Research of Emerging Accounting Issues

Research of Emerging Accounting
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Research of Emerging Accounting Issues: Revenue Recognition in Contract Modifications of Intellectual Property Licenses
Preamble
On May 8, 2019, the Financial Accounting Standards Board (FASB) added the Emerging Issues Taskforce (EITF) No.19-B issue to address revenue recognition from changing terms in contracts involving intellectual property (IP) licenses (FASB, 1). The issue affects all entities obtaining revenues from licenses of functional intellectual property from modified contracts. Under the Accounting Standards Codification (ASC) 606, individuals and organizations that license functional property such as software providers often obtain revenues at some point in time instead of asking on the license terms. As the new revenue recognition standard, the ASC 606 affects all forms of businesses, including private, public, and non-profit entities entering contracts with clients to provide goods or services. The scope of the issue includes accounting for any contract modification where the prevailing rights of the contract term have been protracted and adding rights. The EITF also accounts for the revocation of the rights of licenses, including the conversion of terms of software licenses and software as a service or SaaS arrangements.
The impact that EITF Exerts upon FASB
EITF serves to minimize the need for FASB to expend time and efforts in addressing minor implementations, applications, and other emerging issues in accounting practice. Since its design, EITF has improved financial reporting through timely identification, dialogue, and determination of issues related to financial reporting based on current authoritative literature. EITF design came into existence following the 1982 report by the Financial Accounting Foundation (FAF) that identified serious efficiency issues and a need for timely guidance on implementation questions (FASB 1). Over the last decades, there has been a growing number of financial reports, a major change in the user focus on the information provided before filing 10-Q and 10-K forms, and increased emphasis on earning releases and investor packages given to users. Besides, the specialization and professionalization of investors have been a major development over the last two decades.
The above factors have increased the duration taken from issuing standards to effecting the changes to four-plus years to allow standard adoption. Years ago, businesses used to go through 8 or 9 books on EITF consensus to find information related to topics, but it only requires one to search for a topic and codification today. This has improved the effectiveness of finding resolutions to several emerging accounting issues. Nevertheless, some improvements such as evaluating the costs of implementing standards, user input evaluation, and readability can improve IETF's mission in collaboration with FASB (Bricker & Smith, 2). In general, there should be an increased focus on internal controls than financial reporting and improve ways users access information.
Analysis of Areas being addressed by the EITF
EITF No.19-B issue addresses two main areas in recognizing revenue from customer contracts. The first area is to account for contract changes where the terms for present rights have been extended and rights. Secondly, the EITF issue also seeks to account for any revocations of the rights of licenses, including the change of terms of software licenses to SaaS arrangements (FASB 1). The main purpose of this guidance is to provide a single framework for companies in all industries to apply when making changes to rights and obligations specified in their contracts with clients. In this regard, if a company and its clients agree to make changes to the rights and obligations or the amount the customer should pay, then there will be a contract modification.
A modification of contract requires a separate contract, a termination of the previous contract, and the creation of another contract without adjustments, or a cumulative catch-up adjustment to the revenue under the previous contract (PwC 3). In general, a new agreement made with an existing client in using software licenses as SaaS arrangements amounts to a modification of an existing contract even when these agreements have not been structured as modifications to the terms and conditions of the present contract. These modifications are addressed by EITF No.19-B that entities in industries should consider when making changes to existing contracts with their customers.
Impact of EITF wor...