The Crucial Role of Stakeholders and the TRG in Updating ASC 606: Case Study

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09: Revenue from Contracts with Customers, later codified as Accounting Standards Codification (ASC) 606. Shortly thereafter, the FASB and the International Accounting Standards Board (IASB) formed the Transition Resource Group (TRG) to facilitate discussion and to address important questions from various stakeholders. The FASB and the IASB (the Boards) created the TRG to receive feedback regarding how to improve and clarify the newly issued standard prior to the standard’s effective date. This article explains the formation of the TRG, describes the process that leads to standard updates, and follows a specific issue that started with a company’s question and resulted in an official update to ASC 606.

TRG Background

When the FASB and IASB collaborated on the joint revenue recognition project, they tried to anticipate the issues and concerns that would arise, but the Boards understood that some concerns would only surface as entities began the implementation process. To deal with these concerns, the Boards formed the TRG, comprised of auditors, financial statement preparers, and other professionals from a wide range of industries and organizations. Along with the TRG members, representatives from the Securities and Exchange Commistion (SEC), Public Company Accounting Oversight Board (PCAOB), American Institute of Certified Public Accountants (AICPA), and the Boards attend and actively participate in TRG meetings. As outlined on the FASB’s website, the TRG’s purpose is:

1. To solicit, analyze, and discuss stakeholder issues arising from implementation of the new guidance;
2. To inform the FASB and the IASB about those implementation issues, which will help the Boards determine what, if any, action will be needed to address those issues; and
3. To provide a forum for stakeholders to learn about the new guidance from others involved with implementation.

Although the TRG is prohibited from issuing authoritative guidance, entities with legitimate questions and concerns about applying ASC 606 are encouraged to submit their questions to the FASB staff. Some minor issues are treated like technical inquiries, and the FASB staff addresses these questions directly with the entity. For more broadly applicable submissions, particularly the more controversial questions or issues with substantial diversity in interpretation among stakeholders, the FASB staff drafts memos, participates in outreach, and makes other preparations for the next TRG discussion. To date, the TRG has discussed topics presented in over 50 staff memos based on submissions received from auditors, accounting advisory firms, for-profit companies, non-profit organizations, and other stakeholders. TRG discussions have clarified many issues, and the TRG’s conclusions often have a large impact on an entity’s interpretation and implementation of the new revenue standard. In fact, in March 2016, SEC Chief Accountant James Schnurr stated that SEC filers will need to justify any deviation from TRG discussions and conclusions. For further discussion on the implications of Mr. Schnurr’s statement, see the RevenueHub article titled, “SEC Makes TRG Discussions Authoritative.”

Issue Submission and Updating the Standard

Issues are generally identified when an entity begins implementation planning for ASC 606. During planning and implementation, an entity may identify a potential problem or concern. For example, a question may stem from vague language or phrasing within the standard, an unclear application of the standard to a specific transaction, or an issue not addressed by the Boards at all. Sometimes, an entity feels that the prescribed accounting under the proposed standard may not accurately represent the transfer of goods and services in a unique transaction. Using the existing framework within ASC 606 as a guide, the entity may develop various alternative accounting treatments for the given event and determine which treatment best represents the transfer of goods and services in the transaction. Often, the entity consults with industry peers and industry leaders on the issue. Together they work to agree on the accounting treatment that will hopefully become a best-practice within the industry. As part of this process, some companies will disseminate their views by authoring and publishing whitepapers or other documents.

If these positions gain traction and are widely supported, stakeholders submit issues to the TRG for further analysis and discussion, with the hope of having their whitepaper consulted and the arguments for a certain position integrated into the TRG’s opinion. Sometimes, major industry participants are split on a certain issue and multiple views may be submitted. Other times, smaller companies with challenging questions have few resources to develop a whitepaper. They simply submit the issues and basic viewpoints to the TRG, and the FASB staff conducts research and analysis internally to substantiate the various views.

If the issue is entity-specific, the TRG will most likely resolve the question privately with the entity. However, if the issue is pervasive and may apply to a broad subset of constituents, the Staff will research the issue further and add it to the TRG’s agenda for a future meeting. If the TRG discussions indicate that an entity should be able to resolve the issue based on existing guidance, the TRG will often clarify the correct interpretation so entities know to apply this interpretation to their circumstances. However, if the TRG discussions indicate that a solution or interpretation is unclear, the TRG will recommend that the Boards conduct further research, deliberate on the issue, and issue clarifying authoritative guidance in the form of an ASU (FASB), which is subsequently integrated into the Codification under ASC 606, or in the form of a formal amendment to IFRS 15 (IASB). Once updated, all entities are required to apply the updated authoritative guidance.

Going forward, the IASB has indicated they will no longer actively participate in TRG discussions.

Case Study: OEM and Automotive Industry Submission Results in ASU

The following real-world example illustrates this process. In the early stages of planning for ASC 606, Original Equipment Manufacturers (OEMs) and auto manufacturers identified a potential issue that would significantly increase the costs of ASC 606 implementation and continued compliance. Under ASC 605, a company could view some “marketing” costs, such as trial subscriptions to interactive navigation systems or free limited maintenance plans, as “perfunctory and inconsequential.” This allowed a company to exclude these activities from the deliverables in the transaction, and thus not allocate revenue to these small incentive activities. The costs associated with these activities were expensed when incurred. However, under ASU 2014-09 as originally issued, no such “perfunctory and inconsequential” language existed. OEMs and auto manufacturers were concerned that they would have to identify all such activities and costs and include them in the analysis of the contract, performance obligations, standalone selling price, transaction price allocation, and pattern of revenue recognition. Although they viewed many of these obligations as inconsequential, the firms thought the new standard allowed no flexibility to designate these obligations as inconsequential.

As the planning and implementation discussion continued, many of these OEMs collaborated to identify two alternative views for how to treat these costs and activities using the five-step revenue recognition model. They agreed that one of the two views was more “correct” than the other, meaning that one view more faithfully reflected the transfer of goods and services in the transaction. Briefly, that view supported allocating revenue to the perfunctory and inconsequential activities based on a standalone selling price (SSP) equal to its cost plus a very small margin. This revenue would then be recognized after the initial sale of the main manufactured good, either over time or at a point in time depending on the type of activity. This is a change from revenue recognition under ASC 605, where all the revenue from this same contract would be recognized at the time of sale. A few of the larger OEMs issued a joint whitepaper that explained the views and why the one should be adopted over the other. This whitepaper was not circulated publically, but solely among the interested stakeholders.

This whitepaper, along with likely many other publications and resources, reached the TRG in conjunction with at least a few submissions regarding performance obligation identification. The staff at the FASB and IASB wrote a memo summarizing the issues at hand and staff insights. The TRG publically discussed these issues at the TRG meeting on January 26, 2015. The staff then summarized the TRG discussion in a public memo (TRG Memo 25), the link for which can be found in the “Resources Consulted” section below.

The TRG members did not directly address the two views in the whitepaper, but instead focused on the fundamental question of whether such relatively small activities should be performance obligations to begin with. The TRG asserted “that any promised goods or services in a contract that are considered to be marketing incentives (and not deliverables) under current guidance [ASC 605] should be evaluated as potential performance obligations under the new revenue standard ASC 606” (TRG Memo 25, Paragraph 8). TRG members acknowledged that Basis for Conclusions (BC) paragraph 90 of the original ASU 2014-09 states that the Boards did not want to include the “perfunctory or inconsequential” language from the previous standard in order to accurately account for all promised goods and services within a contract, and thus all performance obligations for which the customer pays. However, BC90 makes mention of considering materiality when identifying performance obligations. While this concept of materiality as it relates to identifying performance obligations is found in the Basis for Conclusions, many entities either (a) chose not to consider materiality or (b) were unaware of the concept entirely because it wasn’t included in the authoritative standard.

The TRG members concluded: “The full paragraph, including the references to materiality, should be considered when assessing promised goods or services and identifying performance obligations.” This was not without reservation: “Some TRG members based in the United States noted that demonstrating whether promised goods or services are immaterial at the financial statement level might involve cost and complexity” (TRG Memo 25, Paragraph 11).

These recommendations and concerns were discussed at the joint meeting of the FASB and IASB on February 18, 2015. Two exposure drafts were subsequently released, each followed by a comment period, and finally ASU 2016-10 was released in May 2016. The updated authoritative guidance, as it relates to this issue, includes a new paragraph in the authoritative standard, ASC 606-10-25-16A (emphasis added):

An entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. If the revenue related to a performance obligation that includes goods or services that are immaterial in the context of the contract is recognized before those immaterial goods or services are transferred to the customer, then the related costs to transfer those goods or services shall be accrued.

Based on this new guidance, materiality will now be considered when identifying performance obligations, and materiality is determined at the contract level, not the financial statement level. This update in the language maintains the integrity of the underlying concept in the new standard while facilitating practical implementation and transition to ASC 606. This is just one of many examples of how helpful the TRG has been and will continue to be.

Conclusion

The TRG has become an essential resource for entities planning for and implementing ASC 606. The TRG discussions will help maintain consistent application of ASC 606 across entities and industries, and many entities are taking advantage of this resource by submitting implementation issues and questions to the FASB and TRG. The submissions that are publicly discussed at TRG meetings result in issue clarification, answers to questions, and in some cases an updated, clearer, and improved accounting standard.

Resources Consulted

• ASC 606
• FASB Joint Transition Resource Group for Revenue Recognition: “About the Group.” Accessed 30 April 2016.
• ASU 2014-09: "Revenue from Contracts with Customers."
• FASB TRG Memo 25: "January 2015 Meeting -- Summary of Issues Discussed and Next Steps." 30 March 2015.