Question

1. Gamebox, a seller of video-gaming systems, games and online gaming subscriptions, recently made available a coupon that allows its gaming subscription members to extend their subscriptions by three months at no charge. Subscribers need only to login to the website using their user name and password and provide the coupon code. Because this contract modification (from 12 months to 15 months) does not add distinct goods or services from the original contract, Gamebox need only make a cumulative catch-up adjustment.

True or False

2. Regarding ASC Topic 606 guidance for revenue recognition, which of the following statements is not true?

a. ASC Topic 606 is based on principles that are radically different from prior guidance.

b. The FASB was involved with deciding to create a single, unifying framework for revenue recognition.

c. A goal was to create a framework that could be applied to any industry and provide similar results for similar fact sets.

d. Prior to ASC Topic 606, U.S. GAAP related to revenue recognition was generally based on industry-specific guidance.

3. Which of the following statements is not true regarding transactions involving intellectual property?

a. A transaction involving intellectual property can represent a sale or a license.

b. The revenue recognition approach depends on whether the transaction is considered a sale or a license.

c. If a contract is considered a license, the firm must determine if the license is a distinct performance obligation.

d. If the customer’s right to use the intellectual property is not limited, the contract is considered a license.

4. Which of the following statements is not applicable to revenue recognition guidance under ASC Topic 606?

a. Disaggregated revenues are to be disclosed in a note to the financial statements.

b. The standard applies a minimum number of categories that must be provided.

c. Revenue may be disaggregated by geographic region.

d. Firms must disaggregate revenues into categories that depict how revenue is affected by economic factors.

5. Under ASC Topic 606, which of the following statements is not true regarding the use of practical expedients in applying the revenue recognition model?

a. One expedient is to use a portfolio approach to numerous contracts with similar characteristics.

b. A firm can file an application to use a practical expedient on a large contract if it is under severe time pressure.

c. A firm is not required to adjust the transaction price for a significant financing component if at the contract inception, the period between the payment and the transfer of goods or services is expected to be a year or less.

d. Determining the use of an expedient is dependent on whether there would not be a material difference in the financial statements from a more vigorous application of the standard.

Answer 1

1. False. Gamebox needs to recognize the revenue from subscriptions for 15 months period instead of 12 months. Similarly, the cost will have to be matched against the revenue in these 15 months instead of 12 months. Hence, making only a cumulative catching adjustment will be not enough.
2. ASC Topic 606 is based on principles that are radically different from prior guidelines is not true in relation to the ASA Topic 606 guidance. Thus, the first option is incorrect.
3. Option d is not true. If the customer’s right to use intellectual property is not limited, the contract is considered a sale and not a license.
4. Disaggregated revenues are to be disclosed in a note to the financial statements is not applicable to revenue recognition guidance under ASC Topic 606 complete disclosure has to be made in the financial statements.
5. Determining the use of an expedient is dependent on whether there would not be a material difference in the financial statements from a more vigorous application of the standard is not true under ASC Topic 606.