Guidance proposes accounting method changes for FASB revenue recognition

The IRS is seeking comments on proposed procedures for requesting consent to make accounting method changes to reflect FASB’s new revenue recognition standards (Notice 2017-17). The proposed revenue procedure contained in the notice would govern changes in a method of accounting for recognizing income when the change is made for the same tax year for which the taxpayer adopts the new financial accounting revenue recognition standards and the change is made as a result of, or directly related to, the adoption of the new revenue recognition standards.

On May 28, 2014, FASB and the International Accounting Standards Board (IASB) announced new financial accounting standards for recognizing revenue (Accounting Standards Update (ASU) No. 2014-09, Revenue From Contracts With Customers (Topic 606), issued by FASB, and International Financial Reporting Standard 15, Revenue From Contracts With Customers, issued by the IASB).

Since that announcement, FASB has revised the new revenue recognition standards and provided guidance on implementing the new standards in certain situations. See FASB’s ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date; ASU No. 2016-10, Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-08, Revenue From Contracts With Customers (Topic 606): Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net); ASU No. 2016-12, Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts With Customers.

The new revenue recognition standards are effective for publicly traded entities, certain not-for-profit entities, and certain employee benefit plans for annual reporting periods beginning after Dec. 15, 2017. For all other entities, they are effective for annual reporting periods beginning after Dec. 15, 2018; taxpayers were allowed to voluntarily adopt the standards early for reporting periods beginning after Dec. 15, 2016.

Qualifying same-year method changes may include automatic changes for which existing guidance, including Rev. Procs. 2015-13 and 2016-29, already provides automatic change procedures. Taxpayers requesting consent for automatic changes for which existing guidance already provides automatic change procedures must use the existing automatic change procedures to make a request. For qualifying same-year method changes for which existing guidance does not provide automatic change procedures but that comply with Sec. 451 or other guidance regarding the tax year of inclusion of income, the taxpayer will be required to make the change under the proposed revenue procedure.

The proposed revenue procedure requires taxpayers to file Forms 3115, Application for Change in Accounting Method, check the box for line 1(b), and write “Rev. Proc. 2017-XX” (using the number of the revenue procedure when it is issued) followed by the applicable provision of the Code or regulations or the relevant guidance, and attach a brief description of the method change and why it satisfies the applicable income provision or guidance referenced. Multiple requests may be made on the same form. Taxpayers with one or more separate and distinct trade(s) or business(es) that meet a small business exception outlined in Section 5.02(2) of the proposed revenue procedure will be allowed to adopt the method change on a cutoff basis for each separate and distinct trade or business. Taxpayers must make Sec. 481 adjustments for the year of change for all other separate and distinct trades or businesses that do not meet the small business exception.

In connection with the notice, the IRS requests comments on all aspects of the proposed revenue procedure and on the specific method change issues that it had specifically identified in Notice 2015-40. The IRS also continues to seek comments on the specific issues identified in Notice 2015-40 regarding conformity between the new standards and the Code and the Regulations. Comments are due by July 24, 2017.