I do not fully understand the FASB and IASB update to US GAAP revenue recognition regarding, Costs of Obtaining a Contract, specifically the section on "Services: Separately Priced Extended Warranty and Product Maintenance Contracts" (Section 605-20-25; FSAB Codification). Refer to slide 24 of attached pdf. Please explain in plain terminology (not terminology used by the accounting profession) what this update is and how it is compared to the current guidance?
The question is about explaining in simple words the following provision of the FASB standards:
"25-4 Costs that are directly related to the acquisition of a contract and that would have not been incurred but for the acquisition of that contract (incremental direct acquisition costs) shall be deferred and charged to expense in proportion to the revenue recognized. All other costs, such as costs of services performed under the contract, general and administrative expenses, advertising expenses, and costs associated with the negotiation of a contract that is not consummated, shall be charged to expense as incurred. "
That specific issue is related to the general issue of recognizing revenue from service contracts. The first question that may come to the mind of someone who is not familiar with accounting standards is: what is the relationship between said costs and revenue recognition? Indeed, there is an accounting principle called the matching principle that requires any cost to be matched to the revenue to which it ...
The solution gives an explanation using simple terminology and examples the update to US GAAP revenue recognition regarding, Costs of Obtaining a Contract, specifically the section on "Services: Separately Priced Extended Warranty and Product Maintenance Contracts" (Section 605-20-25; FSAB Codification).