts subject to renegotiation.
293. Amend paragraph 912-275-05-1, with a link to transition paragraph 60610-65-1, as follows:
Contractors—Federal Government—Risks and Uncertainties
Overview and Background
912-275-05-1 This Subtopic provides guidance to government contractors related to incremental disclosures about risks and uncertainties associated with
contracts subject to renegotiation and
contracts terminated for the convenience of the government.
294. The following amendment reflects the removal of industry-specific guidance, specifically, the guidance on contracts subject to renegotiation.
295. Supersede paragraph 912-275-50-1 and its related heading and amend paragraph 912-275-50-4, with a link to transition paragraph 606-10-65-1, as follows:
Disclosure
> Contracts Subject to Renegotiation
912-275-50-1 Paragraph superseded by Accounting Standards Update 201409.
Renegotiation uncertainties, their significance, the basis used in determining the amount of the provision (such as the prior years’ experience of the contractor or of similar contractors if their experience is available and is used), and renegotiation discussions relating to the current year shall be disclosed. Such disclosure may be helpful in informing shareholders or other interested persons as to the entity’s status under the renegotiation law. If conditions change, the results of a prior-year determination or settlement are not, in most circumstances, indicative of the amount probably refundable for the current year.
> Termination Claims
912-275-50-4 The effect of a contract termination shall be reflected in the financial statements of the contractor in the period in which the termination occurs, or earlier if the termination is a subsequent event occurring before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) and attributable to conditions that existed at the date of the balance sheet. If sufficient information is not available to predict the effect of a very recent termination, then the best information available shall be disclosed in the notes to financial statements in conformity with Topic 450.
Paragraph 912605-25-22 addresses the effective date of termination.
The effective date of termination shall be the date at which the contractor acquires the right to receive payment on the terminated portion of the contract. [Content moved from paragraph 912-605-25-22]

Amendments to Subtopic 912-310

296. The following amendments to paragraphs 912-310-25-1 through 25-2 reflect the removal of the reference to the term percentage-of-completion method and the addition of other language consistent with Topic 606. The following amendments to paragraphs 912-310-25-6 and 912-310-25-8 through 25-9 reflect the removal of industry-specific guidance on unbilled amounts, progress payments, and advance payments.
297. Amend paragraphs 912-310-25-1 through 25-2 and supersede paragraphs 912-310-25-6 and 912-310-25-8 through 25-9 and their related headings, with a link to transition paragraph 606-10-65-1, as follows:
Contractors—Federal Government—Receivables
Recognition
> Cost-Plus-Fixed-Fee Contracts
912-310-25-1 Unbilled costs and fees under cost-plus-fixed-fee contracts are receivables or contract assets rather than advances or inventory.
912-310-25-2 Payments on account of the fees (minus amounts withheld until completion) are made from time to time as specified in the agreements, usually subject to the approval of the contracting officer. In most circumstances the amount of each payment is determined by the ratio of expenditures made to the total estimated expenditures rather than on the basis of deliveries or other measures of progress toward complete satisfaction of a performance obligation in accordance with the guidance in paragraphs 606-10-25-31 through 25-37 and paragraphs 606-10-55-16 through 55-21
on the percentage of completion otherwise determined
.
> Unbilled Amounts
912-310-25-6 Paragraph superseded by Accounting Standards Update 201409.
Receivables from the U.S. government may include billed and unbilled amounts. Unbilled amounts arise if sales or revenues cannot be billed yet under terms of the contract or if unit prices for items shipped have not been determined. However, unbilled amounts are appropriately recorded as receivables.
> Progress Payments
912-310-25-7 The accounting for progress payments under a government contract depends on the progress-payments clause as follows:
a. If legal title to the related accumulated costs of contracts in progress vests with the U.S. government on the contractor’s receipt of progress payments, progress payments received on fixed-price contracts shall be applied by individual contract first to amounts carried in unbilled receivables, with any remainder applied to accumulated costs of contracts in progress (often referred to as inventories).
b. If a legal determination is made that the U.S. government receives only a secured interest in the accumulated costs of contracts in progress, progress payments received shall be accounted for as a financing transaction.
912-310-25-8 Paragraph superseded by Accounting Standards Update 201409.
Amounts representing progress payments billed but not yet received by the contractor are not shown in the balance sheet because it would be improper to show uncollected progress payments as an offset to the accumulated cost of contracts in progress.
> Advance Payments
912-310-25-9 Paragraph superseded by Accounting Standards Update 201409.
Although advance payments differ from progress payments in that they are not related to progress of work on a contract, they are reported in a manner similar to progress payments. Paragraph 912-405-45-6 provides guidance on classifying advance payments received in excess of unbilled receivables and accumulated costs of contracts in progress as a liability.
298. The following amendments reflect the removal of the guidance on unbilled amounts, progress payments, and advance payments.
299. Supersede paragraphs 912-310-45-9 through 45-10 and their related headings, with a link to transition paragraph 606-10-65-1, as follows:
Other Presentation Matters
> > Unbilled Amounts
912-310-45-9 Paragraph superseded by Accounting Standards Update 201409.
Unbilled amounts (net of unliquidated progress payments) shall be stated separately if the amounts constitute a significant portion of the U.S. government contract receivables.
> > Advance Payments
912-310-45-10 Paragraph superseded by Accounting Standards Update 201409.
Paragraph 912-405-45-6 provides guidance on classifying advance payments received in excess of unbilled receivables and accumulated costs of contracts in progress as a liability.

Amendments to Subtopic 912-405

300. The following amendment reflects the removal of industry-specific guidance, specifically, the guidance on contracts subject to renegotiation.
301. Amend paragraph 912-405-05-1, with a link to transition paragraph 60610-65-1, as follows:
Contractors—Federal Government—Liabilities
Overview and Background
912-405-05-1 This Subtopic provides guidance to government contractors on accounting for liabilities associated with
contracts subject renegotiations,
claims of subcontractors on cost-plus-fixed-fee
contracts
,contracts
and progress payments.
payments, and advance payments.
302. The following amendments reflect the removal of industry-specific guidance, specifically, the guidance on contracts subject to renegotiation.
303. Supersede paragraphs 912-405-25-1 through 25-2 and their related heading, with a link to transition paragraph 606-10-65-1, as follows:
Recognition
> Contracts Subject to Renegotiations
912-405-25-1 Paragraph superseded by Accounting Standards Update 201409.
In keeping with the established accounting principle that provision shall be made in financial statements for all liabilities, including reasonable estimates for liabilities not accurately determinable, provision shall be made for probable renegotiation refunds wherever the amount of such refunds can be reasonably estimated. See Topic 450.
912-405-25-2 Paragraph superseded by Accounting Standards Update 201409.
If experience of the entity or of comparable entities with renegotiation determinations is available and would make a reasonable estimate practicable, provision in the income account for an estimated refund shall be made.
304. The following amendments to paragraphs 912-405-45-1 through 45-2 reflect the removal of guidance on contracts subject to renegotiation. The following amendment to paragraph 916-405-45-6 reflects the removal of guidance on advance payments.
305. Supersede paragraphs 912-405-45-1 through 45-2 and 912-405-45-6 and their related headings, with a link to transition p