Revenue Recognition Standard for Licensing and Performance Obligation Amended by FASB

In order to offer further guidance on licensing and performance obligations, the Financial Accounting Standards Board has recently issued an update on accounting standards for amending the standards on revenue recognition. In 2014, the International Accounting Standards Board and FASB issued a converged revenue recognition standard after working for 10 years on harmonizing the International Financial Reporting Standards with the U.S GAAP. Nonetheless, the two boards that set standards also set a joint Transition Resource Group for evaluating issues that may arise for those companies that try to implement the new standards. These issues entail licensing and performance obligations which they referred to IASB and FASB for setting standards further.

The amendments were issued by FASB by last week and are in harmony with the changes made to the standard recently by IASB even if they are not similar. Last year, the two boards also got into an agreement to defer the standard’s effective date for one more year after receiving input from the Transition Resource Group. This will not proceed till the beginning of the annual reporting periods that start on 15^th Dec 2017 for the public companies and 15^th Dec 2018 for the private companies.

In the latest update of accounting standards, FASB said that the main principle is that an organization needs to recognize revenue in depicting transfer of goods or services promised to clients in an amount reflecting the consideration to which the organization expects in getting entitlement in exchange for services or goods.

In order to achieve that main purpose, the following steps are applicable to the entity:

1. Identifying contracts with consumers

2. Identifying performance obligations in a certain contract

3. Determination of the transaction price

4. Allocating the transaction price to the contract’s performance obligations

5. Recognizing revenue upon an entity satisfying a performance obligation

With respect to the guidance of license implementation, this amendment clarifies various matters, among them:

i) An organization’s promise of granting a license to a customer for intellectual property which possess a standalone functionality

ii) An organization’s promise to offer a customer with the privilege of using an organization’s intellectual property is content when the customer cab be able to use and get benefit from the license

iii) An organization’s offer in granting license to a customer to symbolic intellectual property which doesn’t have a major stand- alone functionality