| Business, Basis of Presentation and Summary of Significant Accounting Policies | 1. Business, Basis of
Presentation and Summary of Significant Accounting
Policies Business
MagnaChip
Semiconductor Corporation (together with its subsidiaries, the
“Company”) is a Korea-based designer and manufacturer
of analog and mixed-signal semiconductor products for consumer,
computing, communication, industrial, automotive and Internet of
Things (“IoT”) applications. The Company provides
technology platforms for analog, mixed signal, power, high voltage,
non-volatile memory and Radio Frequency (“RF”)
applications. The Company’s business is comprised of two
operating segments: Foundry Services Group and Standard Products
Group. The Company’s Foundry Services Group provides
specialty analog and mixed-signal foundry services mainly for
fabless and Integrated Device Manufacturer (“IDM”)
semiconductor companies that primarily serve the consumer,
computing, communication, industrial, automotive and IoT
applications. The Company’s Standard Products Group is
comprised of two business lines: Display Solutions and Power
Solutions. The Company’s Display Solutions products provide
flat panel display solutions to major suppliers of large and small
flat panel displays and include sensor products for mobile
applications, and industrial applications and home appliances. The
Company’s Power Solutions products include discrete and
integrated circuit solutions for power management in consumer,
communication and industrial applications. Basis of
Presentation
The
consolidated financial statements are presented in accordance with
accounting principles generally accepted in the United States of
America (“US GAAP”).
Significant
accounting policies followed by the Company in the preparation of
the accompanying consolidated financial statements are summarized
below. Principles of
Consolidation
The
consolidated financial statements include the accounts of the
Company including its wholly-owned subsidiaries. All intercompany
transactions and balances are eliminated in
consolidation. Use of
Estimates
The preparation
of financial statements in accordance with US GAAP requires
management to make estimates and assumptions about future events.
These estimates and the underlying assumptions affect the amounts
of assets and liabilities reported, disclosures about contingent
assets and liabilities, and reported amounts of revenue and
expenses. Such estimates include the valuation of accounts
receivable, inventories, stock based compensation, property plant
and equipment, intangible assets, other long-lived assets,
long-term employee benefits, contingencies liabilities, estimated
future cash flows and other assumptions used in long-lived asset
impairment tests and calculation of income taxes and deferred tax
valuation allowances, and assumptions used in the calculation of
sales incentives, among others. Although these estimates and
assumptions are based on management’s best knowledge of
current events and actions that the Company may undertake in the
future, actual results may be significantly different from the
estimates. Changes in those estimates resulting from continuing
changes in the economic environment will be reflected in the
financial statements in future periods. Foreign Currency
Translation
The Company has
assessed in accordance with Accounting Standards Codification (ASC)
830, “Foreign Currency Matters”
(“ASC 830”), the functional currency of each of
its subsidiaries in Luxembourg and the Netherlands and has
designated the U.S. dollar to be their respective functional
currencies. The Korean Won is the functional currency for the
Company’s Korean subsidiary, which is the primary operating
subsidiary of the Company. The Company and its other subsidiaries
are utilizing their local currencies as their functional
currencies. The financial statements of the subsidiaries in
functional currencies other than the U.S. dollar are
translated into the U.S. dollar in accordance with ASC 830.
All the assets and liabilities are translated to the
U.S. dollar at the end-of-period exchange rates. Capital
accounts are determined to be of a permanent nature and are
therefore translated using historical exchange rates. Revenues and
expenses are translated using average exchange rates for the
respective periods. Foreign currency translation adjustments
arising from differences in exchange rates from period to period
are included in the foreign currency translation adjustment account
in accumulated other comprehensive income (loss) of
stockholders’ equity. Gains and losses due to transactions in
currencies other than the functional currency are included as a
component of other income, net in the statement of
operations. Cash and Cash
Equivalents
Cash
equivalents consist of highly liquid investments with an original
maturity date of three months or less when purchased. Accounts Receivable
Reserves
An allowance
for doubtful accounts is provided based on the aggregate estimated
uncollectability of the Company’s accounts receivable. The
Company also records an estimate for sales returns, included within
accounts receivable, net, based on the historical experience of the
amount of goods that will be returned and refunded or replaced. In
addition, the Company also includes in accounts receivable, an
allowance for additional products that may have to be provided,
free of charge, to compensate customers for products that do not
meet previously agreed yield criteria, the low yield compensation
reserve. Sales of Accounts
Receivable
The Company
accounts for transfers of financial assets under ASC 860,
“Transfers and Servicing,” as either sales or
financings. Transfers of financial assets that result in sales
accounting are those in which (1) the transfer legally
isolates the transferred assets from the transferor, (2) the
transferee has the right to pledge or exchange the transferred
assets and no condition both constraints the transferee’s
right to pledge or exchange the assets and provides more than a
trivial benefit to the transferor, and (3) the transferor does
not maintain effective control over the transferred assets. If the
transfer does not meet these criteria, the transfer is accounted
for as a financing. Financial assets that are treated as sales are
removed from the Company’s accounts with any realized gain or
loss reflected in earning during the period of sale. Inventories
Inventories are
stated at the lower of cost or market, using the average cost
method, which approximates the first in, first out method
(“FIFO”). If net realizable value is less than cost at
the balance sheet date, the carrying amount is reduced to the
realizable value, and the difference is recognized as a loss on
valuation of inventories within cost of sales. Inventory reserves
are established when conditions indicate that the net realizable
value is less than costs due to physical deterioration,
obsolescence, changes in price levels, or other causes based on
individual facts and circumstances. Reserves are also established
for excess inventory based on inventory levels in excess of six
months of projected demand for each specific product.
In addition, as
prescribed in ASC 330, “Inventory,” the cost of
inventories is determined based on the normal capacity of each
fabrication facility. In case the capacity utilization is lower
than a certain level that management believes to be normal, the
fixed overhead costs per production unit which exceeds those under
normal capacity are charged to cost of sales rather than
capitalized as inventories. Vendor
Rebates
The Company,
from time to time, entered into arrangements whereby rebates are
obtained from vendors when the Company achieves certain levels of
purchases. The vendor rebates are computed at an agreed upon amount
or percentage of purchase levels. As these vendor rebates are
impacted by actual and estimated purchases for the applicable
agreed upon period, the Company periodically assess the progress of
its purchase levels and revise the estimates when necessary. The
Company accounts for such rebates as a reduction of inventory until
the Company sells the product, at which time such rebates are
reflected as a reduction of cost of sales in its consolidated
statements of operations. Vendor rebates recorded as a reduction of
inventory were $359 thousand as of December 31, 2016 and as a
reduction of cost of sales were $4,044 thousand for the year ended
December 31, 2016. Property, Plant and
Equipment
Property, plant
and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets as set forth below.
Buildings 30 - 40 years
Building related
structures 10 - 20 years
Machinery and
equipment 10 - 12 years
Others 3 - 10 years
Routine
maintenance and repairs are charged to expense as incurred.
Expenditures that enhance the value or significantly extend the
useful lives of the related assets are capitalized. Impairment of
Long-Lived Assets
The Company
reviews property, plant and equipment and other long-lived assets
for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable in accordance with
ASC 360, “Property, Plant and Equipment”.
Recoverability is measured by comparing its carrying amount with
the future net undiscounted cash flows the assets are expected to
generate. If such assets are considered to be impaired, the
impairment is measured as the difference between the carrying
amount of the assets and the fair value of assets using the present
value of the future net cash flows generated by the respective
long-lived assets. Restructuring
Charges
The Company
recognizes restructuring charges in accordance with ASC 420,
“Exit or Disposal Cost Obligations”. Certain costs and
expenses related to exit or disposal activities are recorded as
restructuring charges when liabilities for those costs and expenses
are incurred. Lease
Transactions
The Company
accounts for lease transactions as either operating leases or
capital leases, depending on the terms of the underlying lease
agreements. Machinery and equipment acquired under capital lease
agreements are recorded at the lower of the present value of future
minimum lease payments and estimated fair value of leased property
and depreciated using the straight-line method over their estimated
useful lives. In addition, the aggregate lease payments are
recorded as capital lease obligations, net of unaccrued interest.
Interest is amortized over the lease period using the effective
interest rate method. Leases that do not qualify as capital leases
are classified as operating leases, and the related rental payments
are expensed on a straight-line basis over the shorter of the
estimated useful lives of the leased property and the lease
term. Intangible
Assets
Intangible
assets other than intellectual property include technology and
customer relationships which are amortized on a straight-line basis
over periods ranging from one to five years. Intellectual property
assets acquired represent rights under patents, trademarks and
property use rights and are amortized over their respective periods
of benefit, ranging up to ten years, on a straight-line
basis. Fair Value
Disclosures of Financial Instruments
The Company
follows ASC 820, “Fair Value Measurements and
Disclosures” (“ASC 820”) for measurement and
disclosures about fair value of its financial instruments.
ASC 820 establishes a framework for measuring fair value in
US GAAP, and expands disclosures about fair value
measurements. To increase consistency and comparability in fair
value measurements and related disclosures, ASC 820
establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad
levels. The fair value hierarchy gives the highest priority to
quoted prices (unadjusted) in active markets for identical assets
or liabilities and the lowest priority to unobservable inputs. The
three levels of fair value hierarchy defined by ASC 820
are:
Level 1—Inputs are unadjusted, quoted prices in
active markets for identical assets or liabilities at the
measurement date.
Level 2—Inputs (other than quoted market prices
included in Level 1) are either directly or indirectly
observable for the asset or liability through correlation with
market data at the measurement date and for the duration of the
instrument’s anticipated life.
Level 3—Inputs reflect management’s best
estimate of what market participants would use in pricing the asset
or liability at the measurement date. Consideration is given to the
risk inherent in the valuation technique and the risk inherent in
the inputs to the model. Valuation of instruments includes
unobservable inputs to the valuation methodology that are
significant to the measurement of fair value of assets or
liabilities.
As defined by
ASC 820, the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation
sale, which was further clarified as the price that would be
received to sell an asset or paid to transfer a liability
(“an exit price”) in an orderly transaction between
market participants at the measurement date. The carrying amounts
of the Company’s financial assets and liabilities, such as
cash and cash equivalents, accounts receivable, other receivables,
accounts payable and other accounts payable approximate their fair
values because of the short maturity of these
instruments. Accrued Severance
Benefits
The majority of
accrued severance benefits is for employees in the Company’s
Korean subsidiary, MagnaChip Semiconductor Ltd. Pursuant to the
Employee Retirement Benefit Security Act of Korea, eligible
employees and executive officers with one or more years of service
are entitled to severance benefits upon the termination of their
employment based on their length of service and rate of pay. As of
December 31, 2016, 98% of all employees of the Company were
eligible for severance benefits.
Accrued
severance benefits are funded through a group severance insurance
plan. The amounts funded under this insurance plan are classified
as a reduction of the accrued severance benefits. Subsequent
accruals are to be funded at the discretion of the
Company.
In accordance
with the National Pension Act of the Republic of Korea, a certain
portion of accrued severance benefits is deposited with the
National Pension Fund and deducted from the accrued severance
benefits. The contributed amount is paid to employees from the
National Pension Fund upon their retirement. Revenue
Recognition
Revenue is
recognized when there is persuasive evidence of an arrangement, the
price to the buyer is fixed or determinable, delivery has occurred
and collectability of the sales price is reasonably assured.
Revenue from the sale of products is recognized when title and risk
of loss transfers to the customer, which is generally when the
product is shipped to or accepted by the customer depending on the
terms of the arrangement.
A portion of
the Company’s sales are made through distributors for which
revenue recognition criteria are usually met when the product is
shipped to or accepted by the distributors, consistent with the
principles described above. However, the risk of loss may not pass
upon shipment of products to the distributor due to a variety of
reasons, including the nature of the business arrangement with the
distributor. For example, the financial condition of a distributor
may indicate that payments by the distributor to the Company are
contingent on resale of products to an end customer. In this
situation, the Company defers recognition of revenue and cost of
revenue on transactions with such distributor until the product has
been resold to the end customer.
The Company
recorded deferred revenue in the amount of $11,092 thousand as of
December 31, 2016 and $10,060 thousand as of December 31,
2015 as the Company received cash from certain customers and
distributors for the sale of products prior to risk of loss being
transferred based on the terms of the arrangement.
In accordance
with revenue recognition guidance, any tax assessed by a
governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer is
presented in the statements of operations on a net basis (excluded
from revenues).
The Company
provides a warranty, under which customers can return defective
products. The Company estimates the costs related to those
defective product returns and records them as a component of cost
of sales.
In addition,
the Company offers sales returns (other than those that relate to
defective products under warranty), yield provisions, cash
discounts for early payments and certain allowances to its
customers, including distributors. The Company records reserves for
those returns, discounts and allowances as a deduction from sales,
based on historical experience and other quantitative and
qualitative factors.
All amounts
billed to a customer related to shipping and handling are
classified as sales while all costs incurred by the Company for
shipping and handling are classified as selling, general and
administrative expenses. The amounts charged to selling, general
and administrative expenses were $1,631 thousand, $2,394 thousand,
and $3,386 thousand for the years ended December 31, 2016,
2015 and 2014, respectively.
Derivative Financial
Instruments
The Company
applies the provisions of ASC 815, “Derivatives and
Hedging” (“ASC 815”). This Statement
requires the recognition of all derivative instruments as either
assets or liabilities measured at fair value.
Under the
provisions of ASC 815, the Company may designate a derivative
instrument as hedging the exposure to variability in expected
future cash flows that are attributable to a particular risk (a
“cash flow hedge”) or hedging the exposure to changes
in the fair value of an asset or a liability (a “fair value
hedge”). Special accounting for qualifying hedges allows the
effective portion of a derivative instrument’s gains and
losses to offset related results on the hedged item in the
consolidated statements of operations and requires that a company
formally document, designate and assess the effectiveness of the
transactions that receive hedge accounting treatment. Both at the
inception of a hedge and on an ongoing basis, a hedge must be
expected to be highly effective in achieving offsetting changes in
cash flows or fair value attributable to the underlying risk being
hedged. If the Company determines that a derivative instrument is
no longer highly effective as a hedge, it discontinues hedge
accounting prospectively and future changes in the fair value of
the derivative are recognized in current earnings. The Company
assesses hedge effectiveness at the end of each quarter.
In accordance
with ASC 815, changes in the fair value of derivative
instruments that are cash flow hedges are recognized in accumulated
other comprehensive income (loss) and reclassified into earnings in
the period in which the hedged item affects earnings. Ineffective
portions of a derivative instrument’s change in fair value
are immediately recognized in earnings. Derivative instruments that
do not qualify, or cease to qualify, as hedges must be adjusted to
fair value and the adjustments are recorded through net income
(loss).
The cash flows
from derivative instruments receiving hedge accounting treatment
are classified in the same categories as the hedged items in the
consolidated statements of cash flows. Advertising
The Company
expenses advertising costs as incurred. Advertising expense was
approximately $149 thousand, $144 thousand and $155 thousand
for the years ended December 31, 2016, 2015 and 2014,
respectively. Product
Warranties
The Company
records, in other current liabilities, warranty liabilities for the
estimated costs that may be incurred under its basic limited
warranty. The standard limited warranty period is one to two years
for the majority of products. This warranty covers defective
products, and related liabilities are accrued when product revenues
are recognized. Factors that affect the Company’s warranty
liability include historical and anticipated rates of warranty
claims and repair or replacement costs per claim to satisfy the
Company’s warranty obligation. As these factors are impacted
by actual experience and future expectations, the Company
periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts when necessary. Research and
Development
Research and
development costs are expensed as incurred and include wafers,
masks, employee expenses, contractor fees, building costs,
utilities and administrative expenses. Licensed Patents and
Technologies
The Company has
entered into a number of royalty agreements to license patents and
technology used in the design of its products. The Company carries
two types of royalties: lump-sum and running basis. Lump-sum
royalties which require initial payments, usually paid in
installments, represent a non-refundable commitment, such that the
total present value of these payments is recorded as a prepaid
expense and a liability upon execution of the agreements and the
costs are amortized over the contract period using the
straight-line method and charged to research and development
expenses in the consolidated statements of operations.
Running
royalties are paid based on the revenue of related products sold by
the Company. Stock-Based
Compensation
The Company
follows the provisions of ASC 718, “Compensation-Stock
Compensation” (“ASC 718”). Under ASC 718,
stock-based compensation cost is measured at the grant date, based
on the fair value of the award, and is recognized as expense over
the requisite service period. As permitted under ASC 718, the
Company elected to recognize compensation expense for all options
with graded vesting based on the graded attribution
method.
The Company
uses the Black-Scholes option-pricing model to measure the
grant-date-fair-value of options. The Black-Scholes model requires
certain assumptions to determine an option’s fair value,
including expected term, risk free interest rate, expected
volatility and fair value of underlying common share. The expected
term of each option grant was based on employees’ expected
exercises and post-vesting employment termination behavior and the
risk free interest rate was based on the U.S. Treasury yield
curve for the period corresponding with the expected term at the
time of grant. The expected volatility was estimated using
historical volatility of share prices of similar public entities.
No dividends were assumed for this calculation of option
value. Earnings per
Share
In accordance
with ASC 260, “Earnings Per Share”, the Company
computes basic earnings per share by dividing net income (loss)
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per
share reflect the dilution of potential common stock outstanding
during the period. In determining the hypothetical shares
repurchased, the Company uses the average share price for the
period. In the case that earnings are negative, any potential
common stock equivalents would have the effect of being
anti-dilutive in the computation of net loss per share. Income
Taxes
The Company
accounts for income taxes in accordance with ASC 740,
“Income Taxes” (“ASC 740”). ASC 740
requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been
recognized in a company’s financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based upon the difference between the financial
statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Valuation allowances are
established when it is necessary to reduce deferred tax assets to
the amount expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred
tax assets and liabilities.
The Company
recognizes and measures uncertain tax positions taken or expected
to be taken in a tax return utilizing a two-step process. In the
first step, recognition, the Company determines whether it is
more-likely-than-not that a tax position will be sustained upon
examination, including resolution of any related appeals or
litigation processes, based on the technical merits of the
position. The second step addresses measurement of a tax position
that meets the more-likely-than-not criteria. The tax position is
measured at the largest amount of benefit that has a likelihood of
greater than 50 percent of being realized upon ultimate
settlement. Concentration of
Credit Risk
The Company
performs periodic credit evaluations of its customers’
financial condition and generally does not require collateral for
customers on accounts receivable. The Company maintains reserves
for potential credit losses, which are periodically
reviewed. Recent Accounting
Pronouncements
In August 2016,
the Financial Accounting Standards Board (“FASB”)
issued ASU 2016-15, Statement of Cash Flows (Topic 230),
Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 reduces the existing
diversity in practice in financial reporting across all industries
by clarifying certain existing principles in ASC 230, Statement of
Cash Flows, (“ASC 230”) including providing additional
guidance on how and what an entity should consider in determining
the classification of certain cash flows. In addition, in November
2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic
230), Restricted Cash (“ASU 2016-18”). ASU 2016-18
clarifies certain existing principles in ASC 230, including
providing additional guidance related to transfers between cash and
restricted cash and how entities present, in their statement of
cash flows, the cash receipts and cash payments that directly
affect the restricted cash accounts. These ASUs are effective for
fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Early adoption is permitted. The
Company does not expect the adoption of ASU 2016-15 to have a
material effect on the Company’s consolidated financial
statements. The adoption of ASU 2016-18 will modify the
Company’s current disclosures by reclassifying certain
balances within the consolidated statement of cash flows, but this
is not expected to have a material effect on the Company’s
consolidated financial statements.
In March 2016,
the FASB issued Accounting Standards Update No. 2016-09,
“Improvements to Employee Share-Based Payment
Accounting” (“ASU 2016-09”). ASU 2016-09
simplifies several aspects of the accounting for share-based
payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities and
classification on the statement of cash flows. ASU 2016-09 can be
applied either on a retrospective or prospective basis and is
effective for fiscal years beginning after December 15, 2016
and interim periods within those years. The Company will adopt ASU
2016-09 in the first quarter of 2017. The primary impact of
adoption will be the recognition of excess tax benefits within
income tax provision rather than within shareholders’ equity,
which the Company will adopt on a prospective basis. As the Company
does not have a significant amount of excess tax benefits from
share-based payment transactions, it does not expect the adoption
of ASU 2016-09 to have a material effect on its consolidated
financial statements.
In February
2016, the FASB issued Accounting Standards Update No. 2016-02,
“Leases (Topic 842)” (“ASU 2016-02”) in
order to increase transparency and comparability among
organizations by recognizing lease assets and lease liabilities on
the balance sheet for those leases classified as operating leases
under US GAAP. ASU 2016-02 requires that a lessee should recognize
a liability to make lease payments and a right-of-use asset
representing its right to use the underlying asset for the lease
term on the balance sheet. ASU 2016-02 is effective for fiscal
years beginning after December 15, 2018, including interim
periods within those reporting periods using a modified
retrospective approach and early adoption is permitted. The Company
is performing a preliminary review of its contracts that are
expected to be applied under the new guidance.
In November
2015, the Financial Accounting Standard Board (“FASB”)
issued Accounting Standards Update No. 2015-17, “Income
Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes” (“ASU 2015-17”). The amendments in
ASU 2015-17 require an entity to classify all deferred tax assets
and liabilities as noncurrent. ASU 2015-17 is effective for fiscal
years beginning after December 15, 2016 and interim periods
within those years. The Company will adopt ASU 2015-17 in the first
quarter of 2017. As the Company does not have a significant balance
of current deferred tax assets and liabilities, it believes that
the implementation of this guidance will have no material impact on
its consolidated financial statements.
In July 2015,
the FASB issued Accounting Standards Update No. 2015-11,
“Simplifying the Measurement of Inventory” (“ASU
2015-11”). Under this ASU, inventory will be measured at the
lower of cost and net realizable value, and options that currently
exist for market value will be eliminated. Net realizable value is
defined as the estimated selling prices in the ordinary course of
business, less reasonably predictable costs of completion,
disposal, and transportation. No other changes were made to the
current guidance on inventory measurement. ASU 2015-11 is effective
for fiscal years beginning after December 15, 2016 and interim
periods within those years. The Company will adopt ASU 2015-11 in
the first quarter of 2017 and believes that the implementation of
this guidance will have no material impact on its consolidated
financial statements.
In May 2014,
the FASB issued Accounting Standards Update No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”
(“ASU 2014-09”). ASU 2014-09 supersedes the revenue
recognition requirements in “Revenue Recognition (Topic
605)”, and requires entities to recognize revenue when it
transfers promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled to in exchange for those goods or services. ASU 2014-09 is
effective for annual reporting periods beginning after
December 15, 2016 (the “Original Effective Date”),
including interim periods within that reporting period, and can be
adopted either retrospectively to each prior period presented or as
a cumulative-effect adjustment as of the date of adoption, with
early application permitted as of the Original Effective Date. In
August 2015, the FASB issued ASU 2015-14 “Deferral of the
Effective Date,” which defers the required adoption date of
ASU 2014-09 by one year. As a result of the deferred effective
date, ASU 2014-09 will be effective for annual reporting periods
beginning after December 15, 2017, including interim periods
within that reporting period. In March 2016, the FASB issued
Accounting Standards Update No. 2016-08, “Revenue from
Contracts with Customers (Topic 606), Principal versus Agent
Considerations (Reporting Revenue Gross versus Net)”
(“ASU 2016-08”) clarifying the implementation guidance
on principal versus agent considerations. Specifically, an entity
is required to determine whether the nature of a promise is to
provide the specified good or service itself (that is, the entity
is a principal) or to arrange for the good or service to be
provided to the customer by the other party (that is, the entity is
an agent). The determination influences the timing and amount of
revenue recognition. In May 2016, the FASB issued Accounting
Standards Update No. 2016-12, “Revenue from Contracts
with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients” (“ASU 2016-12”) clarifying how to
assess collectibility, present sales tax, treat noncash
consideration, and account for completed and modified contracts at
the time of transition. In addition, ASU 2016-12 clarifies that an
entity retrospectively applying the guidance in Topic 606 is not
required to disclose the effect of the accounting change in the
period of adoption. The effective date and transition requirements
for ASU 2016-12, ASU 2016-08 and ASU 2014-09 ar |
