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2.2 Scope of the revenue standard
Publication date: 30 Nov 2023
us Revenue guide
Management needs to consider all other potentially relevant accounting literature before concluding that the arrangement is in the scope of the revenue standard. Arrangements that are entirely in the scope of other guidance should be accounted for under that guidance. Arrangements may include elements that are partly in the scope of other standards and partly in the scope of the revenue standard. The elements that are accounted for under other standards are separated and accounted for under those standards, as illustrated in Figure RR 2-1 and discussed in RR 2.2.3.
Figure RR 2-1
Accounting for contracts partially in scope of the revenue standard
Accounting for contracts partially in scope of the revenue standard
There are no industries completely excluded from the scope of the revenue standard; however, the standard specifically excludes from its scope certain types of transactions:
- Leases in the scope of ASC 842, Leases
- Contracts in the scope of ASC 944, Financial Services–Insurance
- Financial instruments and other contractual rights or obligations in the scope of the following guidance:
- ASC 310, Receivables; ASC 320, Investments—Debt Securities; ASC 321, Investments—Equity Securities; ASC 323, Investments—Equity Method and Joint Ventures; ASC 325, Investments—Other; ASC 405, Liabilities; ASC 470, Debt; ASC 815, Derivatives and Hedging; ASC 825, Financial Instruments; and ASC 860, Transfers and Servicing
- Nonmonetary exchanges between reporting entities in the same line of business to facilitate sales to current or future customers
- Guarantees (other than product or service warranties—see RR 8 for further considerations related to warranties) in the scope of ASC 460, Guarantees
Arrangements should be assessed to determine whether they are within the scope of other guidance and, therefore, outside the scope of the revenue standard. Refer to Revenue TRG Memo No. 17, Revenue TRG Memo No. 36, Revenue TRG Memo No. 47, US Revenue TRG Memo No. 52, and the related meeting minutes in Revenue TRG Memo No. 25, Revenue TRG Memo No. 44, Revenue TRG Memo No. 49, and Revenue TRG Memo No, 55, respectively, for further discussion of scoping issues discussed by the TRG. Following are examples of how to apply the scoping guidance to specific types of transactions.
- Credit card fees
Credit card fees are outside the scope of the revenue standard for reporting entities, unless the overall nature of the arrangement is not a credit card lending arrangement. Credit card fees are addressed by specific guidance in ASC 310, Receivables. If a credit card arrangement is determined to be outside the scope of the revenue standard, any related reward program is also outside the scope. Management should evaluate the nature of the reporting entity’s credit card programs to assess whether they are in the scope of ASC 310 and continue to evaluate new programs as they evolve. Refer to Revenue TRG Memo No. 36 and the related meeting minutes in Revenue TRG Memo No. 44 for further discussion of this topic. - Depository account fees
When a customer deposits funds at a bank, the customer and the bank enter into a depository agreement that provides the customer with certain services, such as custody of deposited funds and access to those deposited funds. The bank may charge the customer fees for accessing the funds, not maintaining a specified minimum account balance, or not utilizing the account. These fees are not within the scope of other specific guidance and, therefore, are within the scope of the revenue standard. Refer to Revenue TRG Memo No. 52 and the related meeting minutes in Revenue TRG Memo No. 55 for further discussion of this topic. These TRG memos also include discussion of the application of the revenue standard to deposit fees, including determining the contract term when the arrangement can be terminated without significant penalty and the accounting implications of no-fee or reduced-fee arrangements. - Servicing fees
Servicing arrangements are those in which fees are earned when a reporting entity provides servicing (of a mortgage or other financial assets) on behalf of another party that owns the loan or other assets. When a reporting entity records a servicing right as an asset (or a liability), the initial and subsequent recognition of the asset (or liability) is subject to the guidance in ASC 860. While ASC 860 provides guidance on the subsequent accounting for servicing rights, it does not prescribe how the servicing revenue should be recognized. Servicing arrangements within the scope of ASC 860 would not be subject to the revenue standard even though ASC 860 does not prescribe how servicing revenue should be recognized. However, if a reporting entity concludes that its servicing arrangements are not subject to ASC 860, they would be subject to the revenue standard. Refer to Revenue TRG Memo No. 52 and the related meeting minutes in Revenue TRG Memo No. 55 for further discussion of this topic. Refer to TS 6 for further discussion of accounting for servicing arrangements under ASC 860. - Gaming contracts
Fixed-odds wagering contracts, including any associated loyalty programs, within the scope of ASC 924, Entertainment — Casinos, are excluded from the scope of the derivative instruments guidance (ASC 815) and, thus, are within the scope of the revenue standard.
Refer to Revenue TRG Memo No. 47 and the related meeting minutes in Revenue TRG Memo No. 49 for further discussion of this topic. - Insurance
All contracts in the scope of ASC 944 are excluded from the revenue standard. This includes life insurance, health insurance, property and casualty insurance, title insurance, mortgage guarantee insurance, and investment contracts. The scope exception does not apply to other types of contracts that may be issued by insurance reporting entities that are outside the scope of insurance guidance, such as asset management and claims handling (administrative services) contracts.
Contracts could also be partially within the scope of the insurance guidance and partially within the scope of the revenue standard. Management may need to apply judgment to make this determination. If a contract is entirely in the scope of the insurance guidance, activities to fulfill the contract, such as insurance risk mitigation or cost containment activities, should be accounted for under the insurance guidance.
2.2.1 Revenue that does not arise from a contract with a customer
Revenue from transactions or events that does not arise from a contract with a customer is not in the scope of the revenue standard and should continue to be recognized in accordance with other standards. Such transactions or events include but are not limited to:
- Dividends
- Non-exchange transactions, such as donations or contributions. For example, contributions received by a not-for-profit reporting entity are not within the scope of the revenue standard if they are not given in exchange for goods or services (that is, they represent non-exchange transactions). Refer to Revenue TRG Memo No. 26, the related meeting minutes in Revenue TRG Memo No. 34, and NP 6 for further discussion of this topic.
- Changes in regulatory assets and liabilities arising from alternative revenue programs for rate-regulated activities in the scope of ASC 980, Regulated Operations
2.2.2 Evaluation of nonmonetary exchanges
As noted in RR 2.2, nonmonetary exchanges between reporting entities in the same line of business to facilitate sales to current or future customers are excluded from the scope of the revenue standard. Reporting entities should assess these arrangements under ASC 845, Nonmonetary Transactions. An exchange of finished goods inventory for the receipt of raw materials or work-in-process inventory is not considered an exchange to facilitate sales to customers (as stated in ASC 845-10-30-15) and therefore, would not qualify for the scope exception in the revenue standard. Refer to PPE 2.3.1 and PPE 6.3.6 for guidance on nonmonetary transactions.
Nonmonetary exchanges with customers that are in the scope of the revenue standard are exchanges of goods or services for noncash consideration. Refer to the guidance on noncash consideration in RR 4.5.
Determining whether nonmonetary exchanges are in the scope of the revenue standard could require judgment and depends on the facts and circumstances of the arrangement. Example RR 2-1 illustrates an arrangement that is not within the scope of the revenue standard.
EXAMPLE RR 2-1
Scope – exchange of products to facilitate a sale to another party
Salter is a supplier of road salt. Adverse weather events can lead to a sudden increase in demand, and Salter does not always have a sufficient supply of road salt to meet this demand on short notice. Salter enters into a contract with SaltCo, a supplier of road salt in another region, such that each party will provide road salt to the other during local adverse weather events as they are rarely affected at the same time. No other consideration is provided by the parties.
Is the contract in the scope of the revenue standard?
Analysis
No. This arrangement is not in the scope of the revenue standard because the standard specifically excludes from its scope nonmonetary exchanges in the same line of business to facilitate sales to customers or potential customers.
2.2.3 Contracts with components in and out of the scope of revenue
Some contracts include components that are in the scope of the revenue standard and other components that are in the scope of other standards. For example, a contract could include a financial guarantee given by the vendor (refer to RR 4.3.3.9 for further discussion of guarantees) or a lease of property, plant, and equipment in addition to a promise to provide goods or services. A reporting entity should first apply the separation or measurement guidance in other applicable standards (if any) and then apply the guidance in the revenue standard. A reporting entity applies the guidance in the revenue standard to initially separate and/or measure the components of the contract only if another standard does not include separation or measurement guidance. The transaction price, as described in RR 4.2, excludes the portion of contract consideration that is initially measured under other guidance. For guidance on allocating consideration to lease and nonlease components refer to LG 2.4.3.
2.2.3.1 Election to combine lease and non-lease components
Reporting entities can elect a practical expedient (provided in ASC 842) that permits lessors to combine lease and non-lease components within a contract if certain criteria are met. The practical expedient applies to contracts that include an operating lease and a non-lease component, such as a promise to provide services. To qualify for the expedient, the pattern of transfer of the operating lease and the non-lease component must be the same (that is, on a straight-line basis over time).
If the lease and non-lease components are combined under this expedient, a lessor would account for the combined component under the revenue standard if the non-lease component is predominant, and as an operating lease if the non-lease component is not predominant. For example, if the service component (a revenue component) is predominant, the reporting entity could apply the revenue standard to both the revenue and lease components. If the service component is not predominant, the reporting entity could apply the lease standard to all components. If elected, the practical expedient will need to be applied consistently as an accounting policy by class of underlying asset. Refer to LG 2.4.4.1 for further discussion.
2.2.4 Sale of future revenues
An arrangement where an investor acquires rights to future cash flows from a reporting entity is typically not a contract with a customer in the scope of the revenue standard. An example is an arrangement in which a reporting entity receives cash from an investor in exchange for a specified percentage of revenue from an existing product line or business segment. ASC 470-10-25 includes factors indicating the cash received from the investor should be classified as debt.
While the classification of the proceeds from the investor as debt or deferred income depends on the specific facts and circumstances of the transaction, the presence of any one of the following factors independently creates a rebuttable presumption that classification of the proceeds as debt is appropriate:
a. The transaction does not purport to be a sale (that is, the form of the transaction is debt).
b. The entity has significant continuing involvement in the generation of the cash flows due the investor (for example, active involvement in the generation of the operating revenues of a product line, subsidiary, or business segment).
c. The transaction is cancelable by either the entity or the investor through payment of a lump sum or other transfer of assets by the entity.
d. The investor's rate of return is implicitly or explicitly limited by the terms of the transaction.
e. Variations in the entity’s revenue or income underlying the transaction have only a trifling impact on the investor's rate of return.
f. The investor has any recourse to the entity relating to the payments due the investor.
Different guidance may apply if an investor is providing research and development funding to a reporting entity in return for future royalties resulting from the product being developed. Refer to PPE 8.3.4 for further discussion of funded research and development arrangements.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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