Significant Accounting & Reporting Updates

May 2017

The FASB recently issued ASU 2016-20, Technical Corrections and Improvements to Revenue from Contracts with Customers (Topic 606), amending the new revenue recognition standard that it issued jointly with the IASB in 2014. The amendments do not change the core principles of the standard, but clarify certain narrow aspects of the standard including its scope, contract cost accounting, disclosures, illustrative examples and other matters.

With respect to contract cost accounting and disclosures:
  • The ASU clarifies that when performing impairment tests of capitalized contract costs, an entity should (a) consider expected contract renewals and extensions; and (b) include both the amount of consideration it already has received but has not recognized as revenue and the amount it expects to receive in the future.
  • The ASU requires that the provision for losses on construction-type and production-type contracts be determined at least at the contract level, but also allows an accounting policy election to determine the provision for losses at the performance obligation level.
  • Topic 606 requires an entity to disclose information about its remaining performance obligations, including the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of the end of the reporting period. Topic 606 also includes certain optional exemptions from that disclosure requirement. The ASU provides additional optional exemptions for variable consideration when the variable consideration is either a sales-based or usage-based royalty promised in exchange for a license of intellectual property, or is allocated entirely to a wholly unsatisfied performance obligation or a distinct unsatisfied portion of a series accounted for as a single performance obligation. However, the ASU expands the information to be disclosed when an entity applies one of the optional exemptions.
  • Topic 606 requires an entity to disclose revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods. Stakeholders indicated that the placement of the disclosure in the codification results in confusion about whether this disclosure applies only to performance obligations with corresponding contract balances or to all performance obligations. The amendments in this ASU clarify that the disclosure of revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods applies to all performance obligations and is not limited to performance obligations with corresponding contract balances.
The ASU becomes effective concurrently with ASU 2014-09 Revenue from Contracts with Customers (Topic 606).

The FASB recently issued ASU 2017-01, Clarifying the Definition of a Business, which is fundamental in the determination of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This determination is important given the diverging accounting models used for each type of transaction. The guidance is generally expected to result in fewer transactions qualifying as business combinations. The ASU becomes effective in 2018 for public entities, and 2019 for all other entities. The ASU is available here.

The FASB recently issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The ASU has staggered effective dates beginning in 2020 and is available here.

The ASU does not eliminate the private company accounting alternative provided in ASU 2014-02. Private companies still have the option to elect to amortize goodwill, and to test goodwill for impairment when a triggering event occurs using a simplified one-step test. Private companies that have already elected such a policy can voluntarily adopt the guidance in the ASU, no longer amortizing goodwill and reinstating an annual impairment test performed pursuant to the guidance in the ASU.

However, private companies that have elected to subsume certain intangible assets into goodwill under ASU 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council), and are therefore required to amortize goodwill, must demonstrate preferability prior to adopting ASU 2017-04. Paragraph 350-20-65-3 provides specific transition guidance applicable to private entities.

The FASB recently issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, to clarify the scope of Subtopic 610-20, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets, and to add guidance for partial sales of nonfinancial assets, including partial sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets qualified for sales treatment. Moving forward, the new standard reduces the number of potential accounting models that might apply and clarifies which model does apply in various circumstances. The ASU becomes effective in 2018 for public entities and 2019 for all other entities. The ASU is available here.

Read next article, "PErspective in Government Contracting"

Return to BDO Knows Government Contracting Newsletter - Spring 2017