Which of the following transactions would likely involve multiple performance obligations?

1

The February 1999 AICPA publication “Audit Issues in Revenue Recognition” provides an overview of the authoritative accounting literature and auditing procedures for revenue recognition and identifies indicators of improper revenue recognition.

2

Concepts Statement 5, paragraphs 83-84; FASB ASC paragraph 605-10-25-1 (Revenue Recognition Topic); FASB ASC paragraph 605-10-25-3; FASB ASC paragraph 605-10-25-5. The citations provided herein are not intended to present the complete population of citations where a particular criterion is relevant. Rather, the citations are intended to provide the reader with additional reference material.

3

Concepts Statement 2, paragraph 63 states “Representational faithfulness is correspondence or agreement between a measure or description and the phenomenon it purports to represent.” The staff believes that evidence of an exchange arrangement must exist to determine if the accounting treatment represents faithfully the transaction. See also FASB ASC paragraph 985-605-25-3 (Software Topic). The use of the term “arrangement” in this SAB Topic is meant to identify the final understanding between the parties as to the specific nature and terms of the agreed-upon transaction.

4

Concepts Statement 5, paragraph 84(a), (b), and (d). Revenue should not be recognized until the seller has substantially accomplished what it must do pursuant to the terms of the arrangement, which usually occurs upon delivery or performance of the services.

5

Concepts Statement 5, paragraph 83(a); FASB ASC subparagraph 605-15-25-1(a); FASB ASC paragraph 985-605-25-3. The FASB ASC Master Glossary defines a “fixed fee” as a “fee required to be paid at a set amount that is not subject to refund or adjustment. A fixed fee includes amounts designated as minimum royalties.” FASB ASC paragraphs 985-605-25-30 through 985-605-25-40 discuss how to apply the fixed or determinable fee criterion in software transactions. The staff believes that the guidance in FASB ASC paragraphs 985-605-25-30 through 985-605-25-31 and 985-605-25-36 through 985-605-25-40 is appropriate for other sales transactions where authoritative guidance does not otherwise exist. The staff notes that FASB ASC paragraphs 985-605-25-33 through 985-605-25-35 specifically consider software transactions, however, the staff believes that guidance should be considered in other sales transactions in which the risk of technological obsolescence is high.

6

FASB ASC paragraph 605-10-25-3 through 605-10-25-5. See also Concepts Statement 5, paragraph 84(g) and FASB ASC paragraph 985-605-25-3.

7

See FASB ASC paragraph 605-25-15-2 through 605-25-15-3 for additional discussion.

9

FASB ASC subparagraph 605-15-25-1(b).

10

FASB ASC subparagraph 605-15-25-1(b). The arrangement may not specify that payment is contingent upon subsequent resale or consumption. However, if the seller has an established business practice permitting customers to defer payment beyond the specified due date(s) until the products are resold or consumed, then the staff believes that the seller’s right to receive cash representing the sales price is contingent.

11

FASB ASC subparagraph 605-15-25-1(c).

12

FASB ASC subparagraph 605-15-25-1(d).

13

FASB ASC subparagraph 605-15-25-1(e).

14

FASB ASC subparagraph 470-40-15-2(a) (Debt Topic). This paragraph provides examples of circumstances that meet this requirement. As discussed further therein, this condition is present if (a) a resale price guarantee exists, (b) the seller has an option to purchase the product, the economic effect of which compels the seller to purchase the product, or (c) the buyer has an option whereby it can require the seller to purchase the product.

15

FASB ASC subparagraph 470-40-15-2(b).

16

See FASB ASC paragraphs 985-605-25-28 through 985-605-25-29.

17

See In the Matter of Stewart Parness, AAER 108 (August 5, 1986); SEC v. Bollinger Industries, Inc., et al, LR 15093 (September 30, 1996); In the Matter of Laser Photonics, Inc., AAER 971 (September 30, 1997); In the Matter of Cypress Bioscience Inc., AAER 817 (September 19, 1996). See also Concepts Statement 5, paragraph 84(a). and FASB ASC paragraph 985-605-25-25.

18

Such requests typically should be set forth in writing by the buyer.

20

Such individuals should consider whether FASB ASC Subtopic 835-30, Interest — Imputation of Interest, pertaining to the need for discounting the related receivable, is applicable. FASB ASC subparagraph 835-30-15-3(a) indicates that the requirements of that Subtopic to record receivables at a discounted value are not intended to apply to “receivables and payables arising from transactions with customers or suppliers in the normal course of business which are due in customary trade terms not exceeding approximately one year” (emphasis added).

21

FASB ASC paragraph 985-605-25-25.

22

FASB ASC paragraph 985-605-25-21. Also, Concepts Statement 5, paragraph 83(b) states “revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.” If an arrangement expressly requires customer acceptance, the staff generally believes that customer acceptance should occur before the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, especially when the seller is obligated to perform additional steps.

23

See, for example, FASB ASC paragraphs 985-605-25-28 through 985-605-25-29.

24

FASB ASC paragraph 605-15-05-3.

25

FASB ASC subparagraph 605-15-25-1(f).

26

FASB ASC subparagraphs 605-15-25-3(c) and 605-15-25-3(d).

27

FASB ASC paragraph 460-10-25-5 (Guarantees Topic) and FASB ASC subparagraph 605-15-15-3(c).

28

FASB ASC paragraph 460-10-25-6.

29

This fact is provided as an assumption to facilitate an analysis of revenue recognition in this fact pattern. No interpretation of FASB ASC Subtopic 605-25 is intended.

30

Concepts Statement 5, paragraph 83(b) states “revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled the benefits represented by the revenues.”

31

FASB ASC paragraph 985-605-25-12.

32

See FASB ASC paragraphs 985-605-25-81 through 985-605-25-85 for analogous guidance.

34

Concepts Statement 5, paragraph 83(a) and FASB ASC subparagraph 605-15-25-1(b).

35

FASB ASC paragraph 926-605-25-1 ( Entertainment — Films Topic).

36

The staff believes that the vendor activities associated with the up-front fee, even if considered a deliverable to be evaluated under FASB ASC Subtopic 605-25, will rarely provide value to the customer on a standalone basis.

37

See Concepts Statement 5, footnote 51, for a description of the “earning process.”

38

In a similar situation, lenders may collect nonrefundable loan origination fees in connection with lending activities. The FASB concluded in FASB ASC Subtopic 310-20, Receivables — Nonrefundable Fees and Other Costs, that loan origination is not a separate revenue-producing activity of a lender, and therefore, those nonrefundable fees collected at the outset of the loan arrangement are not recognized as revenue upon receipt but are deferred and recognized over the life of the loan (FASB ASC paragraph 310-20-35-2).

39

The revenue recognition period should extend beyond the initial contractual period if the relationship with the customer is expected to extend beyond the initial term and the customer continues to benefit from the payment of the up-front fee (e.g., if subsequent renewals are priced at a bargain to the initial up-front fee).

40

A systematic method would be on a straight-line basis, unless evidence suggests that revenue is earned or obligations are fulfilled in a different pattern, in which case that pattern should be followed.

41

Concepts Statement 5, paragraph 84(d).

44

FASB ASC paragraph 605-20-25-4.

45

Note, however, the staff believes that this obligation qualifies as a guarantee within the scope of FASB ASC Topic 460, subject to a scope exception from the initial recognition and measurement provisions.

46

FASB ASC paragraph 985-605-25-37.

49

FASB ASC paragraph 405-20-40-1 (Liabilities Topic).

50

FASB ASC paragraph 605-15-15-3.

51

The staff will question further analogies to the guidance in FASB ASC Subtopic 605-15 for transactions expressly excluded from its scope.

52

Reliability is defined in Concepts Statement 2 as “the quality of information that assures that information is reasonably free from error and bias and faithfully represents what it purports to represent.” Paragraph 63 of Concepts Statement 5 reiterates the definition of reliability, requiring that “the information is representationally faithful, verifiable, and neutral.”

53

For example, if an estimate of the expected cancellation rate varies from the actual cancellation rate by 100% but the dollar amount of the error is immaterial to the consolidated financial statements, some would argue that the estimate could still be viewed as reliable. The staff disagrees with that argument.

54

The term “remote” is used here with the same definition as used in the FASB ASC Master Glossary.

55

FASB ASC paragraph 605-15-25-3 notes various factors that may impair the ability to make a reasonable estimate of returns, including the lack of sufficient historical experience. The staff typically expects that the historical experience be based on the particular registrant’s historical experience for a service and/or class of customer. In general, the staff typically expects a start-up company, a company introducing new services, or a company introducing services to a new class of customer to have at least two years of experience to be able to make reasonable and reliable estimates.

56

The staff believes deferred costs being amortized on a basis consistent with the deferred revenue should be similarly adjusted. Such an approach is generally consistent with the amortization methodology in FASB ASC paragraph 310-20-35-26.

57

FASB ASC paragraphs 310-20-25-2 and 605-20-25-4 both provide for the deferral of incremental direct costs associated with acquiring a revenue-producing contract. Even though the revenue discussed in this example is refundable, if a registrant meets the aforementioned criteria for revenue recognition over the membership period, the staff would analogize to this guidance. However, if neither a nonrefundable contract nor a reliable basis for estimating net cash inflows under refundable contracts exists to provide a basis for recovery of incremental direct costs, the staff believes that such costs should be expensed as incurred. See SAB Topic 13.A.3.f. Question 3.

58

These factors include “a) the susceptibility of the product to significant external factors, such as technological obsolescence or changes in demand, b) relatively long periods in which a particular product may be returned, c) absence of historical experience with similar types of sales of similar products, or inability to apply such experience because of changing circumstances, for example, changes in the selling enterprise’s marketing policies and relationships with its customers, and d) absence of a large volume of relatively homogeneous transactions.”

59

FASB ASC paragraph 605-15-25-1.

60

FASB ASC subparagraph 605-15-25-1(f).

61

Lessees should follow the guidance established in FASB ASC Subtopic 840-10.

62

Concepts Statement 5, paragraph 83(a).

63

Concepts Statement 5, paragraph 83(b).

64

See Regulation S-X, Article 5-03(1) and (2).

65

See Regulation S-K, Item 303 and FRR 36.

66

FRR 36; See also In the Matter of Caterpillar Inc., AAER 363 (March 31, 1992).

67

FASB ASC Subtopic 825-10, Financial Instruments - Overall.

68

Gains or losses from the sale of assets should be reported as “other general expenses” pursuant to Regulation S-X, Article 5-03(6). Any material item should be stated separately.

What are performance obligations?

Where there are potentially multiple performance obligations within a single contract if products or services are interdependent and interrelated they must be?

When multiple performance obligations exist in a contract they should be accounted for as a single performance obligation when *?

When Must multiple performance obligations in a revenue arrangement be accounted for separately?