1. The eighth meeting of the Transition Resource Group for Revenue Recognition (TRG) was held on November 7, 2016. The purpose of the meeting was for the TRG members to inform the FASB about potential issues with implementing Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, and Update No. 2016-10, Identifying Performance Obligations and Licensing (the"new revenue standard"), to help the Board determine what, if any, action may be needed to address those issues.

2. The purpose of this paper is to provide a summary of (a) the issues discussed at the November 7, 2016 meeting, (b) the views expressed at the meeting by the TRG members and FASB staff views about those issues, and (c) the planned next steps, if any, for each of those issues.

3. The following topics were discussed at the November 7, 2016 meeting:

4. The staff papers for each of those topics were made public to all stakeholders before the TRG meeting and are available on the FASB website. A direct link to the staff papers is also included within each topic below. This summary should be read in conjunction with those staff papers, which contain a more detailed description of the issues, stakeholder views, and staff analysis.

5. A replay of the entire meeting is available on the FASB's website. The website also contains a log of questions submitted to the TRG.

6. Guidance in the new revenue standard requires an entity to recognize, as an asset, the incremental costs of obtaining a contract with a customer (for example, sales commissions) if the entity expects to recover those costs. Some stakeholders informed the staff that there are different interpretations of the guidance regarding the recognition and measurement of incremental costs of obtaining a contract as an asset and estimating the period of amortization. The TRG previously discussed questions related to incremental costs of obtaining a contract on January 26, 2015. Therefore, this summary memo should be read in conjunction with TRG Agenda Ref No. 23 and TRG Agenda Ref No. 25. At the November 2016 meeting, the TRG discussed the following two questions:

7. Paragraph 340-40-25-1 requires an entity to recognize, as an asset, the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs. Paragraph 340-40-25-2 defines incremental costs as 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. Stakeholders have questioned how broadly the term incremental should be interpreted when identifying the costs to capitalize.

8. On Question 1, TRG members generally agreed with the staff's view on the identification of incremental costs subject to capitalization. The staff explained that a way to think about the guidance in paragraphs 340-40-25-2 and 25-3 is to assess whether the entity would incur the cost if the customer (or the entity) decides, just as the parties are about to the sign the contract, that it will not enter into the contract. If the costs would have been incurred even though the contract is not executed, then the costs are not incremental costs of obtaining a contract. Additionally, the staff's view is that the employee's title or level in the organization is not a determining factor for assessing whether a sales commission is incremental.

9. TRG members noted that there may be a broader range of costs capitalized under the new standard as compared to current practice. Additionally, the TRG discussion highlighted that stakeholders should refer to existing guidance outside of the new revenue standard when determining whether and when to recognize a liability for the costs. The guidance in Subtopic 340-40 only addresses whether the costs are expensed or capitalized (that is, the other side of the liability entry).

10. On Question 2, TRG members agreed that the asset should 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 (consistent with the guidance in paragraph 340-40-35-1). TRG members observed that the amortization period will be an estimate and could range from the initial contract term to the average customer life, and points in between, depending on the facts and circumstances. TRG members agreed that judgment often will be necessary to identify the goods or services to which the asset relates and accordingly estimate an appropriate amortization period. These considerations are generally consistent with how an entity determines an amortization period in other areas of GAAP, such as for intangible assets or other long-lived assets.

11. TRG Agenda Ref No. 57 highlights some factors for an entity to consider when estimating the amortization period.

12. The staff noted that assessing whether a renewal commission is commensurate with an initial commission solely on the basis of the level of effort to obtain the contract would not be consistent with the guidance in Subtopic 340-40 and the basis for conclusions in Update 2014-09.

13. Because the discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believes is consistent with the standard, the staff recommends that the Board take no further action.

14. Stakeholders informed the staff that minimum guarantees are used in license arrangements for intellectual property in which the consideration is in the form of a sales-based or usage-based royalty. The minimum guarantee effectively establishes a floor for the amount of consideration to be paid to the licensor.

15. Some stakeholders informed the staff that there are questions about the guidance in Update 2014-09 and Update No. 2016-10, Identifying Performance Obligations and Licensing, when determining how to account for a sales-based or usage-based royalty (variable consideration) promised in exchange for a license of intellectual property that includes a minimum guaranteed amount. Specifically, those stakeholders question whether and how the guaranteed minimum impacts the application of the recognition constraint for sales-based or usage-based royalties for licenses of intellectual property in paragraph 606-10-55-65. The TRG discussed the following two questions:

16. For symbolic licenses (Question 1), the TRG memo included the following views for the recognition of sales-based or usage-based royalties. Examples of the views are included in TRG Agenda Ref No. 58

17. TRG members generally agreed with the staff's view that the new revenue standard does not prescribe a single approach on recognizing revenue for license arrangements of symbolic intellectual property with minimum guaranteed royalties. The standard permits judgment in selecting a measure of progress, as long as the measure of progress is consistent with the guidance in paragraphs 606-10-25-31 through 25-37. TRG members generally agreed that Views A, B, and C are all reasonable applications of the new standard depending upon facts and circumstances. However, TRG members acknowledged that there could be other acceptable applications that were not included in TRG Agenda Ref No. 58. TRG members observed that the revenue recognition for a license of symbolic intellectual property must be in accordance with various aspects of the new revenue standard, including but not limited to the following provisions:

18. On Question 2, TRG members generally agreed with the staff's view that a minimum guaranteed amount of royalties for functional intellectual property should be recognized as revenue at the point in time the entity transfers control of the license to the customer in accordance with paragraphs 606-10-55-58B through 55-58C, which is described as View A in TRG Agenda Ref No. 58.

19. Because the discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believes is consistent with the standard, the staff recommends that the Board take no further action.

20. Payments to customers (or potential customers) can take the form of cash or other items (for example, a coupon, a credit, or a voucher). Scenarios also include the issuance of equity. Some stakeholders informed the staff that there is a question about the timing of recognition of the payments in the income statement, such as whether upfront payments should be immediately recognized in the income statement or recognized as assets (and subsequently"amortized"). Stakeholders have highlighted that there is diversity in practice in this area today and they question whether the guidance in Topic 606 will narrow that diversity and whether the accounting results under Topic 606 could change, compared to outcomes under current GAAP.

21. The scope of the issue discussed at the TRG meeting was about payments to customers and potential customers. The analysis does not apply to payments that are made to third parties that are not customers or potential customers (such as payments to a vendor) and does not apply to scenarios in which an entity sells goods or services to a customer at a loss with a strong expectation of profit on future orders from that customer.

22. The staff's view is that the new revenue standard is clear that when the counterparty is a customer and the payment relates entirely to a current contract with a customer, the payment should be recorded as a reduction of revenue (reduction of the transaction price), unless the payment to the customer is in exchange for a distinct good or service on the basis of the guidance in paragraph 606-10-32-25 through 32-27.

23. The TRG discussed the following circumstances in which the accounting is less straightforward than the scenario in the above paragraph:

24. The TRG memo describes two views about the timing of when the reduction in revenue for an upfront payment should be recorded.

25. TRG members observed that View A would be appropriate in many cases. TRG members agreed with the staff view that if an asset is recorded it should meet the definition of an asset in FASB Statement of Financial Accounting Concepts No. 6, Elements of Financial Statements, and an entity should assess whether the asset is impaired in subsequent reporting periods. However, TRG members agreed with the staff view that View B could be appropriate in some cases. TRG members agreed with the staff view that the accounting is not a policy election and agreed that an entity should understand the reasons for the payment, the rights and obligations resulting from the payment (if any), the nature of the promise(s) in the contract (if any), and other relevant facts and circumstances for each arrangement when determining the appropriate accounting. TRG members also agreed with the staff that the assessment will require significant judgment in some cases and appropriate disclosures in the financial statements might be important.

26. Because he discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believes is consistent with the standard, the staff recommends that the Board take no further action.

27. Step 5 of the new revenue standard is to recognize revenue when (or as) the entity satisfies a performance obligation. This determination is made for each performance obligation identified in the contract. The new revenue standard includes criteria to determine whether an entity transfers control over time and, therefore, satisfies a performance obligation and recognizes revenue over time. If the over time criteria are not met, then an entity recognizes revenue at a point in time.

28. The TRG discussed the following three questions:

29. On Question 1, TRG members agreed with the staff's view that an entity that currently recognizes revenue at a point in time should not presume it will recognize revenue at a point in time under Topic 606. Instead, an entity should perform an assessment of the specific facts and circumstances of each contract on the basis of the guidance in the new revenue standard.

30. On Question 2, TRG members agreed with the staff view that (1) the entity shall evaluate the criteria for over time revenue recognition at the inception of the contract, (2) those criteria shall not be reassessed unless there is a contract modification, and (3) when assessing whether the entity’s performance does not create an asset with alternative use to the entity, the entity should consider the characteristics of the ultimate asset to be transferred to the customer, except as follows. If the entity is contractually restricted or has a practical limitation on its ability to direct the asset for another use, then the asset would not have alternative use, regardless of the characteristics of the ultimate asset.

31. On Question 3, TRG members agreed with the staff's view that an entity has an enforceable right to payment if, on termination for reasons other than the entity's failure to perform as promised, the termination payment compensates the entity for its performance completed to date, including a reasonable profit margin (see paragraph 606-10-25-29). An entity should consider the terms of the contract, as well as any legislation or legal precedent that could supplement or override those contractual terms, when assessing the existence and enforceability of a right to payment for performance completed to date.

32. When assessing whether the overtime criteria in paragraph 606-10-25-27(c) have been met, some TRG members discussed the linkage among right of payment, measure of progress, and the timing of the customization of a good. Example B in TRG Agenda Ref No. 56 describes a scenario in which the customization of the asset begins when the manufacturing process is 75% complete. That example does not include any facts regarding right to payment. However, TRG members raised questions about the impact on the over time assessment in scenarios in which an entity does not have a right to payment prior to the start of the product customization (for example, prior to the customization the product may be considered inventory). The staff explained that the right to payment is for performance completed to date on the contract and that performance should coincide with how an entity defines the nature of its performance obligation and its performance when measuring progress towards satisfaction of that performance obligation.

33. Because the discussion indicated that stakeholders can understand and apply the applicable guidance in the new revenue standard in a manner that the staff believes is consistent with the standard, the staff recommends that the Board take no further action.

34. At the TRG meeting, the staff provided an update on issues raised at previous TRG meetings. The majority of the implementation questions discussed at the first seven TRG meetings have been resolved at those meetings without any further action needed. However, standard setting has been required on a few of the issues. The staff provided the following update on the status of those issues.

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