Practical expedients and private company elections in Topic 606

In this lesson you will

List the recognition and measurement practical expedients and their conditions
Identify the policy elections added by ASU 2016-10 and ASU 2016-12
Apply the disclosure relief available to entities that are not public business entities
Evaluate the ASU 2021-02 franchisor pre-opening services expedient

Why track them

Expedients and elections save work, but each comes with conditions and most require disclosure. A client that uses one without meeting its condition has a misstatement, not a simplification. Keep a list in the permanent file of which expedients the client uses and the evidence each condition is met.

Recognition and measurement expedients

Expedient	Where	Condition
Portfolio approach	606-10-10-4	Effects of applying the guidance to a portfolio of similar contracts would not differ materially from applying it to each contract
No financing adjustment	606-10-32-18	At inception, period between transfer and payment expected to be one year or less
Expense costs to obtain	340-40-25-4	Amortization period of the asset would be one year or less
Right to invoice	606-10-55-18	Right to consideration corresponds directly with value to the customer of performance to date
Immaterial promises	606-10-25-16A	Promise is immaterial in the context of the contract; not a material right

The portfolio approach is used most for returns, rebates and similar estimates on large numbers of small contracts. Estimates must reflect the size and composition of the portfolio.

Policy elections

Shipping and handling after control transfers (606-10-25-18B), from ASU 2016-10: treat it as a fulfillment cost rather than a promised service. Accrue the cost if revenue is recognized before shipping.
Sales and similar taxes (606-10-32-2A), from ASU 2016-12: exclude from the transaction price all taxes imposed on and concurrent with a specific revenue transaction and collected from customers. Gross receipts taxes and taxes imposed in the inventory procurement process are outside the election.

Both elections are applied consistently and disclosed as accounting policies.

Disclosure relief for entities that are not PBEs

Topic 606 allows an entity that is not a public business entity, not a not-for-profit with traded or quoted securities (or a conduit bond obligor for them), and not an employee benefit plan that files with the SEC to elect out of several disclosures:

Disaggregation (606-10-50-7): may skip the quantitative disaggregation, but must at least disaggregate by timing of transfer (point in time versus over time) and give qualitative information about how economic factors affect revenue and cash flows.
Contract balances (606-10-50-11): may skip the detailed contract balance disclosures, but must still give opening and closing balances of receivables, contract assets and contract liabilities.
Remaining performance obligations (606-10-50-16): may skip entirely.
Significant judgments (606-10-50-21): may skip some, such as why the methods used for over-time obligations faithfully depict transfer and certain transaction price methods.
Use of the financing and costs-to-obtain expedients (606-10-50-23): may skip disclosing that fact.
Contract costs (340-40-50-4): may skip the 340-40 disclosures.

Lesson 12 covers the full disclosure set.

Franchisor pre-opening services

ASU 2021-02 added a practical expedient for franchisors that are not public business entities. They may account for pre-opening services as distinct from the franchise license if the services are consistent with those on a predefined list in the guidance, such as assistance with site selection, training and setup. They may also elect to treat those pre-opening services as a single performance obligation. The Board's stated aim was lower cost and fewer outcomes where the whole initial fee was spread over the license term without analysis. The expedient changes only how performance obligations are identified. Allocation still follows relative SSP, so the SSP of the pre-opening services caps the revenue recognized as they are performed (ASU 2021-02, BC20); the license share is recognized over the license term.

Transition expedients

ASU 2016-12 added transition relief for completed contracts and for modifications made before the earliest period presented. Those matter now only when restated comparatives or old contracts are reviewed.

Audit habit

For each expedient, test the condition, not just the policy note. A right-to-invoice expedient applied to a contract with a large upfront fee, or a one-year commission expedient applied where renewals carry no new commission, are common findings. The ASC 606 private company guide and the disclosure checklist list the related disclosures.

Worked example

Testing a client's expedient list

Ashford Fitness, a private franchisor, reports these policies: (1) right-to-invoice for personal training sold at $60 per session; (2) one-year expedient for commissions on 12-month memberships; (3) ASU 2021-02 pre-opening expedient; (4) no disaggregation beyond point in time versus over time.

(1) Sessions are billed at a fixed rate per session delivered. The right to consideration corresponds directly with value delivered. Condition met.

(2) Ashford pays a $100 commission on new memberships and the same $100 on each annual renewal. Because renewal commissions are commensurate, the asset for the initial commission relates only to the 12-month term. Condition met.

(3) Pre-opening services provided to franchisees are site selection, training and opening support, all consistent with the predefined list. Ashford is not a PBE. Expedient available. Ashford still allocates each $45,000 initial fee between the pre-opening services and the franchise license on relative SSP; the services' share is recognized as those services are performed, and the license share over the 10-year term.

(4) Ashford is not a PBE and discloses revenue by timing of transfer, which is the minimum under the 606-10-50-7 election. Acceptable.

Conclusion: all four policies are supported; document the evidence for each in the permanent file.

Self-check

Answer each question before you open the answer.

What condition must be met to use the portfolio approach?
Show answer
The entity reasonably expects that applying the guidance to the portfolio would not differ materially from applying it to the individual contracts or performance obligations in it (606-10-10-4).
Which taxes are excluded from the ASU 2016-12 sales tax election?
Show answer
Taxes assessed on the entity's total gross receipts and taxes imposed during the inventory procurement process.
A private company elects out of quantitative disaggregation. What must it still disclose?
Show answer
At a minimum, revenue disaggregated by timing of transfer (point in time versus over time) and qualitative information about how economic factors affect the nature, amount, timing and uncertainty of revenue and cash flows.
Who may use the ASU 2021-02 franchisor expedient?
Show answer
Franchisors within Topic 952 that are not public business entities, for pre-opening services consistent with the predefined list in the guidance.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error