November 15, 2011 Volume 18, Issue 37

Heads Up
In This Issue:
Background Key Provisions of the Proposed ASU Applying the Provisions of the Proposed ASU Required Disclosures Effective Date and Transition Other Notable Provisions of the Proposed ASU Potential Income Tax Implications

Revenue Enters the Home Stretch FASB Issues Revised Exposure Draft on Revenue Recognition
by Mark Crowley, Sean St. Germain, and Beth Young, Deloitte & Touche LLP

On November 14, 2011, the FASB and IASB (the boards) jointly issued their revised exposure draft (ED) Revenue From Contracts With Customers. The revised ED, released by the FASB as a proposed Accounting Standards Update (ASU), is the result of months of redeliberations of their June 2010 ED. (For a summary of the tentative decisions reached during the redeliberations, see Deloittes July 22, 2011, Heads Up.) The proposed ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and would supersede most current revenue recognition guidance. This Heads Up summarizes the key provisions of the proposed ASU and provides insight into some potential income tax implications. Editors Note: For insight into how the new proposal will affect specific industries, look for future publications in Deloittes Industry Spotlight series.

The proposed ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and would supersede most current revenue recognition guidance.

Background
The goal of the boards revenue recognition project, which began in 2002, is to clarify and converge U.S. GAAP and IFRS revenue recognition principles and develop guidance that would: Remove weaknesses from current revenue recognition requirements and make these requirements more consistent. Include a more robust framework for addressing revenue [recognition] issues. Enhance the comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. Provide users of financial statements with more useful information through improved disclosure requirements. Decrease the number of standards that entities must refer to, thereby simplifying the preparation of financial statements. The boards 2008 discussion paper Preliminary Views on Revenue Recognition in Contracts With Customers represented a significant milestone in the project. The project then picked up momentum in 2010 with the issuance of the June 2010 ED and has been one of the boards top priorities over the past several years. After receiving nearly 1,000 comment letters, conducting extensive outreach, and redeliberating almost every aspect of the June 2010 ED, the boards modified the proposed guidance and developed the revised ED.

Comments on the proposed ASU are due by March 13, 2012. The boards are inviting comments on all aspects of the proposal but are requesting specific feedback on (1) the criteria for when a good or service transfers over time, (2) the measurement and presentation of collectibility (i.e., the customers credit risk), (3) the reasonably assured revenue recognition constraint, (4) the scope of the onerous performance obligations test, (5) the proposed interim financial statement disclosure requirements, and (6) the application of certain provisions from the proposed guidance to the transfer of a nonfinancial asset that is not within the proposals scope (such as the sale of property, plant, and equipment). Editors Note: Question 6 of the revised EDs Questions for Respondents requests feedback on a proposal that would supersede the current accounting for some transfers of nonfinancial assets (e.g., under ASC 360-201). Specifically, the revised ED proposes that an entity apply the revenue recognition principles for the transfer of control (and the proposed measurement guidance) to the derecognition of (and the determination of gains or losses on) the transfer of a nonfinancial asset. Thus, an entity would need to use greater judgment in accounting for these types of transactions under the proposed ASU than it does under the current rules-based guidance in U.S. GAAP. The boards plan to consider the comment-letter feedback and perform extensive outreach activities before finalizing the revenue recognition project. A final standard is not expected until later in 2012, and the effective date will be no earlier than January 1, 2015 (with a minimum of a one-year deferral for nonpublic entities). Editors Note: One FASB member (Thomas Linsmeier) and one IASB member (Jan Engstrm) disagreed with the publication of the proposed ASU. Mr. Linsmeier believes that the proposal (1) provides exceptions that may permit revenue recognition that is inconsistent with the proposals core principle, (2) results in inconsistent accounting for economically similar circumstances (under both the proposed ASU and other ASC topics), and (3) fails to provide operable [and] auditable guidance. Mr. Engstrm is concerned about the extent of the proposed disclosure requirements, primarily those related to interim financial statement disclosures and the resulting amendments to IAS 34.2

The boards plan to consider the comment-letter feedback and perform extensive outreach activities before finalizing the revenue recognition project.

Key Provisions of the Proposed ASU

The proposed ASUs core principle is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The proposed ASU would apply to all contracts with customers except those that are within the scope of certain other Codification topics.3 It also clarifies that contracts with counterparties that are collaborators or partners, rather than customers (common in certain industries, such as pharmaceuticals and biotechnology, oil and gas, and health care), do not represent contracts with customers and are outside the scope of the proposed ASU.

2 3

For titles of FASB Accounting Standards Codification (ASC) references, see Deloittes Titles of Topics and Subtopics in the FASB Accounting Standards Codification. IAS 34, Interim Financial Reporting. The proposed ASU would not apply to contracts within the scope of ASC 840 (leases) and ASC 944 (insurance); contractual rights or obligations within the scope of ASC 310, 320, 405, 470, 815, 825, and 860 (primarily various types of financial instruments); contracts within the scope of ASC 460 (guarantees other than product warranties); and nonmonetary exchanges whose purpose is to facilitate a sale to another party.
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Editors Note: The FASB and IASB have also proposed guidance as part of their joint project on lease accounting. The proposed lease guidance provides indicators for entities to use in determining whether an asset used by a supplier in the delivery of a service is separable from the arrangement as a whole (e.g., whether the asset is sold or leased separately by the supplier and whether the customer can use the asset on its own or together with other resources available to the customer). In situations in which a supplier directs how an asset is used to perform services for a customer, the customer and supplier must assess whether the use of the asset is separable from the services provided to the customer (e.g., computer and server equipment with outsourced information technology services or a cargo ship with time charter services). If the asset is separable, the arrangement could contain a lease (and thus be outside the scope of the proposed revenue guidance). However, if the use of an asset is an inseparable part of the services requested by the customer, the entire arrangement would be within the scope of the proposed revenue guidance. For Deloittes most recent summary of the status of the lease project, see the August 17, 2011, Heads Up. In applying the provisions of the proposed ASU to contracts within its scope, an entity would: Identify the contract with a customer. Identify the separate performance obligations in the contract. Determine the transaction price.

Compared with current U.S. GAAP, the proposed ASU would require significantly expanded disclosures about revenue recognition.

Allocate the transaction price to the separate performance obligations in the contract. Recognize revenue when (or as) the entity satisfies a performance obligation. Compared with current U.S. GAAP, the proposed ASU would also require significantly expanded disclosures about revenue recognition. The rest of this Heads Up briefly summarizes (1) each of the steps that an entity would follow in recognizing revenue under the proposed ASU, (2) the proposed disclosure requirements, (3) the effective date and transition, (4) some of the proposals other notable provisions, and (5) some potential income tax implications of the proposal.

Applying the Provisions of the Proposed ASU

Identify the separate performance obligations (Step 2) Determine and allocate the transaction price (Steps 3 & 4) Recognize revenue when (or as) performance obligations are satisfied (Step 5)

Identify the contract with the customer (Step 1)

Identifying the Contract With the Customer

A contract can be written, verbal, or implied; however, the proposed ASU only applies to a contract if: The contract has commercial substance (that is, the risk, timing, or amount of the entitys future cash flows is expected to change as a result of the contract). The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. The entity can identify each partys rights regarding the goods or services to be transferred. The entity can identify the payment terms for the goods or services to be transferred.
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Although these provisions would most likely be applied to a Principle single contract, in certain circumstances an entity may need An entity shall to combine a group of contracts. The proposed ASU provides apply [the] proposed guidance on determining when an entity would combine guidance to each contracts entered into at or near the same time with the contract identified in same customer (or parties related to the customer). Further, a accordance with the contract modification would be accounted for as a separate standard. contract only if the modification results in (1) a separate performance obligation and (2) additional consideration that reflects the entitys stand-alone selling price of that separate performance obligation (when appropriate adjustments for the contracts particular circumstances are taken into account). Otherwise, an entity would evaluate the modified contract and allocate the remaining transaction price to the remaining performance obligations (on a prospective basis) and update its measure of progress toward completion for performance obligations that are satisfied over time (which could result in a cumulative catch-up). However, if the modification to the contract is only a change in the transaction price, the modified transaction price would be reallocated to all performance obligations in the contract (see Allocating the Transaction Price section below). Editors Note: Under the proposed ASU, a collectibility threshold is not explicitly required for revenue recognition (which some have noted as a change from current U.S. GAAP). However, in the proposed ASUs Basis for Conclusions, the boards clarified that they decided not to include a separate recognition threshold for collectibility because (1) a reasonable expectation of collectibility is implicit in the definition of a contract (i.e., for a contract to have commercial substance, an entity would have a reasonable expectation of collectibility) and (2) the new requirement to present losses for collectibility as a separate line item next to gross revenue (i.e., as contra revenue) helps users compare those losses with revenue recognized.

The proposed ASU provides guidance on determining when an entity would combine contracts entered into at or near the same time with the same customer (or parties related to the customer).

Identifying the Separate Performance Obligations

Although the proposed ASU does not define goods or services, it provides a few examples, including goods produced (purchased) for sale (resale), granting a license, and performing contractual acts (to name a few). The following diagram illustrates the process in the proposed ASU for identifying the separate performance obligations in a contract.

Principle An entity shall evaluate the goods or services promised in a contract and shall identify which goods or services (or which bundles of goods or services) are distinct and, hence, that the entity shall account for as a separate performance obligation.

Are there multiple goods or services promised in the contract?

Yes

Do the promised goods or services transfer at the same time?

No

Is the good or service distinct?

No No Treat as a single performance obligation. Yes Account for a distinct good or service as a separate performance obligation. Yes Combine goods or services until two or more are distinct and account for as a separate perfornace obligation.

A bundle of distinct goods or services is required to be treated as a single performance obligation when certain criteria are met.
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A good or service is distinct if the entity regularly sells it separately or the customer can benefit from the good or service on its own or together with resources that are readily available. Further, the boards decided that an entity would account for a bundle of goods or services as a single performance obligation if the goods or services are (1) highly interrelated and the entity provides a significant service of integrating them into a combined item or items and (2) significantly modified or customized to fulfill the contract. Editors Note: Under the proposed guidance, an entity may need to use significant judgment when determining whether the goods or services are highly interrelated and significantly modified or customized. The proposed ASU includes examples to illustrate this guidance; however, further clarification may be needed to ensure consistent application.

Determining the Transaction Price

The boards tentatively decided that adjustments for collectibility would be presented in the income statement as a separate line item next to gross revenue (i.e., as contra revenue).

Principle The proposed ASU requires an entity to determine the The transaction price is the amount of consideration (the transaction price) it expects amount of consideration to be entitled to in exchange for the promised goods or to which an entity expects services in the contract. The transaction price can be a to be entitled in exchange fixed amount or can vary because of discounts, rebates, refunds, credits, incentives, performance bonuses/penalties, for transferring promised goods or services to a contingencies, price concessions, or other similar items. customer. Under the proposed guidance, an entity would estimate the transaction price by considering the effect of variable consideration, the time value of money (if significant), noncash consideration, and consideration payable to the customer. A transaction price that is subject to variability would be estimated by using a probability-weighted approach (expected value) or an approach based on the single most likely amount (whichever is more predictive). Under the proposed ASU, an entity would continue applying the measurement and recognition guidance in ASC 310 to consideration the entity deems uncollectible. However, the boards tentatively decided that adjustments for collectibility would be presented in the income statement as a separate line item next to gross revenue (i.e., as contra revenue). Editors Note: The adjustment to revenue for collectibility, as proposed in the ASU, refers to a customers credit risk that is, the risk that an entity will be unable to collect from the customer the amount of consideration to which the entity is entitled in accordance with the contract. Entities may need to evaluate the type of adjustments currently being recorded within the allowance for doubtful accounts as bad-debt expense (or similar accounts) to ensure that the adjustments recorded for collectibility upon adoption of the proposed guidance are consistent with this principle.

Allocating the Transaction Price

Principle Under the proposed ASU, when a contract For a contract that has more contains more than one separate performance than one separate performance obligation, an entity would generally be required obligation, an entity shall allocate to allocate contract consideration to each separate the transaction price to each performance obligation on a relative stand-alone separate performance obligation in selling price basis. The best evidence of standan amount that depicts the amount alone selling price is the price at which the good of consideration to which the entity or service is sold separately by the entity. If the expects to be entitled in exchange good or service is not sold separately, an entity is for satisfying each separate required to estimate it by using an approach that performance obligation. maximizes the use of observable inputs. Acceptable estimation methods may include, but are not limited to, expected cost plus a margin, adjusted market assessment, or residual (when the selling price is highly variable or uncertain). If certain conditions are met, there would be limited exceptions to this general allocation requirement.
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Except for contract modifications discussed in the Identifying the Contract With the Customer section above, changes in the transaction price after contract inception would be allocated to all performance obligations in the contract (unless an entity meets certain criteria that allow for specific allocation to one or more performance obligations). Editors Note: The proposed ASU allows entities to use a residual approach in allocating contract consideration but only when the stand-alone selling price of a good or service is highly variable or uncertain. An entity would need to use judgment in determining whether the stand-alone selling price of a particular good or service meets this criterion. Entities may need to develop policies and work closely with their accounting advisers to ensure that they have applied the guidance, and exercised judgment, consistently in similar situations. For example, some may conclude that the use of the residual method would be appropriate whenever an entity is required to estimate a selling price because such a price would be deemed uncertain. However, others may conclude that the use of the residual method was intended to be limited and would only be used when there are difficulties in estimating a selling price.

When a performance obligation is deemed to be satisfied over time, an entity recognizes revenue by measuring the obligations progress toward completion in a manner that best depicts the transfer of goods or services to the customer.

Recognizing Revenue When (or as) Performance Obligations Are Satisfied

The boards defined control in the context of this principle as the ability to direct the use of and obtain substantially all the remaining Principle benefits from the asset underlying the good or service. Under the proposed ASU, an entity first An entity shall recognize revenue demonstrates whether control of a good or service when (or as) the entity satisfies is transferred over time. a performance obligation by When the control of a good or service (and therefore satisfaction of the related performance obligation) is transferred over time, an entity would be required to recognize revenue over time as the goods or services are transferred to the customer. Under the proposed ASU, a performance obligation is considered to be transferred over time when at least one of the following criteria is met: transferring a promised good or service (that is, an asset) to a customer . . . when (or as) the customer obtains control of that asset . . . [in] the amount to which the entity is reasonably assured to be entitled.

(a) The entitys performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced. . . . (b) The entitys performance does not create an asset with an alternative use to the entity . . . and at least one of the following criteria is met: (i) The customer simultaneously receives and consumes the benefits of the entitys performance as the entity performs. (ii) Another entity would not need to substantially reperform the work the entity has completed to date if that other entity were to fulfill the remaining obligation to the customer. . . . (iii) The entity has a right to payment for performance completed to date, and it expects to fulfill the contract as promised.

When a performance obligation is deemed to be satisfied over time, an entity recognizes revenue by measuring the obligations progress toward completion in a manner that best depicts the transfer of goods or services to the customer. The proposed ASU provides specific guidance on the use and application of an output method and an input method for measuring progress toward completion. The boards added that revenue may only be recognized over time when an entity can reasonably measure the progress toward completion. When an entity is not able to reasonably determine the amount of profit but it is reasonably assured that a loss will not be incurred, revenue should be recognized to the extent that costs are incurred (i.e., a contract with a zero profit margin).

If a performance obligation does not meet the criteria to be satisfied over time, it is satisfied at a point in time. The proposed ASU states that indicators that control of an asset has been transferred to a customer at a point in time include, but are not limited to, the following: The entity has a present right to payment for the asset. The customer has legal title to the asset. The entity has transferred physical possession of the asset. The customer has the significant risks and rewards of ownership of the asset. The customer has accepted the asset. Finally, in response to concerns about recognizing contingent revenue without constraints, the boards tentatively decided to limit the cumulative amount of revenue recognized for a satisfied performance obligation to the amount to which the entity was reasonably assured to be entitled. That is, if the transaction price is variable, revenue would only be recognized to the extent that the entity is reasonably assured to be entitled to the amount allocated to the satisfied performance obligation. The proposed ASU provides specific criteria that must be met for an entity to conclude that it is reasonably assured to be entitled to an amount. Editors Note: Under current U.S. GAAP, the amount of revenue recognized is generally limited to the amount that is not contingent on a future event. Under the proposed guidance, the amount of revenue recognized would be limited to the amount to which the entity is reasonably assured to be entitled. An entity must use considerable judgment in determining whether it is reasonably assured to be entitled to an amount; however, such a constraint should be less restrictive than that under current U.S. GAAP, which may allow for earlier recognition of revenue in certain circumstances.

The boards tentatively decided to limit the cumulative amount of revenue recognized for a satisfied performance obligation to the amount to which the entity was reasonably assured to be entitled.

Required Disclosures
The proposed ASU requires entities to disclose both quantitative and qualitative information about (1) the amount, timing, and uncertainty of revenue (and related cash flows) from contracts with customers; (2) the judgment, and changes in judgment, exercised in applying the proposals provisions; and (3) assets recognized from costs to obtain or fulfill a contract with a customer. The required disclosures, which are significantly expanded compared with those in existing revenue standards, include: A disaggregation of revenue into the primary categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. A reconciliation of the beginning and ending balance of contract assets and liabilities. Certain information about performance obligations (e.g., types of goods or services, significant payment terms, typical timing of satisfying obligations, and other provisions). Information about onerous performance obligations (nature and amount of such performance obligations, the reasons they became onerous, the expected timing to satisfy the liability, and reconciliation of onerous balances). A description of the significant judgments, and changes in those judgments, that affect the amount and timing of revenue recognition. Information about the methods, inputs, and assumptions used to determine the transaction price and allocate amounts to performance obligations. Information about assets recognized from costs to obtain or fulfill a contract, including a reconciliation of the beginning and ending assets (by main category of asset).

There are certain exceptions to the disclosure requirements for nonpublic entities. As noted in the Background section above, the boards have requested feedback on their tentative decision to require entities to provide certain of the proposed ASUs disclosures in their interim financial statements.

Effective Date and Transition

The proposed ASU would be applied retrospectively in accordance with ASC 250, with certain optional practical expedients that can be employed during the retrospective application. The final standards effective date will not be earlier than annual reporting periods beginning on or after January 1, 2015, for public entities, with a minimum of a one-year deferral for nonpublic entities. Early application would not be permitted for the FASBs proposed ASU; however, the IASBs proposal would permit early application. Editors Note: The proposed ASU does not provide nonpublic entities with any relief from the proposed transition requirements. However, the boards noted that nonpublic entities are not specifically required by U.S. GAAP to present multiyear financial statements. This may allow certain entities to avoid some of the complexity of applying the transition guidance to multiple periods.

Other Notable Provisions of the Proposed ASU

The final standards effective date will not be earlier than annual reporting periods beginning on or after January 1, 2015, for public entities, with a minimum of a one-year deferral for nonpublic entities.

In addition to the core principles discussed above, the proposed ASU provides guidance on several other important topics, including the accounting for certain revenue-related costs. Some of the more significant provisions are highlighted below.

Onerous Performance Obligations

Entities that satisfy separate performance obligations in a contract over a period greater than one year are required to determine whether the lowest costs to satisfy (or settle) those obligations are greater than the transaction price allocated to them. If so, entities would be required to recognize a liability and corresponding expense for the expected loss. This loss would be updated as of each reporting date and would be reflected in the income statement. Editors Note: Many respondents to the June 2010 ED were concerned about the onerous performance obligations test, since entities were required to perform the test at the level of each separate performance obligation. These respondents noted that this requirement could have resulted in accounting that was inconsistent with the economics of the contract (e.g., recognition of an onerous loss at the performance obligation level when the overall contract is profitable). During redeliberations, the boards tentatively decided that the unit of account for the onerous test would be at the contract level (i.e., the remaining performance obligations in the contract). However, because of the decision to limit the scope of the test to performance obligations satisfied over a period greater than one year, the revised ED proposes that the unit of account be returned to the level of each separate performance obligation.

Contract Costs
The proposed model contains specific criteria for capitalizing certain costs associated with obtaining and fulfilling a contract. As a practical expedient, qualifying costs to obtain a contract can be expensed as incurred when the expected amortization period is one year or less. Amortization of capitalized costs would occur in a manner consistent with the pattern of transfer of the goods or services to which the asset relates and, in certain circumstances, may extend beyond the original contract term with the customer (e.g., future anticipated contracts, expected renewal periods). Editors Note: The proposed ASU may make the accounting for costs to obtain and fulfill a contract more consistent throughout U.S. GAAP. However, depending on how an entity currently accounts for revenue-related costs, the proposed guidance may also result in significant changes in practice. Entities may want to closely evaluate the impact of such guidance on their current accounting policies and provide feedback on the proposed ASU if they have concerns with the proposed guidance.
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Right of Return
During deliberations, the boards considered whether a right of return should represent a separate performance obligation (a stand-ready obligation to accept a return during a specified period) and ultimately decided that such rights should not be accounted for as a separate performance obligation. However, the proposed guidance indicates that revenue should not be recognized for goods or services that are expected to be returned (or refunded).

Warranties
The proposed ASU allows entities to continue to use a cost accrual model to account for warranty obligations (in accordance with ASC 460), but only for warranties that assure that the good or service complies with agreed-upon specifications. To the extent that a warranty provides a service beyond assuring that the good or service complies with agreed-upon specifications, it would be accounted for as a separate performance obligation. Further, if the customer has the option to purchase the warranty separately, it would also be accounted for as a separate performance obligation. Product liabilities, such as compensation paid by an entity for harm or damage caused by its product, would not represent a separate performance obligation in the contract and would continue to be accounted for in accordance with the existing literature on loss contingencies in ASC 450.

Customer Options for Additional Goods or Services

Under the proposed guidance, an option provided to a customer to acquire additional goods or services would represent a separate performance obligation if it provides a material right to the customer that it otherwise would not have received without entering into the contract. If an option is deemed to be a separate performance obligation, an entity would allocate a portion of the transaction price to the option and recognize revenue when control of the goods or services underlying the option is transferred to the customer or when the option expires.

The proposed ASU includes numerous examples illustrating application of many of its provisions.

Customers Unexercised Rights

Customer contracts may include a nonrefundable prepayment for the right to receive goods or services in the future (e.g., prepaid gift cards). In certain instances, a customer may not exercise all of its rights (which results in breakage on the contract liability). The proposed guidance allows for the recognition of the expected breakage amount in proportion to the pattern of rights exercised by the customer but only when an entity is reasonably assured of such an amount. Otherwise, the breakage amount would not be recognized until it is remote that the rights will not be exercised by the customer.

Other Topics
Other topics addressed in the proposed ASU that are not covered in this section include presentation of contract assets and liabilities, principal-versus-agent considerations, licensing and rights to use, nonrefundable up-front fees, repurchase agreements, consignment arrangements, bill-and-hold arrangements, and customer acceptance. The proposed ASU also includes numerous examples illustrating application of many of its provisions. Editors Note: The boards decided to eliminate the original EDs guidance on licenses and rights to use an entitys intellectual property (which was a lease-type model). Accordingly, sales of licenses and rights to use intellectual property will be subject to the projects overall revenue recognition model.

Potential Income Tax Implications

Federal income tax law contains specific rules on certain types of revenue recognition, such as income from long-term contracts and advance payments for goods and services. However, those rules often overlap with a taxpayers financial reporting records; in those circumstances, the taxpayer simply follows the tax revenue recognition method it uses in maintaining its books and records (e.g., cash basis, U.S. GAAP, IFRSs). The Internal Revenue Code does not require that a taxpayer maintain its accounting records on a specific method of accounting, such as U.S. GAAP, to determine its taxable income. The proposed guidance may change the amount and timing of revenue recognition for entities that maintain their books and records under U.S. GAAP or IFRSs; these changes may, in turn, affect taxable income. For example, under federal tax principles, the general rule is that income is recognized no later than when received. There are a few limited exceptions that allow a taxpayer to defer revenue recognition (one or two years or longer) for advance payments. One exception allows a taxpayer to defer the recognition of revenue for advance payments for one year to the extent that the revenue is deferred under the taxpayers applicable books and records. The proposed ASU may affect the timing and measurement of revenue for contracts with advance payments and thus may accelerate revenue recognition for contracts with multiple performance obligations, which could have an impact on current taxable income. In addition, a few of the concepts in the proposed ASU may give rise to or affect the measurement of certain temporary differences. These concepts may include: Revenue recognition upon the transfer of control that results in changes in book revenue recognition (and contract assets and contract liabilities). Potential changes in the timing of revenue in contracts that include variable or contingent consideration or a significant financing component. Capitalization of certain costs incurred to obtain or fulfill a contract, some of which currently may be deductible for tax purposes. Timing of loss deductions related to onerous performance obligations. The tax implications associated with implementing the proposed ASU will be based on an entitys specific facts and circumstances. Thus, it will be important for tax professionals to understand the detailed financial reporting implications of the proposed ASU so that they can analyze the tax ramifications and facilitate the selection of any alternative tax accounting methods that may be available. Before a taxpayer can select a new tax accounting method, however, the taxpayer must obtain consent from the commissioner. In addition to selecting alternative tax accounting methods, if a taxpayer is following its book method and the book method changes, the taxpayer may have to secure the commissioners consent to continue to follow the book method. A taxpayer that does not secure consent to change its tax accounting method may have to maintain its current tax accounting method, which could require additional record keeping. There are generally two procedures a taxpayer performs to gain consent from the commissioner to change its tax accounting method. Certain tax accounting method changes require the IRS to review an application before granting consent. Other tax accounting method changes provide automatic consent if the taxpayer complies with certain terms and conditions. The following are a few questions for entities to consider in planning for the transition: Will potential changes to the timing or measurement of U.S. GAAP or IFRS revenue or expenses affect the timing of revenue or expense recognition for income tax purposes? If the financial statement modifications in revenue recognition methods under the proposed ASU are favorable and permissible for tax purposes, is there a change in method of tax accounting that the taxing authorities might need to approve?

The proposed guidance may change the amount and timing of revenue recognition for entities that maintain their books and records under U.S. GAAP or IFRSs; these changes may, in turn, affect taxable income.

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 If the financial statement modifications are unfavorable or impermissible, will the entity need to maintain certain legacy U.S. GAAP or IFRS accounting records (i.e., records in accordance with the revenue recognition guidance that will be superseded by the proposed ASU)? When the amount of revenue in a contract with multiple performance obligations is allocated to the separate performance obligations under the proposed ASU, are there specific contractual terms that may result in a difference between the allocation for tax and book accounting purposes? To the extent that tax accounting methods differ from book accounting methods, are there any new data or system requirements that need to be taken into consideration? Are there any cash tax implications in foreign controlled entities that, for example, maintain statutory accounting records under IFRSs?

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