• Discussed with National Standard Setters May 2002
• Discussed and added to the Agenda at the June 2002 IASB Meeting
• Discussed at October 2002 IASB Meeting
• Discussed at November 2002 IASB Meeting
• Discussed at December 2002 IASB Meeting
• Discussed at February 2003 IASB Meeting
• Discussed at May 2003 IASB Meeting
• Discussed at June 2003 IASB Meeting
• Discussed at July 2003 IASB Meeting
• Discussed at September 2003 IASB Meeting
• Discussed at October 2003 IASB Meeting
• Discussed at December 2003 IASB Meeting
• Discussed at January 2004 IASB Meeting
• Discussed at February 2004 IASB Meeting
• Discussed at March 2004 IASB Meeting
• Discussed at April 2004 IASB Meeting
• Discussed at May 2004 IASB Meeting
• Discussed at June 2004 IASB Meeting
• Discussed at July 2004 IASB Meeting
• Discussed at October 2004 IASB Meeting
• Discussed at December 2004 IASB Meeting
• Discussed at June 2005 IASB Meeting
• Discussed at October 2005 IASB Meeting
• Discussed at October 2005 Joint IASB-FASB Meeting
• Discussed at February 2006 IASB Meeting
• Discussed at March 2006 IASB Meeting
• Discussed at April 2006 IASB Meeting
• Discussed at April 2006 Joint IASB-FASB Meeting
• Discussed at July 2006 IASB Meeting
• Discussed at September 2006 IASB Meeting
• Discussed at October 2006 IASB Meeting
• Discussed at November 2007 IASB Meeting
• Discussed at December 2007 IASB Meeting
• Discussed at January 2008 IASB Meeting
• Discussed at April 2008 IASB Meeting
• Discussed at April 2008 Joint IASB-FASB Meeting
• Discussed at May 2008 IASB Meeting
• Discussed at July 2008 IASB Meeting
• Discussed at September 2008 IASB Meeting
• 19 December 2008 Discussion Paper issued
  19 June 2009 comment deadline on Discussion Paper
• Discussed at March 2009 IASB Meeting
• Discussed at May 2009 IASB Meeting
• Discussed at June 2009 IASB Meeting
• Discussed at July 2009 IASB Meeting
• Discussed at September 2009 IASB Meeting
• Discussed at October 2009 Joint IASB-FASB Meeting
• Discussed at November 2009 IASB Meeting
• Discussed at December 2009 IASB Meeting
• Discussed at January 2010 Joint IASB-FASB Meeting
• Discussed at February 2010 Joint IASB-FASB Meeting
• Discussed at March 2010 Joint IASB-FASB Meeting
• Discussed at May 2010 Joint IASB-FASB Meeting
• June 2010 Exposure Draft issued. Click for more information.
• Discussed at November 2010 IASB Meeting (jump to notes below)
• Discussed at December 2010 IASB Meeting (jump to notes below)
• Discussed at January 2011 IASB Meeting (jump to notes below)
• Discussed at 1-2 February 2011 Special IASB Meeting (jump to notes below)
• Discussed at February 2011 IASB Meeting (jump to notes below)
• Discussed at 1-2 March 2011 Special Joint IASB-FASB Meeting (jump to notes below)
• Discussed at March 2011 Joint IASB-FASB Meeting (jump to notes below)
• Discussed at April 2011 IASB Meeting (jump to notes below)
• Discussed at May 2011 Special Joint IASB-FASB Meeting (jump to notes below)
• Discussed at May 2011 IASB Meeting (jump to notes below)
• Discussed at Special 31 May-2 June 2011 IASB-FASB Meeting (jump to notes below)
• Discussed at June 2011 IASB Meeting (jump to notes below)
• Discussed at Special 28 July 2011 IASB Meeting (jump to notes below)
• August 2011: EFRAG invites companies to participate in the field-testing of the forthcoming revised proposals on Revenue Recognition (more information)
• Discussed at October 2011 IASB Meeting (jump to notes below)
• November 2011 Exposure Draft reissued. Click for more information.

Timetable

• Click for IASB Project Timetable

IASB Project Insights

• A quick overview of this project is available on our IASB Project Insights page

Deloitte IFRS podcasts on revenue recognition

Randall Sogoloff, Leader for Communications in the Deloitte IFRS Global Office, and Phil Barden, Leader for Deloitte’s Global Revenue Recognition team, discuss the November 2011 revenue recognition exposure draft Revenue from Contracts with Customers with Robert Bruce. They discuss the key changes that are proposed and provide insights into the likely effect they will have in practice. The podcasts are part of a series we make available on IAS Plus:

• Exposure Draft: Revenue from Contracts with Customers. The podcast is available for download here (30 mins, 13mb) or via iTunes.
• Other Deloitte IFRS Podcasts. All Deloitte podcasts are available here.

Background

This objective of this project is to develop a single conceptual model, and general principles, for determining when revenue should be recognised in the financial statements. This single conceptual model would apply to all industries and all types of revenue-generating transactions.

Currently, IAS 18 provides guidance on revenue recognition. However, it provides little guidance on revenue transactions with multiple components (for example, sale of hardware combined with software, and sale of hardware combined with service).

Discussion at the IASB Meeting May 2003

At the Board meeting in May 2003, the staff presented four views of revenues as the basis for developing a definition of revenue:

• The gross Inflows View
• The Liability Extinguishment View
• The Broad Performance View
• The Value Added View

Gross Inflows View

Definition of revenue: The gross inflows view defines revenues in terms of the consideration from the reporting entity's customers over which the reporting entity obtains control.

Alternative interpretations of that view reflect revenue as the stated contract price, the amount paid by the customer, or the amount received by the reporting entity.

Liability Extinguishment View

Definition of revenue: Revenues are decreases in the reporting entity's liabilities to customers resulting from the extinguishment of its performance obligations for which it is primarily liable. Those obligations are extinguished by providing goods and services to customers, either directly by the reporting entity itself or indirectly by having third parties provide them on its behalf.

Under the liability extinguishment view, revenues arise only from the extinguishment of "performance obligations". A performance obligation is a legally enforceable obligation of a reporting entity to its customer, under which the entity is obligated to provide goods or services. Performance obligations are extinguished by the performance of the reporting entity's promises to provide the customer with goods or services, regardless of whether the entity does so directly or indirectly.

Other obligations that can arise from customer contracts are debt obligations and "custodial obligations". With custodial obligations, the reporting entity is the "custodian" of assets for another entity, such as a customer or a taxing authority. A custodial obligation may be defined as an obligation requiring the reporting entity to pass on assets to other entities for activities it is not responsible to perform.

Broad Performance View

Definition of revenue: Revenues are increases in the reporting entity's assets (including inflows of assets or enhancements of assets) or decreases in its liabilities resulting from activities that are integral to the provision of products (goods and services) by the entity itself that are ultimately destined for customers.

The key feature of this definition is that the reporting entity generates revenues only in respect of the activities it performs itself.

Under the broad performance view, if the reporting entity provides goods it owns to customers, revenues arise from satisfying its performance obligation to provide those goods. This is regardless of whether the reporting entity subcontracts the manufacture of part or all of those goods, and whether the entity owns those goods momentarily.

The definition of revenues includes inflows of additional assets and enhancements of existing assets resulting from activities that are integral to the entity's provision of goods and services.

Value Added View

Definition of revenue: Revenues are the excess of the value of the reporting entity's outputs in the form of goods and services that it creates over the costs of its inputs in the form of materials and services that it purchases from other entities.

Value added might be defined more narrowly by also excluding the value of all other factor inputs such as the wages of the reporting entity's employees or interest accrued to its creditors. That would leave profit as the measure of revenues. Yet another possibility might be to interpret value added as the entity's gross margin.

During its last meeting, the FASB rejected the "Gross Inflows View" and the "Value Added View" and asked its staff to concentrate on the other two views. The IASB Board also rejected the "Gross Inflows View" and the "Value Added View" as drafted. They believe the "Value Added View" has predictive value disclosure benefits and may be reconsidered from that point of view at a later stage.

There was support for considering what should be excluded from revenue under the "Gross Inflows View" view (for example, custodial and agency collections) and comparing this to the two remaining views.

Board members questioned whether the remaining two views encompassed asset enhancement, such as growth in agricultural assets. Staff suggested that such enhancement is within revenue under the "Broad Performance View" not under the "Liability Extinguishment View". One Board member suggested the Board should not be concerned whether this is classified as revenue or as "other gains".

Several Board members expressed support for subdividing revenue into components, such as sales and gains on assets (if included).

The staff asked the Board to consider whether once they had agreed on a definition of revenue, they would want to consider the recognition criteria on a different view. The Board did not support this, though a formal vote was not taken.

Discussion at June 2003 IASB Meeting

The Board discussed the types of contractual rights and obligations that could give rise to revenue. The Board determined that conditional rights (performance has not occurred) should not give rise to revenue.

The Board noted that under the staff's proposal, conditional rights could give rise to a fair value gain or loss. For example, if an entity submitted a purchase order for 1 unit at the fair value price of 100 and, prior to delivery, the fair value increased to 105, the purchaser would have a gain of 5 and the seller a loss of 5. Therefore, the seller would record revenue of 100, cost of sale (say 80), and a loss of 5 from the fair value movement of its stock prior to delivery.

The Board decided that pre-performance assets and liabilities would be carried at fair value at initial recognition and subsequent remeasurement. Post-performance assets and liabilities would be subject to another standard. The staff was asked to continue consideration of this model in co-operation with the FASB staff.

Discussion at July 2003 IASB Meeting

The Board agreed that the conceptual model should apply only to those contracts that are enforceable, and that the threat of legal action is not the key element.

The unit of account issue concerns applying the definitions of an asset and a liability in the course of recognition (assuming that all of the recognition criteria have been met). More specifically, the issue concerns what is the asset or liability that is to be recognised for wholly or partially executory contracts.

Some believe that the unit of account for all such assets and liabilities should be the contract as a whole. Others believe that the unit of account should be the assets and liabilities arising from the rights and obligations in the contract. Still others believe that the unit of account for some pre-performance assets and liabilities should be the contact as a whole, and for others the unit of account should be the assets and liabilities arising from the rights and obligations in the contract.

The Board agreed the unit of account should be the assets and liabilities arising from rights and obligations in the contract.

Regarding the date of recognition, the Board agreed that the delivery date should be retained and not the assignment date. The Board agreed that future performance should no to be assumed. However, the Board was undecided whether revenue should be recognised base on the extinguishment of the liability or performance under the contract (broad performance).

Discussion at September 2003 IASB Meeting

The Board considered a paper prepared by the UK Accounting Standards Board staff. This paper considered three views for revenue recognition: the US EITF approach, the wholesale approach, and the retail approach.

The Board discussed how to account for revenue in contracts where a customer pays but the supplying entity does not perform or only partially performs at the time the payment is made. The presented paper states that there is a liability and that this liability should be measured at fair value. It concludes that the fair value should be determined on the retail approach being the price that a purchaser would pay to purchase the goods or services in a retail market (rather than the price that the seller would have to pay another entity to provide the contracted goods or services).

The Board gave comments but no decisions were made.

Discussion at October 2003 IASB Meeting

The Board had previously agreed the following:

• Conditional rights and obligations do not meet the definitions of assets and liabilities.
• Unconditional rights and mature rights meet the definition of an asset if they are enforceable and give access to future economic benefits.
• Unconditional obligations and mature obligations meet the definition of a liability if they are enforceable and oblige the entity to make a future sacrifice of economic benefits.
• Unless a contract is enforceable, the obligations that it imposes on the contracting parties will not meet the definition of liabilities, and the corresponding rights that it conveys to counterparties will not meet the definition of assets.
• Contracting rights and obligations that qualify for recognition as assets and liabilities should initially be measured at their fair values.

The Board discussed the application of these principles in relation to revenue recognition in long-term construction contracts. The Board appeared generally supportive of the approach but expressed some reservations which needed to be further considered.

Discussion at December 2003 IASB Meeting

The Board noted the four views of revenue previously discussed, these being:

• The Gross Inflows View
• The Liability Extinguishment View
• The Broad Performance View
• The Value Added View

In addition the staff noted that the Board had approved a preliminary set of working criteria for revenue recognition, termed the elements criterion and the measurement criterion, that focus on uncertainties about whether the elements definitions have been met (element uncertainty) and uncertainties about the ability to reliably measure the item in question (measurement uncertainty). Revenues should be recognised when both of those criteria are met.

The elements criterion

The elements criterion requires that a change in assets or liabilities has occurred, specifically:

1. An increase in assets has occurred that increases equity, without a commensurate investment by owners; and

2. A decrease in liabilities has occurred that increases equity, without a commensurate investment by owners (such as the forgiveness by owners of a debt owed to them by the entity).

The measurement criterion

The measurement criterion requires that the change in assets or liabilities can be appropriately measured, specifically:

1. The assets or liabilities are measured by means of a relevant attribute; and

2. The increase in assets or decrease in liabilities is measurable with sufficient reliability.

Contractual rights

It was further noted that the Board had considered the economic consequences that contractual rights have for their holders and that related contractual obligations have for their obligors, and tentatively decided that:

• Conditional rights and obligations do not meet the definitions of assets and liabilities.
• Unconditional rights and mature rights meet the definition of an asset if they are enforceable and give access to future economic benefits.
• Unconditional obligations and mature obligations meet the definition of a liability if they are enforceable and oblige the entity to make a future sacrifice of economic benefits.
• Unless a contract is enforceable, the obligations that it imposes on the contracting parties will not meet the definition of liabilities, and the corresponding rights that it conveys to counterparties will not meet the definition of assets.
• Contractual rights and obligations that qualify for recognition as assets and liabilities should initially be measured at their fair values.

The staff further noted for enforceable contracts the Board discussed whether the unit of account (the subject of recognition) should be the individual assets and liabilities arising from the rights and obligations embodied in the contract or the contract as a whole and had agreed that:

The unit of account should be based on the legal remedies for a breach of contract that are available to the contracting parties.

• For contracts for which the only legal remedy for a breach of contract is money damages, the only outcome that could occur from settling the contract before performance of the items specified in the contract (that is, while the contract remains executory) is a flow of cash in one direction between the contracting parties. As a result:
• One party has a pre-performance asset and the other a pre-performance liability (pre-performance assets and liabilities are the unconditional rights and obligations that exist until either party to a contract performs its stated conditional obligation); and
• The unit of account should be the contract as a whole and a net amount should be recognised.

• That legal remedy renders unconditional the rights to performance of the items specified in the contract and the related performance obligations for the contracting parties.
• The only outcome that could occur from settling the contract at any time (unless one of the parties forgoes its right to specific performance) is flows of assets in both directions between the contracting parties. As a result:
• Each contracting party would have at least one asset and one liability; and
• The unit of account for each party should be the individual assets and liabilities arising from its contractual rights and obligations, reported on a gross basis.

The staff noted that the Board tentatively agreed to use fair value as the measurement attribute for analysing issues, but not to decide the measurement attribute for an exposure draft until decisions are made in the Measurement project. The staff further noted that the Board has discussed whether the fair value of performance obligations should reflect the price that the reporting entity would have to pay a third party to assume responsibility for performing all of those obligations (generally "wholesale" fair value) rather than the amounts at which the reporting entity sold (or could sell) identical or similar products or services to similarly situated customers (generally "retail" fair value).

It was clarified that no decision had been taken on whether a remeasurement of a performance obligation should occur but the working principle to use fair value would imply that if remeasurement were to take place it would be at fair value. In addition certain Board members requested clarity in determining the markets to be used in both the "wholesale" and "retail" methods.

Discussion at the IASB's January 2004 Meeting

The Board discussed several issues related to the enforceability of contracts under the conceptual model for assets and liabilities arising from contractual rights and obligations.

The staff noted that the discussion related to sales agreements that are enforceable, legally or otherwise. It was further noted that "enforceable" may differ in different legal jurisdictions.

The Board agreed that this would be incorporated into a definition for clarity. This would avoid a need to describe any underlying features of a legal agreement.

The staff expressed a view that it does not change whether there is an intention to enforce the contract. The Board agreed but noted that this may have an impact on measurement.

In addition the staff noted that this would apply equally to probability. The Board agreed. Certain Board members noted that this would need an amendment to the IASB Framework. The Board agreed that if this was the conclusion when everything was brought together the Framework would need to be amended.

The Board agreed that cancellation rights do not render contracts unenforceable and would affect measurement.

Discussion at the IASB's February 2004 Meeting

The staff presented various recognition and measurement principles based on the Board's tentative decisions to date. These principles are:

Fundamental Revenue Recognition Principle

A reporting entity should recognise revenues in the accounting period in which they arise and measure them at their fair value on the date that they arise if it can determine both their occurrence and measurement with sufficient reliability.

The following recognition principles amplify and extend the fundamental revenue recognition principle:

Recognition Principle #1

Contractual revenues cannot arise before a contract with a customer exists.

Recognition Principle #2

A reporting entity should recognise contractual revenues when an increase in its claims against its customers can be determined to have occurred and the fair value of that increase can be measured with sufficient reliability.

Recognition Principle #3

A reporting entity should recognise contractual revenues when a decrease in claims against it by its customers can be determined to have occurred and the fair value of that decrease can be measured with sufficient reliability.

Recognition Principle #4

Increases in assets or decreases in liabilities that give rise to contractual revenues stem from contractual promises that may be either express or implied.

Recognition Principle #5

Contractual revenues should be recognised at contract inception if the fair values of the contractual assets obtained on that date exceed the fair values of the contractual liabilities simultaneously incurred, and if those revenues can be measured with sufficient reliability.

Recognition Principle #6

Subsequent to contract inception, contractual revenues should be recognised upon the reporting entity's performance of its obligations under the contract, as evidenced by a decrease in its contractual liabilities or an increase in its contractual assets, the fair value of which can be determined with sufficient reliability.

Recognition Principle #7

Contractual revenues should be recognised upon contract completion to reflect any final increases in the fair values of contractual assets or final decreases in the fair values of contractual liabilities.

Fundamental Measurement Principle

A reporting entity should measure revenues arising from an increase in its assets or a decrease in its liabilities (or a combination thereof) at the fair value of that increase or decrease.

The following measurement principles amplify and extend the fundamental measurement principle:

Measurement Principle #1

The estimates of the fair value that the reporting entity uses to measure revenues arising from increases in its assets or decreases in its liabilities should be those that have the highest relative reliability.

Measurement Principle #2

The estimates of the fair value of revenues that are consistent with Level 3 of the fair value hierarchy should be developed by means of multiple valuation techniques that maximise market inputs, such as a market approach or an income approach, whenever information necessary to apply those techniques is available.

Measurement Principle #3

The fair value of revenues arising from increases in the reporting entity's contractual assets reflects the effects of credit risk, the time value of money, and dilution risk.

Measurement Principle #4

The measures that reflect the effects of credit risk on the fair value of a reporting entity's revenues also should reflect expectations of recoveries, if any, in case of breach of the contract by the customer.

Measurement Principle #5

Any express or implied rights of return and refund, allowances, rebates, discounts, credits, and other similar rights granted to customers that reduce revenues by reducing the reporting entity's contractual assets or increasing its contractual liabilities should be measured at fair value.

Measurement Principle #6

Revenues arising from increases in contractual assets that stem from the reporting entity's rights to the customer's stand-ready performance in case of occurrence or non-occurrence of a specified event should be measured at fair value that reflects the assessment of the probability that the specified event will occur.

It was noted that the use of fair value was adopted as a working principle, and no formal decision on this has been taken. In addition it was noted that strictly speaking fair value would apply to assets and liabilities and not revenue.

The Board noted that there were certain of these principles, and the effects of these principles, that they still needed to discuss and the principles could be expanded.

The Board agreed that the effects of the time value of money and credit risk would only ever be disregarded as a result of materiality.

The staff noted that, for the revenue recognition project, conditional is defined as 'subject to the occurrence of an event that is not certain to occur (such as performance by the counterparty)' and unconditional as 'only the passage of time is required to make performance due.'

The Board agreed.

Discussion at the March 2004 IASB Meeting

Regarding the definitions of income and revenues, the staff recommended that:

• it is important to define income before defining revenues;
• definitions of income and revenues should be based on Approach A (defining the items that compose income) and not Approach B (defining the inflows of economic benefits – recognised increases in assets and decreases in liabilities – that are excluded in arriving at income);
• the definition of income under Approach A should be developed from the following initial draft:

  "Income is:
  (a) recognised increases in assets or decreases in liabilities arising from a transaction or event in respect of which there are also related recognised decreases in assets or increases in liabilities that result from the provision of goods or services to customers; and
  (b) increases in equity resulting from other recognised changes in assets or liabilities, except those resulting from investments by owners."

The Board discussed whether the distinction in part (a) of this definition should be based on customers vs non-customers as currently drafted or based on activities of the business. This would determine which transactions are reported gross and which are reported net.

The Board agreed with the first two staff recommendations and asked the staff to develop further the definition of income.

Discussion at the April 2004 IASB Meeting

The IASB preliminarily discussed a paper that will be discussed during its joint meeting with the FASB on Friday. The IASB made several tentative decisions/statements:

• Distinctions between components of comprehensive income such as revenues and gains provide useful information to investors and creditors.
• The present distinction between revenues and gains is ambiguous and difficult to operationalise.
• Increases in assets as a result of production can give rise to a component of comprehensive income.
• Increases in assets as a result of production give rise to revenue (although there was concern about the several definitions of 'revenue' used by the Board members). That piece of comprehensive income should be labelled something like 'income from production' or 'production income' rather than a gain.
• Reporting subcontracting and outsourcing activities separately provides useful information to investors and creditors. This information should be provided on the income statement.
• Revenues arise for a reporting entity from the performance by a third party of a contractual obligation to a customer for which the reporting entity continues to be obligated. A legal layoff or a contractual obligation to a customer does not eliminate this liability.
• Outsourcing revenues do not reduce the amount of revenues-they just change the aggregation of expenses.

Discussion at the May 2004 IASB Meeting

The Board considered how the fair value of a reporting entity's performance obligations to its customers is determined. In particular the Board considered whether it should be:

• the amount that would have to be paid to a third party to legally assume responsibility for performing all of the reporting entity's remaining obligations, or
• the amount of consideration paid or to be paid to the reporting entity by the customer, or
• the amount of the reporting entity's costs to perform the activities.

The staff recommended using the amount that would be paid to a third party to assume the obligations and noted that the FASB had recently affirmed that this measurement requirement be adopted and that it be measured as a business-to-business transaction.

The Board noted that the measurements should include any performance guarantees.

The following example was considered:

Retailer A is a consumer electronics company that sells television sets for $300 that it buys from the manufacturer for $250. Like other consumer electronics retailers, Retailer A also sells for $100 warranty contracts that extend 2 years beyond the manufacturer's 1-year product warranty. Those extended warranties are offered only on products that are sold in the same transaction, and the high profit margins on the warranties allow the products to be offered at highly competitive prices. The fees charged for those extended warranties are not refundable.

Like other consumer product sellers, Retailer A can either service the warranties itself or pay reliable third-party administrators to legally assume the warranty servicing obligations. History indicates that one in 10 sets will experience a failure during the extended warranty period, and that the average incremental cost to repair or replace a defective unit is approximately $140.

Reliable third-party administrators are willing to legally assume the warranty obligations for a price of $30 per contract.

Retailer A sells 10 television sets with extended warranties and collects the selling price in full. However, it has not yet decided whether to engage a third-party administrator to legally assume the liabilities for servicing the warranties or to service the warranties itself (Retailer A has a year between the date of sale and the beginning of the extended warranty period in which to decide).

In this case, Retailer A's performance obligations are unconditional obligations to stand ready to repair or replace any defective television sets that fail during the warranty period. The issue is whether the fair value of the performance obligations should be measured at $1,000 (10 warranties @ $100 customer consideration amount per warranty) or $300 (10 warranties @ $30 legal layoff amount per warranty).

Certain Board members expressed concern as to whether the amount a third party would pay to assume performance obligations can be reliably measured and verified.

The Board asked whether in a sale of goods the staff recommendation resulted in recognising the full gross profit on date of order as the obligation to fulfill the order would be measured at the amount charged by the manufacturer. The staff agreed that this was a correct application of the principle but noted that the longer the time between order and delivery, the greater the risk and this would have an impact on the measurement of the performance obligation.

The Board expressed considerable concerns particularly as to the practical application of the approach but expressed support for the concept and agreed to continue pursuing the approach.

Discussion at the June 2004 IASB Meeting

Reassessed Expected Outcomes Approach

The FASB staff presented the Reassessed Expected Outcomes (REO) approach for determining classification, unit of account, measurement, and earnings per share for financial instruments involving an issuer's own shares and a list of 'touchstones' developed by the FASB staff based on objections heard from FASB Board members and others to various possible approaches to resolving liability and equity issues.

This approach breaks down equity-linked instruments into its base components of ordinary share equity, liabilities, and assets by analysing the expected future cash flows and other flows of economic resources at each reporting date. A financial instrument or portion thereof would only be classified as equity if its expected payment varies directly with the share price.

This method would, therefore, change the existing liability and equity distinction, which is based on amounts repayable in cash. Although the allocation would be recalculated at each reporting date, the reallocation would be based on the original proceeds, and the only effect of share price movements would be to change expected outcomes.

The Board expressed concern about the approach and, in particular, about the manner in which this would change the nature of accounting for equity and liabilities. They did, however, support exploring the approach further in conjunction with the FASB.

Revenue Recognition

The staff noted that the Board had previously tentatively concluded that the fair value of an entity's performance obligations should be measured at the 'legal layoff amount'. In considering this the Board noted that different prices exist and requested the staff to consider why these prices arise.

The staff noted that the price differences arose from different bundles of goods and services. The staff recommended that the 'legal layoff amount' should be measured at the minimum amount the entity would incur to settle the specific bundle of goods and services including internal costs such as arranging delivery or insurance. Certain Board members continued to express concern as to this approach. It was noted that discussion on this topic would continue.

The Board agreed that estimates used in revenue recognition should be subject to the same reliability threshold as used for other estimates in financial reporting.

The Board discussed various examples with differing ways of determining the fair value of the performance obligation to determine what factors they would accept as evidence of fair value.

Discussion at the July 2004 IASB Meeting

At recent Board meetings, several Board members expressed the view that a reporting entity's performance obligations to its customers should be initially measured based on the amount that the customer paid or agreed to pay to the reporting entity (the 'customer consideration amount') rather than the amount that the reporting entity would have to pay to legally lay off its obligation to its customers (the 'legal layoff amount'). Some of those Board members also expressed the view that measurement of those obligations should be based on the perspective of the customer rather than that of the reporting entity.

A customer perspective focuses on the fact that the customer and the reporting entity are counterparties to the same contract. Under this view, the reporting entity's obligations to its customer are thought to correspond precisely to the customer's rights (and vice versa). Accordingly, the reporting entity's accounting for its rights and obligations should mirror the customer's accounting for its rights and obligations under the contract (assuming that the customer prepares financial statements).

Under a reporting entity perspective, the reporting entity's accounting for its rights and obligations is not based on how the customer accounts for its rights and obligations under the contract. Instead, the reporting entity's accounting is based on the reporting entity view of its rights and obligations, which does not necessarily mirror the customer's view of those rights and obligations.

The Board agreed with the reporting entity perspective. Some Board members continued to express concern that revenue would be recognised despite an obligation to refund in the case of non-performance.

The Board discussed a case study covering a long term contract illustrating the application of the proposed conceptual model for accounting for contractual rights and obligations.

In this example a number of Board members agreed that allocating revenue to contract origination, assuming its fair value can be determined, would be better than current percentage-of-completion accounting. Other Board members expressed concern either because they disagreed with the model or because they were concerned as to its application due to the assumptions being unrealistic.

Tatsumi Yamada conveyed a message from the Accounting Standards Board of Japan (ASBJ). The ASBJ expressed concern as to the direction of the project and requested that it be stopped. The message was noted.

Discussion at the October 2004 Board Meeting

The Boards discussed a paper in which the fair value ED issued by the FASB was applied to certain revenue recognition examples. In addition, the Boards were asked to answer certain questions that would provide the staff with direction on this project.

In going through the various examples, the Boards agreed that absent evidence to the contrary, actual exchange prices (in other than active markets) should be presumed to be consistent with fair value.

Discussion at the December 2004 Board Meeting

In October 2004 the staff of the IASB and FASB conducted small non-public meetings to gauge the response of IASB and FASB members to the following three broad issues

• a. Whether an increase in net assets that occurs at contract generation gives rise to revenue that should be recognised if it can be measured reliably.
• b. Whether the standard or revenue recognition should include a 'special' reliability threshold for measuring the increase in net assets at contract generation.
• c. If the standard includes a 'special' reliability threshold and that threshold is not met, how the increase in net assets at contract generation should be recognised and measured and when that increase should be recognised as revenue in the income statement.

In considering these questions Board members had been asked to consider a very specific fact pattern in which cash is given for entering into a non-refundable contract. The objective of the simplified fact pattern was to focus debate only on one side of the journal entry (because the fair value of cash consideration is readily measurable). In real situations the fair value of the consideration received, related service obligations etc may in fact be quite complex.

Prior to commencing their discussion of this matter Board members emphasised the specific fact pattern they had considered, that they were not discussing recognition of profit on taking an ordinary sales order, and that they did not expect the proposals to result in a revenue recognition model that they would expect to be implemented in the short term.

Once a determination had been made on that fact pattern the intention was to develop a conceptual method of dealing with revenue recognition (based on the broad concepts previously agreed: that revenue and expenses should be determined by reference to assets and liabilities) which would then be road tested on a number of fact patterns.

On point a, whether an increase in net assets at contract generation gives rise to revenue, a majority of both Boards had indicated in the small group meetings that they did not understand what other possible alternative there was, and therefore agreed that this would be the case. It was noted that not all members might agree with the method suggested in determining the increase in net assets (such as measuring the performance obligation at its legal lay-off amount). However, the Board agreed that where an increase in net assets had occurred, this would result in the recognition of revenues.

On the second point, a majority of Board members agreed that a 'special' threshold should not be introduced for the measurement of revenue. They noted that where a 'special' threshold came into play this would necessarily result in the recognition of a 'special' liability (to recognise the dangling credit) which would not meet the recognition criteria for liabilities. The Board did note that its discussion paper should clearly set out the reasons why a 'special' threshold is not considered possible, in order to address the concerns of those who believe a 'special' threshold is appropriate. This discussion would include the pros and cons of such a threshold and illustrate why it is not possible or desirable. Therefore the third question relating to accounting if there is a 'special' threshold did not require resolution by the Board.

Discussion at the June 2005 IASB Meeting

The objective of the Board's discussion was to decide whether it shares the FASB's views about the way in which the project should proceed.

The FASB had reconsidered the objective and scope of the joint project on revenue recognition. It decided that its preference would be to:

• continue the joint project, with the same goals and scope as before, ie to develop a conceptual framework for revenue recognition and a general standard derived from that framework; but
• at the standard level, use a different measurement attribute for performance obligations than has been proposed up until now. The FASB reaffirmed its past decision that the general standard for revenue recognition should require revenue to be recognised on the basis of changes in assets and liabilities (without consideration of additional recognition criteria, such as earning or realisation).

However, the FASB decided to pursue an approach in which not all assets and liabilities in revenue arrangements would be measured at fair value. Instead, performance obligations would be measured at 'performance value', that is, the amount at which the good or service could be sold to a customer. In practice, performance value would normally equal the consideration received or receivable from the customer.

The majority of IASB members indicated that their preference would be to continue with the joint project, with the same goals and scope as before but would be willing to compromise and explore the performance value measurement approach.

Discussion at the October 2005 IASB Meeting

In preparation for the joint meeting with the FASB and future discussion on the topic, the Board held a preliminary discussion to clarify certain matters in advance of the joint meeting. Three main issues were discussed:

• Identification and initial measurement of performance obligations.
• Illustrative application examples for a range of revenue transactions.
• Definition of revenues.

The Board discussed the identification and initial measurement of performance obligations, including staff proposals to clarify the appropriate unit of account, the meaning of the term 'customer's reference market' and the definition of a performance obligation. The Board also discussed a proposed change in terminology – ceasing to use the term 'customer-based value' in favour of 'allocated consideration amount' when describing the measurement and measurement objective associated with using an allocation methodology.

The Board discussed various aspects of the measurement of stand-ready obligations. Board members expressed varying degrees of discomfort with the proposals, in particular the measurement of items using methods with few or no market inputs.

The staff noted that the IASB and the FASB were likely to reach different conclusions on the use of allocated customer amount and fair value when measuring unconditional stand ready obligations and that the staff proposal would be that the discussion document would include both alternatives.

The Board discussed several illustrative examples. Only a few comments were made.

Finally, the Board discussed the definition of revenue. Some Board members expressed concern that the proposed definition of revenue encompassed 'enhancement of assets', and that 'revenue' should arise only from actual sales; changes in the value assets were components of profit or loss, but were not 'revenue.'

No decisions were made. The Board will discuss this topic during the joint IASB-FASB meeting on 24/-5 October 2005.

Discussion at the October 2005 Joint IASB-FASB Meeting

The Boards had previously agreed that performance obligations in revenue contracts should be disaggregated from the customer's perspective based on whether the deliverable has utility to the customer. In this meeting the Boards considered the following revised criteria for determining whether the deliverable has utility to the customer:

A good, service, or other right has utility to the customer if either:

• a. It is sold separately or as an optional extra by any vendor in the customer's reference market or it could be resold separately by the customer in that reference market, or
• b. It gives the customer an unconditional right that obligates the reporting entity to stand ready to provide goods, services, rights, or other consideration if specified events occur.

The Boards agreed that this definition was an improvement from that which had previously been considered. However, the Boards did not believe the requirement in (a) that the customer could resell it in that same reference market was necessary. The Boards agreed that the customer reference market is ordinarily the market that the customer buys in, that is, the market in which the entity and the customer transacted with each other. That being the case, measurement is normally appropriate at the price negotiated between the entity and the customer. It was agreed that practical guidance regarding the identification of customer reference markets will need to be provided.

Staff noted that the existing definition of 'performance obligation', which refers to an obligation to deliver goods or services, is inadequate, because it does not make reference to other rights which can be sold (for example a refund right.) Staff proposed the following revised definition:

A performance obligation is a legally enforceable obligation of a reporting entity to its customer, under which the entity is obligated to provide good, services or other rights.

The Boards agreed that this definition appeared appropriate. However the need for the word 'legally' to be included was debated, as 'legally' means different things in different jurisdictions, and if an obligation is enforceable, it is ordinarily legally enforceable, so that word might be superfluous and potentially confusing. The Boards agreed to delete 'legally' from the working definition at this time, but noted this decision might need to be revisited once the accounting for executory contracts had been considered.

Several Board members had expressed concern about the use of the term 'customer based value' in the revenue recognition project. The Boards agreed to rather use the term 'allocated consideration amount' which better describes what the Board was trying to identify by the term.

At previous meetings the Boards had agreed that the estimated sales price of a performance obligation should be measured using the most reliable available evidence, and agreed a hierarchy of reliability. In that hierarchy 'Level-4' was estimated current sales prices based on entity inputs that reflect the reporting entity's own internal assumptions and data. Staff proposed that this could be clarified by requiring entities to use average costs in their data, and requiring that items be assessed on a portfolio basis rather than on an individual contract basis (where such homogenous portfolios exist.) The Boards disagreed, believing that they should not be prescriptive in determining how to arrive at a Level-4 estimate.

Both Boards had considered the measurement of unconditional stand-ready obligations. The IASB had determined that these should be measured at fair value, for the purposes of consistency with the proposed amendments to IAS 37. The FASB had concluded that these should be measured at the allocated consideration amount for consistency with the remainder of the revenue recognition project. The Boards agreed that the allocated consideration amount approach should be considered first before the fair value alternative was developed. It was acknowledged that in developing fully the customer allocation approach, the IASB might be persuaded that the fair value approach did not need to be pursued. If both approaches are pursued the Boards will decide at a later date whether a preference should be expressed in the public consultation documents.

The Boards considered the effects of extinguishment of unconditional stand ready obligations, and confirmed their earlier decision that this would be presented as a credit to the income statement rather than as a reduction of any expense category. The Boards noted that all warranties (whether statutory, express, or implied) arise from revenue contracts (directly or indirectly), and their extinguishment is a revenue earning activity.

The Boards considered a range of examples the staff had prepared illustrating the implications of their decisions to date, and the differences between the allocated consideration amount and fair value approaches, and provided staff with feedback to assist them in further developing the model.

The Board considered the issues surrounding distinguishing transactions that give rise to revenues from those that give rise to gains. The Boards considered whether there might be a better criterion than 'ordinary activities' (IFRS) or 'major or central operations' (US GAAP). The Boards noted that in this context they did not see the notion of comparability as key. The staff proposed some new definitions that would focus this distinction on the provision by the entity of goods, services, or other rights to the customer. The Boards agreed to proceed with this work.

Discussion at the February 2006 IASB Meeting

Wholly executory revenue contracts

The objective of the Board's discussion was to debate how the allocated customer consideration approach would be applied to wholly executory (or wholly unperformed) revenue contracts. First, the Board debated whether assets and liabilities arise in an executory contract and after confirming its earlier decision that rights and obligations do arise (and therefore assets and liabilities) consistent with its earlier decisions, the alternatives identified by the Staff were discussed. The alternatives were discussed in the context of assets and liabilities that are fungible and those that are unique.

Alternative 1 - For fungible assets, the assets and liabilities arising for each counterparty would be set-off on the basis that 'net settlement' could be achieved. For non-fungible (unique) assets and liabilities, set-off would not be permitted.

Alternative 2 was sub-divided into two components:

• Alternative 2 - No assets or liabilities arise therefore the distinction between fungible and non-fungible is irrelevant.

• Alternative 2 'Prime' - If the contract requires a unique performance (i.e. non-fungible) only a combined asset or liability arises. It was not clear what the treatment of fungible items would be under this alternative.

The Board expressed general agreement with the analysis performed by the Staff. Some Board members reiterated their view that for an executory contract, if a court can force the parties to perform, each party to the contract has either an asset or a liability arising from a right or an obligation to receive / deliver. The Board discussed briefly whether the right / obligation should have the same value as the item that is the subject of the contract (put differently, does the right to receive a motor vehicle have the same value as the motor vehicle itself?) but deferred that issue to a subsequent meeting when the Board discusses measurement. It was pointed out that in some jurisdictions within continental Europe (for example) the functioning of the law regarding the various rights and obligations that arise from a contract and those laws that apply to the actual performance have resulted in constituents approaching and thinking about the economics of such transactions differently.

The Board decided, consistent with its earlier decisions, that only Alternatives 1 and 2 'Prime' should be explored further.

Accounting for performance

The Board considered a paper presenting two revenue recognition methods: the extinguishment-based method (EBM) and the performance-based method (PBM). The paper went on to (a) compare and contrast those two methods and (b) evaluate each method against the conceptual criteria in FASB Concepts Statement No. 2 and the IASB Framework.

The PBM is a proportionate-performance-type method, and the EBM is a hybrid of a proportionate-performance-type and a sales-type method. Under the sales-type method, recognition is delayed until performance is complete or substantially complete. The Board indicated a preference for the performance-based method but asked the Staff to work through an example that considers the manufacture over a two year period of an item such as a yacht that separately illustrates the effect of milestone payments, a non-refundable deposit and a scenario where the contract requires no payments until delivery.

Discussion at the March 2006 IASB Meeting

The Board discussed two alternative basis of revenue recognition; extinguishment-based method (EBM) and performance-based method (PBM) in the context of various examples prepared by the staff. Concern was raised about how the EBM model could be applied – in particular, how legal extinguishment could be assessed in all cases. The Board agreed to pursue a hybrid model that encompasses both the EBM and PBM models.

The Board also discussed the notion of customer 'utility' and appeared to agree that this term is unclear. The Staff were asked to articulate this notion on the basis of whether a customer is better off after the entity's performance (or part performance) compared to the situation prior to that performance.

Discussion at the April 2006 IASB Meeting

Staff presented a paper dealing with alternative methods for recognising revenue. The paper represented a continuation of the discussion at the Board's March 2006 meeting. The two main methods examined were the Extinguishment-Based Method (EBM) and the Performance-Based Method (PBM). Several hybrid methods were presented, making a total of five methods:

• 1. EBM
• 2. EBM with an exception for long-term contracts
• 3. Customer Benefit Method
• 4. PBM
• 5. PBM with Application Accommodations (PBM-AA)

Board deliberations focussed on methods three and five. To illustrate the difference between the two methods, the Board discussed a performance obligation. The Customer Benefit Method is founded on a customer perspective, with revenue recognition based on whether the customer has accepted performance to date. The PBM with Application Accommodations takes an entity perspective, with revenue recognition based on the progress that the entity has made in fulfilling its performance obligations; it and uses customer validation merely as a means to determine performance progress.

The Board noted that customer acceptance would be important for revenue recognition if it is a contractual condition. However, customer acceptance would not necessarily create an unconditional asset for the seller.

As Board members seemed to think that view five was more in line with existing standards and with the direction that the IASB has taken in other standards, they voted 10/4 for the staff to develop this view further.

This paper will be discussed further at the joint IASB/FASB Meeting on 27 April 2006.

Discussion at the April 2006 Joint IASB-FASB Meeting

Possible alternative revenue recognition methods

The staff noted that during their discussions earlier in the week, the IASB had modified a condition present in two alternative revenue recognition methods, the 'Customer Benefit Method' (CBM) and the 'Performance-based Method with Application Accommodations' (PBM-AA). The IASB had suggested deleting the 'customer acceptance of performance to date (unless acceptance is perfunctory)' condition from the revenue recognition criterion in each method.

The debate quickly gravitated to a discussion of the CBM and PBM-AA methods, which are much the same. There seemed to be general agreement about the fundamental principles, but less agreement about how those principles were described (the 'labels' being used). FASB members noted that to accept the PBM-AA method might run the risk of contradicting guidance from the US Securities and Exchange Commission on 'bill and hold' sales.

Ultimately, the following decisions were made:

• The FASB did not object to the IASB's modification of the revenue recognition criteria in the CBM and PBM-AA.
• The FASB did not object to using the notion of a customer's obligation as the 'back-stop' trigger for revenue recognition.

The FASB was asked for an indication of which model it preferred:

• Three members favoured the CBM.
• Four members favoured the PBM-AA.

The due process document would discuss these alternatives.

Discussion at the July 2006 IASB Meeting

The Board discussed further its previous decision at a joint meeting in April with the FASB, that revenue should be recognised when the reporting entity obtains an unconditional right to at least some consideration. Various examples were discussed related to the following:

• Agenda Paper 14B explores how revenue would be recognised if, in the event of breach, a contract requires a legal remedy of specific performance.
• Agenda Paper 14C explores how revenue would be recognised if, in the event of customer breach, a contract requires a legal remedy of monetary damages and those damages would require the customer to pay an amount that reimburses the reporting entity for its costs incurred to date plus a profit margin. In return, the customer would obtain the work in process and title to it. In other words, the contract requires a legal remedy of 'partial physical settlement.'
• Agenda Paper 14D began to consider how revenue would be recognised if, in the event of customer breach, a contract requires a legal remedy of monetary damages and those damages would require the customer to pay a net cash settlement amount to the seller.
• Agenda Paper 14E began to consider how revenue would be recognised if a contract has contractually stated customer acceptance provisions that unconditionally obligate the customer to compensate the reporting entity for performance to date.

The Board did not make specific decisions related to the above examples but indicated its support and general agreement with the direction taken by the Staff.

Discussion at the September 2006 IASB Meeting

Measurement approach under a customer-consideration model and its interaction with IAS 37

The purpose of this session was to get initial input from the Board about how the approach for accounting for performance obligations in the revenue recognition project interacts with the approach for accounting for non-financial liabilities in the project to reconsider IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Issue

In its discussions on the IAS 37 project, the Board has considered the accounting for warranty obligations to be a liability recognition and measurement issue. The Exposure Draft had emphasised that issuing a warranty gives rise to a stand-ready obligation and that both initial and subsequent measurement of that obligation will be a current measurement issue. In the project on revenue recognition, the Board has also agreed that the issuance of a warranty gives rise to an obligation as under IAS 37. However, the initial measurement of the obligation is performed by reference to the customer consideration which is received and, in the examples considered to date, the subsequent measurement is by reference to the revenue recognition.

The objective of the Board's discussion was to explore how these approaches interact and, particularly, what a customer-consideration model might mean for subsequent measurement of a performance obligation.

The Board explored two approaches.

• Approach A:

  Under Approach A all estimates about the performance obligation are locked in at inception. Those estimates are not revised until the measurement of the liability is deemed inadequate compared to a direct measure of the liability under IAS 37. In such cases, the liability is remeasured.

• Approach B:

  Under Approach B, customer consideration is viewed largely as a current measurement approach, with only specified aspects of the measurement locked in at inception.

The Board discussed the two approaches. A Board member also introduced a third approach in which the customer consideration would be recognised over the service period on a straight-line basis.

No conclusions were reached. The Board asked staff to investigate further the alternative approach that was introduced.

The Board will continue its discussions at a later meeting.

Discussion at the October 2006 IASB Meeting

The Board held a short session to discuss a revised approach for the joint IASB-FASB Revenue Recognition project. This revised approach will be discussed at the joint meeting with the FASB on 23-24 October 2006.

The proposal is to work to develop both the customer consideration model and the fair value model instead only focusing on one model. This is proposed because each of those models has support from members of both the FASB and the IASB without any clear majority among either Board favouring either of the two models. In addition, the development would best be performed by establishing two small groups of Board advisers, from both Boards, that should advise and assist the staff in developing the models. That would mean that the development but not deliberation would be done mostly outside the Boards' open meetings.

The Board indicated agreement with the proposed approach but emphasised that such a project should be brought to Board meetings at certain stages during the development for review and discussion. Staff indicated that the FASB had already indicated agreement with the proposal.

Discussion at the November 2007 IASB Meeting

At the October joint meeting between the IASB and the FASB, the staff presented a summary of both the measurement and customer consideration models. The objective of the November meeting is to provide the Board with a more thorough explanation of the measurement model described as the asset and liability approach. The objective of the discussion is for the Board to focus on the measurement model and not compare it with the customer consideration model.

An asset and liability approach

The Board first discussed Agenda Paper 4B, which describes why the Boards did not pursue a revenue recognition model based on notions of realisation and an earnings process. The paper also describes why the Boards have instead pursued a model based on changes in assets and liability and includes the Boards' initial definition of revenue in terms of an entity's contract with a customer.

The staff introduced the paper and noted that although this paper was the basis for a chapter in the forthcoming discussion paper on revenue, it was not intended to be the complete chapter. Any finalised chapter would include additional information explaining the background to the project and why certain decisions were made.

The staff noted the following key points in the paper:

• The chapter will be common to both the measurement and customer consideration models as both models focus initially on the customer contract.
• Many constituents believe that the asset and liability approach is 'code' for fair value. Staff does not believe this is the case.
• Much of the accounting that exists under the existing model will not change as a consequence of adopting an asset and liability approach.
• Both the measurement model and the customer consideration models focus on the contract. However, it is recognised that in some industries this information may not be the most decision useful information. An example is agriculture. In such industries the focus may be better placed on an asset more generally (the growth of a tree) rather than a contract with a customer.
• Obligations are satisfied by the transfer of economic resources. Both models need to describe the criteria for transfer.

The Board then discussed the agenda paper, and a number of concerns were raised. One Board member noted that a particular concern is that contract with customers in some jurisdictions may be 'firm' where as in other jurisdictions it may be more behavioural in nature. That is, there is a shared understanding of what will be done under the contract, but no formal terms are agreed until a later point. The Board member queried whether this project was talking only about irrevocable non-cancellable contracts, or something else? The Board discussed the need to clarify the meaning of a contract.

The same Board member also noted that the Board needed to consider the cost-benefits of the models.

The Board discussed the issue of whether the asset and liability approach is requiring fair value. It was noted that not all increases in assets should be referred to as revenue (fir instance, agriculture). It was argued by some that performance should be measured on the same basis regardless of which model is used.

One Board member noted that the section outlining the shortcomings of IAS 18 Revenue in the agenda paper was short and cryptic. It was suggested to staff that the final discussion paper should also include discussion of aspects of IAS 18 that are not flawed, and also include more examples and explanation. Another Board member reminded the Board that IAS 18 was written prior to the conceptual framework.

The Board then moved on to discuss the decision usefulness of information and a tentative definition of revenue. One Board member emphasised that the key issue is whether people are able to understand the information.

In relation to how an asset or liability arises, the issue of 'right of return' and cancellability of contracts was highlighted as critical. One Board member noted that a right of refund is inseparable from cancellability of a contract. This was considered to be a critical point in understanding if and when revenue should be recognised. The staff noted that the papers focussed on enforceable cash flows, which may be contingent on the performance of a supplier; however they have not addressed the issue of any intangible asset that may arise as part of a contract relationship.

Measurement

The Board then moved on to Agenda Paper 4C, which considers how a contract asset or liability should be measured. The staff highlighted the four main reasons why current exit price was selected as the measurement attribute as:

• The measurement reflects the future cash flows associated with the remaining rights and obligations in the contract.
• The measurement includes a margin at each measurement date for all of the remaining contractual obligations.
• The measurement is current.
• The measurement enhances comparability.

The Board discussed these reasons at length. One Board member noted that the model is not a predictor of cash flows, as it is highly unlikely that the contractor is going to lay off the obligation. The requirement to measure the contract at current exit price was highlighted by the staff as a significant change to current practice. An extensive discussion ensued on issues related to measuring assets at exit price. Some Board members said that they were uncomfortable with the issue that sales price is not remeasured, but cost is.

Accounting for the contract with the customer

The Board then moved on to Agenda Paper 4D, which explores the implications of the proposals for revenue recognition. The Board agreed that revenues cannot arise before a contract with a customer exists. The Board discussed the issue of when revenue should be recognised, and noted that it was not clear from the current papers when this would occur. The issue of contract cancellability was raised again. Some Board members thought that cancellability may be outside the scope of the project. One Board member noted that unless there are legal remedies, all contracts are cancellable – it is just that you may be required to pay your way out of the contract. This issue was referred to staff for further research and consideration.

Following extensive discussion, staff noted that some people disagree with the asset and liability model on a conceptual basis because it gives rise to 'day 1 revenue' whereas others disagree with the model on the basis of measurement difficulties.

It was noted that delivery of the good or service is fundamental to revenue recognition. The links between asset derecognition and obligation satisfaction was agreed by Board members to be critical to both proposed models of revenue recognition. Staff said they would expect the approach to derecognition for purposes of revenue recognition would be consistent with the approach adopted in the financial instruments project. One Board member noted that such consistency should not be limited to derecognition – the revenue project should also be consistent with the current projects on liabilities and insurance.

The Board agreed to continue discussing the model at the December meeting.

Discussion at the December 2007 IASB Meeting

The Board continued its discussion of the 'Measurement Model', begun in November 2007 (see IASPlus Meeting Notes for November 2007). The measurement model is one of two that are being considered for inclusion in the forthcoming FASB/ IASB discussion paper on revenue recognition. This session was intended to ensure that issues to be raised with respondents were identified and included in the discussion paper.

The staff reminded the meeting that, under the measurement model, revenue is not defined. Rather, revenue reflects the change in the exit price of the contract asset or contract liability from providing goods and services at the date the goods and services are provided. The Board discussed four possible approaches. Briefly, those approaches were:

1. All contract revenue would be reported in the revenue line. Any losses on the contract would be reported in a separate line item. Total revenue recognised could be greater than contract consideration.
2. Report the effects of price changes as revenue – revenue and changes in the exit price of the customer contract would be reported in the same line. Total revenue recognised would be equal to contract consideration; however in any one period revenue could be negative.
3. Report the effects of price changes outside revenue – in this presentation, all changes in the exit price would be presented separately from revenue as contract gains and losses. Total revenue recognised would be equal to the contract consideration.
4. Report the effects of price changes as an adjustment of revenue – within 'revenue', there would be an analysis of gains and losses on contract, coming to a total of 'contract revenue' that would be equal to the contract consideration.

Board members suggested that remeasurement would be required either when the exit price changed or when the entity did something under the contract.

A Board member thought that the analysis was useful for complex, infrequent transactions (such as building a nuclear power station). However, the market for such transactions does not exist and it would be very difficult to determine exit prices (as currently understood). In addition, he challenged the staff and other Board members whether and how this information was useful in forecasting the entity's future cash flows. Another Board member shared this concern and asked whether analysts would find this approach useful.

A Board member expressed the view that analysts are more interested in margin rather than revenue; revenue is important but it is not overriding. Other Board members noted that if margin analysis was to be useful and consistent, all the components of gross margin would have to reflect current fair value (at least one Board member objected, noting that the project was restricted to revenue). They noted that, while the information provided by the measurement model might be useful for benchmarking purposes, it would not assist in predicting future cash flows or margin analysis. It was also noted that the Standards Advisory Council had asked the Board to justify changes, especially radical ones like this, on the basis of decision usefulness and utility in predicting future cash flows.

A Board member noted that own costs are important to estimating future cash flows and that neither the measurement model nor the customer consideration model (to be discussed later) solved the problem. However, the measurement model potentially made all prepaid contracts into IAS 39 derivatives (such as by eliminating the notion of 'normal purchase and sale' contracts). In addition, the right to cancel or the right to return with full refund also challenged the measurement model. Another Board member noted that the 'hard issues', such as these last two, were common to both the measurement model and the customer consideration model and were solved by neither.

One Board member asked the staff whether they had consulted with any of the entities that use a similar approach already. He noted in particular some non-life insurance companies in Australia and gold mining and similar commodity companies. Many gold producers sell their production forward; what interests analysts most is how well those companies manage the forward/spot price spread (there is a unified and active market for such transactions). For this to work, such companies re-price their delivery contracts on an ongoing basis (minute-by-minute essentially). For the measurement model to be truly useful, the Board member thought that the re-pricing of the contract must be done on a daily basis.

Measurement model – should the model account for a broader set of assets and liabilities?

The Board then turned to question whether a focus on the contract asset or liability would be too narrow to represent faithfully an entity's economic circumstances. In considering this question, the staff noted the following consequences about the measurement model:

• Measuring only the contract asset and liability at current exit price could result in accounting mismatches arising in profit or loss that may not faithfully depict economic mismatches.
• Profit or loss would depict changes in a narrow set of assets and liabilities that may give an incomplete depiction of the changes in the entity's assets and liabilities throughout the contract.

The Board used the example of a house builder who builds a house 'off plan'. The example highlighted that in addition to the building activity, revenue under the measurement model is driven by the value of the house itself. This suggests that, to reflect the whole of the transaction properly, revenue might be analysed between 'contracting' revenue and 'production' revenue; or that gross margin would reflect the net of revenue, production margin and expenses.

The staff noted that the FASB/IASB group working on the measurement model wants to go beyond the narrow confines of contracts but are undecided about whether to revise the definition of revenue or treat the additional items as other components of income. Board members noted the similarity between where the staff would like to go and the presentation that results from recognising biological transformation in IAS 41. Board members also noted that the discussions highlighted that recognition and measurement were the primary challenges rather than measurement.

Discussion at the January 2008 IASB Meeting

(FASB staff joined by phone)

The staff introduced the customer consideration model noting that at the October joint meeting the staff had presented a summary of both the measurement and customer consideration models. The staff noted that neither the customer consideration nor measurement models are expected to be the final model. A final standard is expected to be drawn from a combination of both models.

Measurement (Agenda paper 2B)

Measurement at contract inception

The staff introduced the concept of measurement under the customer consideration model by initially addressing measurement at contract inception. The staff highlighted that:

• contract rights are measured at the amount of contract consideration stated in the contract (customer consideration); and
• customer consideration is allocated to the individual performance obligations pro rata based on the separate selling prices of each underlying good or service. As a result, the total performance obligations at contract inception are measured at an amount equal to the customer consideration.

Under the customer consideration model the rights within a contract are measured at the amount of consideration promised by the customer and not remeasured. Staff noted that they were still considering the impact of credit risk on the measurement of such rights.

The staff also introduced three potential bases that could be used to measure the contractual obligation:

• the separate selling prices of each promised good or service;
• the lay-off prices of each promised good or service; and
• an allocation of the customer's promised consideration.

The staff favoured a measurement basis using an allocation of the customer's promised consideration and asked for comments from Board members.

One Board member noted that in some situations entities will have to estimate prices for something they don't actually sell (for example, the price for the delivery of individual widgets that the entity only sells as a bundle of widgets) – so although the amount of the contract as a whole is relatively easy to determine, the individual components may require estimation. The Board member queried how entities could make judgements on items they didn't sell.

The staff agreed that allocation was necessary and that estimation was a feature of both the measurement and customer consideration models. One board member noted that the difference between the models was that the total amount of the revenue was capped under the customer consideration model, whereas under the measurement model it was open ended.

Board members discussed the features of each proposal, including the exception for readily observed lay-off prices in active markets. Some board members requested that the staff clarify what was meant by this exemption. The staff responded by indicating that the exemption was intended for commodity contracts.

Allocation of customer consideration

The staff then discussed how the customer consideration is allocated to the identified performance obligation in the contract. The customer consideration allocated to each obligation is based on the most reliable selling price information available. The hierarchy of reliable selling prices proposed by the staff (from most reliable to least reliable) is as follows:

• Level 1 - Current sales prices charged by the entity itself (in an active or inactive market)
• Level 2 - Current sales prices charged by competitors (in an active or inactive market)
• Level 3 - Estimate of sales price the entity would charge using its own pricing practices and internal assumptions.

One Board member pointed out that the agenda paper states that when estimating a Level 2 sales price, the entity could make use of a competitor's sale price, but re-calibrate that price to reflect the entity's own presumed sales price. Another board member noted that this meant that the selling prices were all entity specific, rather than market based. It was proposed by another board member that if this is the case only one level (rather than three) would be required, and another agreed in part, stating that there was no difference between levels 2 and 3. A further board member stated that the 'regular' fair value hierarchy could be used.

One board member queried the fact that the customer consideration model allows estimates of separate selling prices for allocating customer consideration. This was noted in the staff paper as a significant departure from existing US GAAP. One Board member queried why the model chose to depart from US GAAP to which another Board member responded that US GAAP was not an anchor for this project. It was recommended by a further Board member that the reference not be included within the final discussion paper.

The Board then discussed the exception for readily observed lay-off prices in active markets. When a promised good or service is traded in an active market with readily observable market prices the obligation should be measured using this price and no additional amount of consideration should be allocated to it. It was noted by one board member that if the goods or services were all delivered at the same time separation would not be required at all. It was also noted by another board member that just because an entity could sell an item in that marketplace does not mean the exception should be applied.

Measurement after contract inception

The staff then introduced measurement after contract inception. Under the customer consideration model the contract rights are measured after inception at the amount of promised consideration still to be received, adjusted for the time value of money. The contract obligations (that is, performance obligations) are measured at the amount of customer consideration originally allocated to them at contract inception. Performance obligations are not remeasured except when the contract is judged to be onerous.

A board member queried what the staff intended when they referred to 'the time value of money'. The staff indicated that they had not yet discussed this in detail. The board discussed measurement generally; including a continuation of the discussion of concerns that if it is not possible to layoff the obligation the model is potentially trying to measure using an attribute that does not exist.

No decisions were made.

Performance obligations (AP 2C)

The staff then discussed performance obligations. Although the agenda paper is titled 'Customer consideration model - performance obligations' the staff clarified that the discussion of performance obligations applies equally to the measurement model, however the definition of revenue only applies to the customer consideration model. The staff introduced the definition of a performance obligation as an enforceable promise by an entity within a contract with a customer to transfer an economic resource to that customer. The staff identified three key pieces to a performance obligation:

• An enforceable promise
• Contracts with customers
• Transfer of an economic resource

The staff noted that performance obligations are not limited to contracts for specific performance; the definition also extends to remedies for damages.

A number of board members commented that the wording within the definitions and explanations needed work. The board had concerns with the concept of enforceable promises as explained by the staff, in particular how this works for rights of return. Staff were requested to reconsider the wording used in the explanations.

The board then discussed the concept of transfer of economic resources and enforceable promises, with a number of board members noting that they had difficulty in applying the principles to service contracts.

Examples of performance obligations

In an attempt to clarify the preceding discussion the staff then moved on directly to the examples of performance obligations

The three examples dealt with:

• Delivery of paint as part of a painting services contract;
• Return rights; and
• Promotional promises.

Return rights

The majority of the discussion focussed around performance obligations in relation to return rights. Two alternative views of return rights were presented to the board – return rights as performance obligations and return rights as failed sales or cancelled contracts.

A number of board members expressed concern with the example provided by staff for accounting for return rights as performance obligations. The example proposed that by making resources available (e.g. cashiers to process a refund) the entity is providing an immediate benefit to the customer and therefore some of the customer consideration should be allocated to this performance obligation at contract inception and revenue should be recognised when that obligation is satisfied. Other board members supported this view and did not support the 'cancelled contract' view.

One board member queried whether the board should present only one view in the final discussion paper, or present both views on the basis that the board could not decide on a preferred view. It was agreed that only one view should be presented. Staff were requested to reconsider the three examples presented in the paper and prepare a paper presenting a number of alternative views for each example. This paper will be presented to a future board meeting in an attempt to clarify the positions of board members and determine if agreement can be achieved.

When are performance obligations satisfied?

The board then briefly discussed the timing of the satisfaction of performance obligations. This discussion focussed around an example in which a painter delivers paint prior to beginning work on a painting services contract and whether this would indicate that a performance obligation was satisfied. Some board members supported this view, whereas others did not believe that such a delivery should give rise to the recognition of revenue. The board reiterated the above request for staff to prepare a paper dealing with the identification and satisfaction of performance obligations for each of the three examples.

No decisions were made.

The board did not discuss agenda paper 2D

Discussion at the April 2008 IASB Meeting

The staff presented a draft version of three chapters of the forthcoming discussion paper on revenue recognition discussing definitional and recognition issues relating to the proposed contract-based model. The three chapters are:

• Chapter 2: Accounting for contracts with customers (Agenda Paper 11B)
• Chapter 3: Performance obligations (Agenda Paper 11C)
• Chapter 4: Satisfaction of performance obligations (Agenda Paper 11D)

The staff noted that these issues are independent of measurement and suggested to stop referring to two models. Instead it should be outlined that the Board has developed a single revenue recognition model that has two measurement approaches being 'customer consideration' and 'current exit price'.

Chapter 2: Accounting for contracts with customers

The staff explained that this chapter was redrafted based on the comments made by the Board at the November 2007 meeting with the main changes being:

• Amending the discussion about the focus on assets and liabilities to clarify that the pursued assets and liabilities approach is not the only possible approach for a revenue recognition model.
• A clearer explanation of what the Boards mean by a contract.
• A discussion of when a particular contract should first be recognised.

Some Board members asked for clarification on the recognition of a net position (net asset or liability) at inception of the contract, in particular, whether this would lead to the recognition of an executory contract. The staff responded that under the customer consideration measurement approach this position would be zero while under the current exit price approach a day 1 asset or liability could arise.

Some Board members questioned the term 'enforceable or otherwise recognisable at law' in the contract recognition principle. There seemed to be a consensus to align this term to the language used in IFRSs.

Chapter 3: Performance obligations/ Chapter 4: Satisfaction of performance obligations

The two chapters were discussed together. The staff explained that these chapters were redrafted based on the comments made by the Board at the January 2008 meeting with the main changes being:

• An amendment to the description of when a service obligation is satisfied to remove the notion of the customer 'receiving an immediate benefit'. Some Board members noted the awkwardness of saying that a customer has received a benefit if, for example, a painter has only painted half the customer's house, because at that point the customer would probably consider himself to be in a worse position than he was before painting began (even though he has received economic resources).
• Modifications regarding the two views about return rights.

Some Board members asked how the revenue recognition model would interact with IAS 11 Construction Contracts. The staff responded that the model may cause changes to the accounting for construction contracts since IAS 11 refers to contract activity whereas the model exclusively focussed on whether an economic resource has been transferred. The staff also noted that the model may result in a continuous sale if the customer obtains enforceable rights to the economic resources on an ongoing basis.

Way forward

Overall the Board's comments were more of editorial nature rather than challenging the principles in the draft chapters.

The staff intends to present to Board a complete first draft of the discussion paper in May and to discuss the measurement approaches (Chapter 5) at the May Board meeting. The staff noted that the topics 'revenue recognition outside a contract' and 'variable consideration' are still outstanding.

Discussion at the April 2008 Joint IASB-FASB Meeting

EFRAG presentation on PAAinE discussion paper

The Joint Board meeting welcomed representatives from Europe's Pro-active Accounting Activities in Europe (PAAinE) initiative to present an overview of the discussion paper Revenue Recognition–A European Contribution. The paper was published in July 2007 jointly by European Financial Reporting Advisory Group (EFRAG) and the German and French accounting standards boards. Its objective is to stimulate debate on revenue recognition in Europe and to develop European views to be considered by the IASB and FASB in their joint revenue recognition project.

The PAAinE representatives introduced the paper by noting that it was prepared based on the revenue recognition project currently being undertaken by the IASB and FASB. The representatives noted that the IASB and FASB's proposal that revenue should be recognised as the legal layoff amount (the amount the recipient of the revenue would have to pay a third party to fulfill the obligation to deliver goods or services) made many constituents in Europe uncomfortable. PAAinE believe that there is a need for new principles based on existing standards, but indicated that they do not believe that this necessarily means that fair value is the appropriate answer.

The PAAinE paper received 70 comment letters with quite mixed responses.

The representatives highlighted that the PAAinE paper:

• Develops an asset/liability approach starting from the question 'what shall revenue reflect' (revenue being the top line of the income statement).
• Discusses different possible meanings of the revenue number.
• Discusses when revenue arises under different approaches (recognition).

The paper does not discuss measurement issues in depth. The representatives highlighted that it does not discuss defining revenue as changes in the fair value (legal layoff amount) of performance obligations.

The representatives then moved on to discuss what the revenue number should reflect. In this discussion, it was noted that the paper indicated that a binding contract is a necessary precondition for revenue to exist. One Board member queried the emphasis on a binding contract. The Board member was not sure that the boards have a notion of a binding contract. He went on to ask whether the PAAinE representatives believe that a right of return was a binding contract – because, if you can return a good for a refund it is not very binding. The Board member concluded by stating that this was fundamental to the notion of revenue.

The representatives moved on to provide an overview of the models discussed in the PAAinE paper (diagrammed below):

The representatives noted that there is a grey area between the 'critical events approach' and the 'continuous approach' and that, rather than being separate models, the two actually merge into each other.

The discussion then focussed on Approach C. One Board member asked whether the term 'substantively' in Approach C was important. The representatives responded by saying that it wasn't and that the model could be read without the term included.

Some Board members queried how this approach was consistent with the assets and liabilities approach. It was noted that the approach seemed to be more in line with an earnings process.

The representatives moved on to discuss the critical events approaches (A-C). The critical events approaches require that revenue should reflect that the company has completed a defined part or all of a contract.

• Approach A: complete contract fulfilment
• Approach B: fulfilment of part contract as defined by contract itself
• Approach C: fulfilment of part contracts as defined by economic measures

In explaining Approach C it was highlighted that for revenue to be recognised under this approach, the paper says that the customer can use the product for its intended purpose. The representatives clarified that this meant that, for example, if a customer is delivered a computer monitor, they are able to use that monitor as a monitor, rather than for some other purpose (for example, as an ashtray). Some Board members were concerned that this would involve understanding customer intention. Given how difficult it was to determine management intention, Board members queried how customer intention might be determined. One Board member also queried whether revenue could be recognised differently for the sale of the same item to different customers depending on customer intention.

The representatives noted that this was a good point and was not addressed in the paper.

Following general discussion on the models, the representatives then moved on to discuss the continuous approach (Approach D). Under Approach D, revenue reflects the activity of the company under a binding contract in a way that mirrors progress under a contract. The progress of the contract could be measured in a number of different ways, for example:

• as the supplier incurs the costs inherent in the contract;
• as the risks inherent in the transaction decrease or are eliminated by the supplier;
• as the value of the goods created under the contract increases; or
• with the passage of time.

It was clarified that these are not intended to be measurement options.

One Board member queried whether the representatives thought this would be a choice as to which option to take. The representatives did not think so.

Finally, the representatives very briefly highlighted that the paper outlines the differences between the two approaches. In sale of goods scenarios (for example, buying produce at a supermarket) little difference to existing practice is expected. However, for services, more difference are expected to arise.

The representatives said that a summary of comments will be released in early April; however, no decision has yet been made on what, if any, further work will be done on the project.

The IASB Chairman thanked the representatives for their efforts.

Discussion at the May 2008 IASB Meeting

The staff presented the draft version of chapter 5 of the forthcoming discussion paper on revenue recognition discussing the measurement approaches relating to the proposed contract-based model (draft chapter reproduced in Agenda Paper 7B).

Chapter 5: Measurement of the contract

The staff explained that the chapter separately considers the following fundamental issues:

• Measurement objective: Exit price (fair value of obligation to perform) or customer consideration (sales price)
• Remeasurement of the performance obligation: Lock in measurement at contract inception, or remeasure the obligation at each reporting date?

The chapter therefore implies that there are four possible measurement approaches from the combination of using either an exit price or sales price at contract inception and then either remeasuring the performance obligation or locking in those measurements after contract inception.

The staff noted that the 'exit price measurement approach' combines exit price with remeasurement of the performance obligation while the 'customer consideration measurement approach' is a combination of customer consideration with no remeasurement of the performance obligation.

In an appendix to chapter 5 the staff presented a hybrid model taking into account concerns raised by Board members regarding the 'pure' customer consideration model (reproduced in appendix A to agenda paper 7B). The hybrid model was based on the customer consideration measurement approach, that is, a customer consideration (sales price) measurement objective was used.

The main difference to the pure customer consideration measurement approach was that the cost component was updated to measure the performance obligation over the life of the contract.

The Board had a lengthy debate on the principles outlined in the draft chapter. Board members expressed diverse views. The discussion focussed mainly on the following issues:

• Whether the Board should express a preliminary view for one approach.
• Whether the hybrid model in the appendix should be included in the DP.
• Whether the 'day 1 profits' or the remeasurement of the performance obligation is the key difference between the approaches. In this context one Board member pointed out that the customer consideration measurement approach does not allow the recognition of a contract asset and therefore may be in contradiction to the Conceptual Framework in cases where an asset that meets the definition in the Conceptual Framework arises at inception.
• One Board member was concerned that the cross-cutting issues with other standards (in particular IAS 37) were not clearly articulated. In this context another Board member noted that the implications of an exit price measurement approach on other standards (for example, IAS 2 and IAS 39) and ongoing Board projects were not explained.

There seemed to be a consensus that the structure of the chapter is appropriate, but little progress was made regarding the other issues. Finally, the Chairman cut off the debate and asked for a vote on a preliminary view.

Preliminary View

A majority of 9 Board members was in favour of the customer consideration measurement approach, meaning that a customer consideration (sales price) measurement objective should be used. By combining the measurement objective with the remeasurement issue the Board developed the following three approaches:

• Customer consideration without remeasurement of the performance obligation except for onerous contracts (the pure customer consideration approach)
• Customer consideration with 'some' remeasurement of the performance obligation (the 'middle way')
• Customer consideration with 'full' remeasurement of the performance obligation

Of the 9 Board members in favour of the customer consideration measurement approach, 5 preferred the 'middle way'. However, it was not specified which events trigger remeasurement.

Way forward

The staff was asked to redraft the chapter taking into account the decisions made at this meeting and also to address the concern that the customer consideration measurement approach may be in contradiction to the Conceptual Framework. A revised draft will be discussed at a future meeting.

Discussion at the July 2008 IASB Meeting

The Board discussed the project timetable and continued its deliberations on the measurement approaches of the forthcoming discussion paper (DP) on revenue recognition.

Way forward and project timetable

There was a broad consensus that a DP should be drafted and issued as soon as possible. One Board member expressed frustration about the progress made in the project and noted that the unresolved issues are more significant than the resolved issues. Among other things, this Board member noted that the scope is not clear (that is, the impact on accounting for leases, insurance contracts, and financial instruments), that there is no proper definition of onerous contracts, and that the treatment of rights to return and the measurement of contract rights are not addressed. This Board member raised the concern that because of these deficiencies constituents will find it difficult to respond to the DP as currently drafted.

Other Board members acknowledged that several issues are unresolved but noted that the DP is a 'high level document' that seeks input on the general revenue recognition approach.

Finally the Board agreed to the staff proposal to finalise drafting the DP and to publish it in October or November 2008.

The staff explained that it intends starting work on the exposure draft (ED) immediately. The staff was of the view that constituents will not fundamentally disagree to a contract-based recognition principle and the proposed measurement approach.

Consequently, developing the high-level model in the DP into standards-level guidance should begin in parallel to completing and redeliberating the DP. The ED would then be updated to reflect comments on the DP.

The Board agreed to the staff proposal. The Board tentatively decided to have a six-month comment period for the ED.

Eventually, the Board adopted the following timetable:

• October/November 2008: DP issued; six-month comment period.
• Up to September 2009: Development of the ED parallel to completing and redeliberating the DP.
• October 2009: ED issued; six-month comment period.
• March 2010: Roundtable discussions (if necessary).
• May 2011: Publication of final standard.

Measurement of performance obligations

At the May 2008 meeting the Board decided that the discussion paper should express a preliminary view in favour of the customer consideration approach. At this meeting the Board discussed the description of the measurement approach in the pre-ballot draft and when performance obligations should be remeasured under the customer consideration approach.

Measurement at contract inception

By majority vote the Board reaffirmed its decision that at contract inception performance obligations should be measured equal to the transaction price of the contract (customer consideration measurement approach).

The Board agreed to outline the two different views expressed by Board members why at inception a contract should be recognised in that way:

• View A: No revenue should be recognised before a performance obligation is satisfied. Because the transaction price represents the amount the customer is willing to pay for the goods and services to be provided in the contract, that price serves as a meaningful measure of the performance obligations in the contract.

  This view suggests that no matter how observable or costless to obtain a fulfilment price measurement might be the recognition of a contract asset and revenue at contract inception would not be favoured.

• View B: A fulfilment price is conceptually preferable but the costliness and complexity of estimating such a price is unjustified given that the transaction price in the contract is a relatively straightforward, observable, and reasonable proxy for a fulfilment price.

  This view suggests that the Board might decide at some future point that in situations in which a fulfilment price is observable and relatively inexpensive to obtain, that price would be used to measure the bundle of performance obligations, in particular, if the fulfilment price for those obligations materially departs from the transaction price.

Subsequent measurement: Allocation approach

According to the preliminary view expressed by the Board, the transaction price used to measure the bundle of performance obligations at contract inception is allocated to individual performance obligations based on the entity's separate selling prices of the promised economic resources (that is, goods and services). The amount allocated to each performance obligation at inception is then recognised as revenue when that particular performance obligation is satisfied. This approach negates the need to remeasure the remaining performance obligations in subsequent periods to determine how much revenue to recognise in those periods.

By majority vote the Board modified this view by including a limited exception to the allocation approach. This exception applies when goods or services identical to those promised in the contract have a quoted price in an active market (corresponds to 'Level 1 Inputs' of the fair value hierarchy in SFAS 157) or the fair value can be determined using 'Level 2 Inputs'. In these situations the promise to transfer the good or service should be measured at the so determined fair value with any remaining balance of the contract transaction price is allocated to all other performance obligations on a relative selling price basis.

Remeasurement of performance obligations

At the May meeting the Board noted that performance obligations might be remeasured for circumstances other than the onerousness of the performance obligation. The staff identified the following additional circumstances that may trigger remeasurement:

• Availability of observable current exit prices
• Uncertain, long-term performance obligations

Regarding the first issue by majority vote the Board tentatively decided that observable current exit prices should not result in remeasuring the performance obligation. In this context several Board members noted that quoted current exit prices may exist in general but that very often it is difficult to determine the exit price goods or services identical to those promised in the contract with the customers.

Regarding the second issue the Board did not come to a conclusion. The Board noted that a thorough understanding of the onerous contract test would be required to answer this question, that is, to assess whether such an onerous contract test would be sufficient to cover the risk of 'surprise losses' related to these performance obligations.

Finally the Board deferred its decision on remeasurement of performance obligations. The staff was asked to develop a detailed description of the onerous contract test including the measurement of onerousness (in particular how to consider risk and profit margins in such a calculation).

Discussion at the September 2008 IASB Meeting

The Board continued its deliberations on the customer consideration approach. Specifically, the staff said that the objective of this meeting was to discuss possible options of an onerous test (that is, a test whether a contract has become onerous) and possible exceptions to the Board's tentative general decision not to remeasure. The two issues represent items which the Board were not able to conclude on at the July Board meeting.

The staff presented two possible approaches that would trigger a remeasurement of the performance obligation, one of which is cost-based and the other being margin-based. Under the cost approach an entity would remeasure its performance obligation, if its cost of performance exceeded the carrying amount of the performance obligation. Under the margin approach, remeasurement would take place if measurement of the performance obligation in accordance with IAS 37 (or another similar current price) exceeded the carrying amount of the performance obligation.

The staff discussed the advantages and disadvantages of each model. The cost model has the advantage of being fairly easy to apply and of limiting the occasions of remeasurement to unforeseen events. However, by doing so it would, in essence, defer recognition of adverse changes to future periods. The margin-based approach takes into account changes in the entity's margin and would, hence, be a more reliable reflection of the value of the performance obligation. The disadvantage of this lies is a higher complexity.

Some Board members asked for clarification as to the scope of the project and the items/instances that would not fall under either of the approaches proposed. The staff acknowledged that the most likely candidates would be financial instruments and insurance contracts, for which a different model was envisaged (see below). One Board member said that there might even be a third category of arrangements, namely service concessions. Focussing on the onerous test, he remarked that the cost model would be entity-specific, whilst the margin-based approach would take into account all changes in price. Either approach would not take pre-existing inventory into account, which would lead to a mismatch anyway.

Another Board member said that he got the impression that staff was proposing a complete shift in measurement attribute. Under the cost approach an entity would initially measure its performance obligation at fair value and subsequently at an entity-specific amount. He questioned the idea of there being a concept of 'cost' of discharging of a liability. Cost was defined for assets, not for liabilities.

The chairman asked the staff whether the onerous test would be one-sided only, that is, remeasurements would be recorded only if they resulted in an increase of the performance obligation. The staff confirmed that this was how they envisaged the test to work. One Board member replied that such a procedure would be in total contradiction to other parts of the literature. He cited the Board's proposed approach to remeasuring non-financial liabilities under IAS 37, where the remeasurement would take place both directions.

The Board discussed the issues intensively, and there was no predominant view. After a lengthy debate, the chairman took a straw vote as to which approach Board members preferred. Seven members were in favour of the cost model, the other six favoured a margin-based approach.

The Board finally turned to the question whether or not the forthcoming Discussion Paper should acknowledge that a second model might have to be developed for those items/instances where remeasurements seemed appropriate (in contrast to the Board's general view on remeasurements). Nine Board members advocated such an approach. Rather than having a majority and an alternative view being presented in the Discussion Paper, the Board recommended to list the circumstances that might warrant a deviation from the basic principle and to specifically ask the constituents whether they agree.

The chairman asked the staff whether they had all information they needed in order to draft the section. The staff acknowledged that this was the case and that they did not plan to come back to the Board. The chairman thanked the team and closed the meeting.

December 2008: Discussion Paper Published

On 19 December 2008, the International Accounting Standards Board and the US Financial Accounting Standards Board jointly published for public comment a discussion paper (DP) on recognition of revenue titled Preliminary Views on Revenue Recognition in Contracts with Customers. The DP proposes a single, contract-based revenue recognition model. The model would apply broadly to contracts with customers, although contracts in the areas of financial instruments, insurance, and leasing may be excluded. Under the proposed model, revenue would be recognised on the basis of increases in an entity's net position in a contract with a customer.

The Discussion Paper highlights the following differences from current practice:

• Use of a contract-based revenue recognition principle. An entity would recognise revenue only as a result of satisfying a performance obligation. An entity satisfies a performance obligation when it has transferred (provided) the goods or services to the customer. Typically, transfer occurs:
  • for goods, when the customer takes physical possession of the good
  • for services, when the customer has received the promised service.
  Cash collection or production of inventory not transferred to a customer (whether under contract or not) would not trigger revenue recognition. For instance, revenue recognition for construction-type contracts would only occur during construction if the customer controls the item as it is constructed.
• Identification of performance obligations. Under the proposed model, entities would account for contractual promises as performance obligations and would recognise revenue when these obligations are satisfied. For example, some warranties and other post-delivery services accounted for as cost accruals under current guidance would be performance obligations of a contract. If an entity promises to transfer more than one good or service, it recognises revenue as each promised good or service is transferred to the customer.
• Measurement of revenue. The amount of revenue recognised is the amount of the payment (consideration) received from the customer in exchange for transferring goods or services. If a revenue transaction involves multiple performance obligations, an entity will allocate the total consideration to each performance obligation in proportion to the entity's stand-alone selling [rice for the promised good or service underlying each performance obligation.
• Use of estimates. Estimates used to recognise revenue would not be as limited under the proposed model as they are under some existing standards. For example, in multiple-element arrangements, entities would estimate the price of the undelivered goods and services and recognise revenue when goods and services are delivered to the customer, regardless of whether objective and reliable evidence of the selling price of the undelivered item exists.
• Capitalisation of costs. In the proposed model, costs are capitalised only if they qualify for capitalisation in accordance with other standards. For example, an entity would expense as incurred, rather than capitalise, commissions paid to a salesperson for obtaining a contract with a customer. These costs typically do not create an asset that qualifies for recognition in accordance with other standards.

The DP may be downloaded from either the IASB's Website or FASB's Website. Respondents should submit one comment letter to either the IASB or the FASB. The boards will share and consider jointly all comment letters that are received by 19 June 2009. Click for Joint IASB-FASB Press Release (PDF 56k).

The National Office Accounting Standards and Communications Group of Deloitte (United States) has published a Heads Up FASB and IASB Issue Discussion Paper on Revenue Recognition (PDF 104k). The newsletter discusses the joint FASB-IASB Discussion Paper Preliminary Views on Revenue Recognition in Contracts With Customers.

Discussion at the March 2009 IASB Meeting

(FASB staff participated by video link.)

The objective of this session was for the Board to reach tentative decisions on the main issues relating to the measurements of rights in a contract. Specifically, the Board would be asked to consider how rights in the contract should be measured when the amount of consideration to be paid by the customer:

• is paid significantly before or after performance by the entity (time value of money);
• is uncertain; or
• is paid other than in cash.

Effects of the time value of money

The staff introduced the paper by noting that in developing the proposed revenue recognition model the Boards have ignored the time value of money for simplicity; however, an entity's net contract position may contain a financing element. The staff asked the Board to consider whether and how the carrying amount of an entity's net contract position should reflect the time value of money.

The staff recommended that:

• a. Conceptually, the carrying amount of an entity's net contract position should reflect the time value of money.
• b. Practically, the carrying amount of an entity's net contract position needs to reflect the time value of money only if payment by the customer and performance by the entity differ by approximately one year or more.
• c. The discount rate used to reflect the time value of money should be the rate at which the entity and its customer would have entered into a financing transaction independent of providing goods and services under the contract.
• d. The interest income or expense on the net contract position should be presented as a component of revenue.

The Board agreed with the staff recommendation that, in concept, the carrying amount of an entity's net contract position should reflect the time value of money. A number of Board members noted that the concept is right; it is just a question of materiality as to whether it affects the financial statements.

In response to the question of when should the time value of money be reflected, the Board disagreed with the staff recommendation that the Board should specify the circumstances in which an entity should reflect the time value of money. A number of Board members were of the view that the time value of money should be reflected, subject to materiality. Another Board member noted that whether the time value of money is material is a function not only of time, but also of the level of interest rate. One Board member also stated that the Board should resist bright line accounting.

Another Board member noted that the only way to judge if something is material is to calculate the numbers. So that Board member would support an IAS 39.AG79 type model being applied, in which short-term receivables and payables with no stated interest rate may be measured at the original invoice amount if the effect of discounting is immaterial. Other Board members agreed with the concept, and requested the staff to develop some guidance on applying materiality on this basis.

The third issue addressed in relation to time value of money was what interest rate should be used. The Board agreed with the staff recommendation that the discount rate should be the rate at which the entity and its customer would have entered into a financing transaction; however, a number of concerns were raised as to the level of detail in the guidance being developed by the staff. The staff were requested to keep any guidance related to this area high level in nature.

The final question addressed in relation to the time value of money was how should the effects of the time value of money be presented in the financial statements? The Board indicated that this issue was better addressed as part of the financial statement presentation project.

Effects of uncertain consideration

The staff introduced the second paper by noting that, in developing the model to date, the Board has assumed that the promised customer consideration amount is fixed. However, in many contracts the promised consideration amount is uncertain.

The staff recommended that:

• a. At contract inception, the transaction price is the amount of consideration that an entity expects to receive from the customer. The expected consideration is the entity's probability-weighted estimate of consideration from the customer.
• b. After contract inception, the entity should update the measurement of rights to reflect the current transaction price. Changes in the transaction price should be allocated to all performance obligations. Consequently, the entity recognises those changes in profit or loss only to the extent that they relate to satisfied performance obligations.

The staff then directed a number of questions to the Board for consideration in response to these recommendations.

Question 1

• Does the Board agree that the transaction price at contract inception is the amount of expected consideration to be received from the customer (that is, at the entity's probability-weighted estimate of customer consideration)?

• Does the Board agree that after contract inception the measurement of rights should be updated to reflect changes in the transaction price?

• If the measurement of rights is updated to reflect changes in the transaction price, does the Board agree that those changes should be allocated to the performance obligations? Consequently, an entity would recognise revenue for changes in the transaction price only when those changes relate to satisfied performance obligations.

• Does the Board think that an expected consideration approach should be constrained to minimise the risk of reversing revenue? If so, does the Board agree that cumulative revenue should be limited to the amount of certain consideration?

• Does the Board agree that a change in the transaction price should be allocated to all performance obligations in a contract? If not, what is the basis for excluding some performance obligations from the allocation of a change in the transaction price?

The Board generally agreed with questions 1, 2 and 3.

In response to question 4, the Board disagreed with the staff recommendation that the expected consideration approach should be constrained to minimise the risk of reversing revenue. One Board member asked where this concept was in the Framework?

Another Board member noted that the expected value already takes into account the considerations being put forward in the proposal, so also disagreed with the staff recommendation. The majority of Board members did not support the staff recommendation; that is, they supported the view that the expected consideration approach should not be constrained.

In response to question 5, a number of Board members expressed concern with the proposals, with one Board member requesting the staff to identify the principle they were applying. Following discussion, the staff was requested to bring back the issue as part of a future discussion on segmenting transactions.

Noncash consideration

The staff introduced the third paper by noting that in developing the proposed revenue recognition model to date the Board had only considered contracts in which customer consideration is in the form of cash. However, customer consideration might be in the form of goods, services, or other noncash consideration.

In relation to noncash consideration the staff recommended that:

• An entity should measure its right to noncash consideration at the fair value of the promised consideration unless the fair value of the promised consideration cannot be measured reliably or the contract lacks commercial substance.
• If the fair value of the noncash consideration cannot be measured reliably, but the contract has commercial substance, the entity should measure the promised consideration indirectly by reference to the fair value of the goods and services promised in exchange for the consideration.
• A contract in which goods or services are exchanged for goods or services that are of a similar nature is not a revenue generating contract if that contract lacks commercial substance.
• A new revenue standard should not provide specific guidance for particular exchanges involving noncash consideration (for example, barter credit transactions, exchange of advertising services).

The board agreed that, in principle, an entity should measure its right to noncash consideration at the fair value of the promised consideration. The board also agreed with the second recommendation made by the staff that if the fair value of the noncash consideration cannot be measured reliably, but the contract has commercial substance, the entity should measure the promised consideration indirectly by reference to the fair value of the goods and services promised in exchange for the consideration.

In response to a question as to whether a revenue standard should include guidance on when the fair value of an asset received can be measured reliability in the absence of comparable market transactions, the board thought that this issue would be better addressed as part of the fair value measurement project.

The board discussed whether entity should be allowed to recognise revenue in a contract for an exchange of similar goods or services. A number of board members expressed concern as to how this could be applied in practice. It was noted that some guidance already existed in IAS 16. One board member said that if the entity was in the same position before and after the transaction there should be no revenue. Another board member asked the staff to clarify what they meant by the term 'similar'. Following discussion, the staff agreed they needed to consider the issue further and bring the issue back to the board at a later date. No final decisions were made.

Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter – Discussion Paper Proposes New Basis for Revenue Recognition (PDF 117k).

Discussion at the May 2009 IASB Meeting

Contract boundaries

FASB staff joined the meeting via video link.

The staff introduced the first paper to be discussed. The objective of the paper was to decide how options to renew contracts should be accounted for. The staff noted that they thought there were essentially three ways to account for such options:

• (a) ignore the option
• (b) account for the option as a separate performance obligation (method 1)
• (c) look through the option by including within the contract boundaries those optional goods and services the customer is likely to receive (method 2)

The Board was first asked if they agreed with the staff recommendation not to ignore the renewal and cancellation options in the proposed revenue recognition model. The Board agreed.

The Board then had a general discussion around types of options and the difficulty in distinguishing some options from marketing. For example, what happens if an option is one that everyone can get even if they don't buy anything? The staff thought this would have a selling price of nil. It was noted that it was important to distinguish genuine options from selling devices.

The staff noted that they thought the two approaches (method 1 and 2) would give similar financial statements, but they wouldn't say that they are conceptually the same.

The staff then introduced the two approaches. The staff recommended the use of the second method. The Board then discussed the two approaches. One Board member thought that both approaches would be equally as difficult as one another. Another Board member thought that the two models would provide different answers.

Another Board member said that the difference would be that the binomial method used in method 1 would include the time value of money and the second method would not. The Board member thought that the staff were underestimating the degree of difficulty. The value also depends on other factors such as surplus capacity, alternative products etc. This makes this type of valuation more difficult than valuing an employee stock option.

One Board member was not sure why they were worrying about options that were written that were profitable? They were not onerous. The staff responded by saying that onerous contracts are unexpected, whereas the performance obligation relating to the revenue recognition was expected.

The Board did not reach any consensus as to their preferred method. The staff were asked to reconsider their analysis. The (acting) chair noted that some Board member seemed to prefer the components/performance obligation approach (method 1), but there were mixed views.

The Board were then asked by the staff if they supported an approach that requires renewal options to be accounted for as performance obligations if the standalone selling price of that option can be determined without undue cost? The majority of Board members agreed.

As the Board members were running out of time for the session, they then moved directly to Question 5 of the staff paper which asked the Board members if they thought options should be accounted for options for additional goods and services by looking through then, regardless of whether the optional goods and services are the same as the non-optional goods and services. The Board agreed.

The Board then very briefly discussed the second agenda paper regarding collectibility. The Board will continue the discussion later in the meeting.

Uncertain consideration

This topic was a joint FASB-IASB meeting

The session was chaired by FASB Chairman Robert H Herz.

The staff introduced the topic by noting that at previous board meetings, the boards considered how an entity should measure its net contract position and recognise revenue when a customer promises an uncertain amount of consideration. The boards agreed that:

• At contract inception, the transaction price (i.e. the measure of rights and performance obligations) is the probability-weighted estimate of consideration to be received.
• After contract inception, an entity should update the measurement of rights to reflect changes in the transaction price and allocate those changes to the performance obligations. The effects of those changes on satisfied performance obligations would be recognised as revenue in the period of change.

Although the boards agreed with that expected consideration approach for measuring performance obligations, they disagreed on whether to constrain the amount of revenue recognised (and measurement of rights) in some instances.

• The IASB decided tentatively that the approach should not be constrained. Rather, an entity should disclose information about estimates and uncertainty.
• The FASB decided tentatively that the cumulative revenue recognised should be limited to an amount that is certain or noncontingent. That constraint results in a 3-step process whereby an entity 1) measures performance obligations based on an expected consideration amount, 2) determines how much revenue to recognise based on satisfied performance obligations, and 3) adjusts the measurement of rights (and revenue) so that the increase in the net contract position is limited to the amount of consideration that is certain.

The staff thinks that the boards' differing conclusions create a fundamental issue that must be resolved before the development of an exposure draft. Therefore, the objective of the discussion is to get a consistent view from the boards on whether to constrain the expected consideration approach when the customer promises an uncertain amount of consideration. The staff recommendation was to constrain the expected consideration approach only if it is impracticable for an entity to reliably estimate a consideration amount.

The staff highlighted that as part of their outreach activities they had received feedback from preparers, auditors and users. Preparers and auditors were generally supportive of the staff recommendation. Users, however, had differing views. Some had a low tolerance for estimates of revenue, and preferred an approach that constrains revenue. Others thought that estimates were okay and depicted the economic of the transaction.

The Boards were asked if they agreed with the staff recommendation.

A number of Board members expressed support for the staff view; however, they would also like to see some disclosure made around the estimates.

Much of the discussion by the Boards focussed on Example 4 in the staff paper. This example considered a scenario where revenue for fund management services was based on an increase in the funds value relative to an observable index determined at the end of a period (6 months).

One Board member said that they struggled to get to this being reliable. An index is outside the control of the entity. Only the entity's own performance is within their control. Other Board members had difficult in understanding the numbers produced for the constrained revenue approach.

Following discussion, one Board member suggested it is helpful to consider in these types of scenarios how the counterparty would recognise the liability. Another Board member suggested that what the entity really had was a call option on money if they outperformed the index. Some Board members then expressed concerns as to the interaction between IAS 39 and the revenue project, given that any receivable is likely to be a financial asset.

The Chair summed up the discussion by noting that there was a high level of support for the staff recommendation plus some disclosure. There are also issues to consider related to the interaction of revenue recognition and financial instruments. The staff will consider the issues raised in further developing the model.

Collectibility

The Board discussed how collectibility of the customer consideration amount affects the carrying amount of an entity's net contract position and, hence, its effect on revenue recognition. Specifically, the Board considered the effects of the customer's credit risk.

The Board debated whether the measurement of an entity's net contract position should reflect the customer's credit risk. Hence, uncertainty of collectibility because of the customer's credit risk would affect the amount of revenue recognised when a performance obligation is satisfied. In addition, after a performance obligation is satisfied, whether any change to the amount allocated to that performance obligation relating to customer credit risk should be recognised as income or expense rather than revenue. Finally, once the entity has an unconditional right to cash, that right should be accounted for in accordance with existing receivables standards.

In doing so, the Board discussed how revenue should be recognised and whether it should be 'gross' or 'net' – that is, whether the seller's assessment of financing and default should be separated from the consideration itself.

Board members noted that any time that the seller did not receive the consideration on the date of sale, the seller was financing that sale. This would help to derive the true selling price. The longer the time between sale and collection, the larger the financing and credit risk elements.

Some Board members were caught up in separating revenue from bad debt expense and financing. Others did not support this view; rather, they saw gross presentation as an invitation to inflate revenue artificially. Still others saw it as a presentation matter. Many points of view around these positions were aired during the debate.

A majority (8 members) favoured a 'gross presentation' of revenue. However, whether this presentation should be required on the face of the statement of comprehensive income was not resolved and the staff will return at a subsequent meeting to discuss this with the Board.

Discussion at the June 2009 IASB Meeting

Noncash consideration

The FASB staff joined by video conference.

The staff began the discussion by reminding the Board of the previous tentative decisions made at the March and April Board meetings, including that:

• The entity should measure noncash consideration at fair value.
• If an entity cannot reliably estimate the fair value of noncash consideration, it should measure the consideration indirectly by reference to the selling price of the promised goods and services.
• Some exchange transactions should not be transactions that generate revenue but did not decide on which exchange transactions should be excluded from revenue. The Board had asked the staff to seek user input on this matter.

The staff talked to users, particularly in the oil and gas industry. The staff advised that the (almost unanimous) user input was that they preferred that transactions not be recognised as revenue. The users believed that exchanging assets in the normal course of business was more like the acquisition of inventory rather than a sale.

The staff then moved on to their first recommendations:

• that an exchange transaction should not be regarded as a transaction that generates revenue if the purpose of the transaction is to facilitate sales of an asset to another customer in the ordinary course of business.
• that the revenue standard not provide guidance on how to account for contracts whose purpose is to facilitate sales to customers.

One Board member noted that the proposals work well for similar assets, but not for dissimilar assets. Problems are likely to arise if different assets and different timing occurs. For example, what if tow oil companies sold oil to each other and exchanged cash? As long as there is economic substance the Board member though that there may be revenue recognised.

Another Board member noted that the current IAS 18 seemed to work in practice.

The Board agreed with the staff recommendations.

The staff then moved on to their recommendation that either the selling price of the asset surrendered or fair value of the asset received in an exchange transaction needs to be reliably estimable for the transaction to be considered a transaction that generates revenue. One Board member queried whether this is meant to be different to the current paragraph 12 of IAS 18 which refers to goods being dissimilar and measured revenue based on fair value received if able to be measured reliability, or those given up otherwise.

The staff responded by saying they thought it was consistent, but also if you can't measure either then it is revenue.

Another Board member responded to this by stating that they were concerned that the drafting is too broad. They would prefer not to have the reliable criteria, and would prefer to keep the requirements as currently included in IAS 18. Following discussion the Board supported the current requirements of IAS 18 and not the staff recommendation.

Presenting revenues for performance by third parties

The staff introduced the paper that considers whether in some cases an entity should recognise revenue as the gross amount billed to the customer, or the net amount retained by the entity after paying those other parties. The staff presented their first three recommendations:

1. The identification of performance obligations should determine the amounts at which an entity recognises as revenue.
2. The revenue recognition standard should provide indicators to assist entities in identifying performance obligations when it is not clear what goods or services an entity is obliged to transfer.
3. Indicators that an entity may have a performance obligation to provide a good or service to a customer include:
   • Primary responsibility for fulfilment
   • Inventory risk
   • Discretion in establishing prices
   • Customer credit risk.

The Board agreed with each of those recommendations.

The staff then proceeded to their fourth recommendation:

• If an entity transfers a performance obligation to another party, it should not recognise revenue with respect to that obligation.

The staff clarified that by transfer they intended legal transfer. The Board discussed whether any amount that may arise on the transaction (fir example, if an entity was paid by another entity for the transfer of the obligation) would be classified as a gain or revenue. The Board did not conclude on this point. There was general agreement by the Board with the staff recommendation.

The final two recommendations related to disclosure. The staff recommended that an entity:

• Disclose separately revenues in the same line of business from (a) providing goods and services on its own account and (b) arranging for the provision of goods and services.
• Disclose the basis for its assessment and any significant judgement when determining whether it is obliged to provide goods and services to a customer or to arrange the provision of goods and services on behalf of another entity.

The Board agreed with the first disclosure recommendation. A number of Board members thought that the second recommendation was already addressed by IAS 1 requirements. The staff was asked to reconsider this disclosure recommendation to avoid any redundancy in requirements.

Combination, segmentation and modification of contracts

The Board first considered the issue of combination of contracts. The staff recommended that when two or more contracts with the same customer should be combined into a single contract position if the price of those contracts are interdependent. The Board agreed with the staff recommendation. The Board discussed some issues relating to how the indicators for such principle may be expressed, but the Chair reminded the Board that the wording is not yet finalised, and that the staff were heading in the right direction so asked the Board to move on to the next issue.

The Board then moved on to discuss in what circumstances a contract should be segmented. The staff recommended that a single contract with a customer should be segmented into more than one net contract position only if each segment is priced independently. One Board member said that they did not fully understand the principle and would like to see the full picture before concluding. The staff noted that implicitly if the Board agreed with the first recommendation they should also agree with the second recommendation as it is the inverse. Another Board member noted that it is about getting the right allocation, and when contracts should be segmented. Following a brief discussion the staff were asked to reconsider and clarify the issue and bring it back to a future Board meeting.

Discussion at the July 2009 IASB Meeting

Presentation of contracts with customers

The Board reaffirmed its preliminary view expressed in the discussion paper that the unit of account is the remaining rights and obligations in the contract with the customer and the contract position is presented net in the statement of financial position. The Board also made a tentative decision that no exceptions be made to this principle. There was some discussion on the latter point as Board members sought to clarify that this accounting applied before the entity recognised a receivable from the customer (it did).

The Board also decided that, where material, net contract assets should be presented separately from net contract liabilities; short-term contract assets should be presented separately from long-term contract assets; and short-term contract liabilities should be presented separately from long-term contract liabilities. Prompted by a Board member, the staff agreed that the general offsetting rules applied: that an entity had to satisfy the offsetting rules in IFRSs before it could offset a contract asset and a contract liability.

Discussion at the July 2009 Joint IASB-FASB Meeting

Comments received from constituents – summary analysis

The FASB staff (by video link) presented the summary analysis of comments received prior to 10 July. 211 comments had been received; the majority were from preparers and six from users or user representative organisations. Comments were still being received, but the broad themes in those later letters were consistent with the analysis presented.

Broadly, constituents supported the preliminary views in the Discussion Paper, in particular the ideal of a single revenue recognition model, but there were significant application issues – both industry and activity-specific issues and concerns about how to make the model operational. In particular, the definitions of revenue, customer and contract were criticised by many respondents.

The staff noted that detailed analyses of all issues would be brought to both Boards during redeliberations and development of the exposure draft.

The Board discussed the issues raised in the summary, especially the problems identified in industries such as telecommunications. A Board member suggested that a mechanism was needed to feed experience on applying IFRSs in various industries, gained during the Board and staff outreach activities, to the project team. This would help to identify areas in which application guidance is actually necessary, but the Boards should resist the temptation to provide detailed application guidance.

Project objective and strategy

The Board discussed the objective of the revenue recognition project and the strategy to develop an exposure draft, taking into account the views expressed by constituents.

Board members noted that the project does not have a single model for revenue recognition: it as a model based on an asset and liability approach, with two applications, one for services and one for goods. It was important to distinguish goods and services, and the best place to start would be to address construction and long-term contracts first. Many of the issues in this type of contract were critical and if they could be solved in a rigorous manner, many other decisions would follow more easily.

The Boards discussed whether a roundtable with constituents was necessary. After discussion, the suggestion was refined such that the Boards would see whether it would be possible to conduct meetings with constituents (in various locations) that would be a combination of roundtable and field visit – an opportunity to involve preparers, auditors and industry analysts to discuss specific application issues identified in certain industries/ sectors. However, it was also noted that the Boards' calendars are already pretty full and that it might not be possible to arrange such meetings in the time available to the Boards.

The staff will investigate whether it would be possible to hold such meetings.

Discussion at the September 2009 IASB Meeting

FASB staff joined the discussion by video link.

Control

The Board focused on when an entity recognises revenue in the proposed revenue recognition model. In the Discussion Paper the Board proposed that an entity should recognise revenue when it transferred control of a good or a service to the customer.

The Board acknowledged that IASB's and FASB's literature contains definition of control on the level of an entity. Nonetheless, the Board agreed that control of a good or service would require a separate definition.

The staff proposed the definition that 'control of a good or service is an entity's present ability to direct the use and receive the benefit from that good or service'. Broadly the Board agreed with this definition. Nonetheless, several Board members raised important concerns regarding the application of the definition for the work in progress, distinction between a partially completed and a completed product, application of the proposed definition to a service contract and to situation when goods and services are provided continuously.

One Board member was concerned that the proposed definition is too vague and not clear. As a matter of fact, in the discussion it became clear, that several Board members had different understandings of the definition and would apply it differently in some situations. Some Board members were particularly concerned about application of the definition to construction contracts and its effects on the usage of the percentage of completion method.

The Board noted the need for consistency of the proposed model with the derecognition model proposed for the financial assets.

The Board concluded that on the high level the definition was suitable and could be adopted as a working definition. Nonetheless, it directed the staff to revisit the definition after the raised issues are addressed in other parts of the project.

The Board then addressed the issue from whose perspective the control should be assessed. Some of the Board members agreed that the notion of control was not symmetrical, that is, the fact that the vendor lost control over a product did not necessarily mean that the control had been transferred to the customer.

The staff proposal to assess the control from the customer perspective was not supported unanimously. Some Board members preferred that the staff explored the possibility of assessing control also from vendor perspective. In their opinion it could help to alleviate the some concerns about sales returns and application of the percentage of completion method. Other Board members proposed to assess the perspective based on facts and circumstances. The Board disagreed.

Some of the Board members were concerned how this decision would influence how much revenue should be measured. The staff explained that in this initial stage of deliberations this question was not addressed as it would be addressed as part of the measurement part of the next meeting. Nonetheless, the staff pointed out that assessing the transfer from the vendor perspective increased the risk that the revenues would be recognised based on activity.

The Board agreed with the staff view that control should be assess from the perspective of the customer. Nonetheless, it directed the staff to perform further analysis in connection with identification of performance obligation and consequences for complete and continuous delivery of products and services.

The staff than asked the Board to agree whether any indicators of control shall be specified and proposed eight such indicators. The Board agreed that indicators of control would indeed be helpful for constituents and clarity of guidance. Nonetheless, many Board members were concerned about the nature of these indicators, notably their relation to the contractual terms and conditions and their order of precedence. The staff agreed that it needed to further investigate and analyse the relationship with contractual terms and conditions. Moreover, further analysis is to be performed to determine how to define the need for comprehensive assessment of the indicators, their application to part-completed assets as well as identification of the situation when one/combination of indicators may be sufficient to determine control.

Several Board members seemed to support the idea that in case of uncertainty about the control, no revenues should be recognised.

Accounting for an Option for Additional Goods and Services in Contracts with Customers

The Board continued its deliberations in discussion how an entity would determine whether options to acquire additional goods and services are granted in a present contract with customer and how these shall be accounted for. The core of the discussion focused on distinguishing between an option granted implicitly as part of the contract and an offer. The Board agreed with the staff that the option should be accounted for as a performance obligation if that option provided a material right that the customer would not receive without entering into that contract. An entity should account for that performance obligation by allocating to it a portion of the transaction price relative to the standalone selling price of the option.

One Board member, although supporting the proposed principle, was particularly concerned about how operational this principle would be. Another Board member felt that the proposed guidance was not sufficient and was too open-ended. Nonetheless, as another Board member noted, the guidance related just to allocation of the already received consideration for further purchases. The staff agreed to provide more guidance in this respect.

Regarding measurement, the Board had a significant discussion over the staff proposal that the value of the option should be determined using an intrinsic value method if its value was not directly observable. Although, the Board supported simplification of the requirements, majority of the members felt that this principle would give a lot of discretion in the standards and as such would decrease the level of transparency for the users. Using only intrinsic value would be too restrictive as it may not capture many situations arising.

Therefore, the Board tentatively decided that the option shall be valued using observable data or calculated using an option pricing model. Only if determining of the value of the option by a model was impracticable would intrinsic value be used (that is, the time value component should be ignored).

Finally, the Board assessed valuation of renewal options. The staff proposed and alternative model of measurement for renewal options of contracts based on expected optional goods and services (probability-weighted basis) for the additional goods and services that were similar in nature to the other goods and services in the contract and were provided in accordance with terms and conditions of the contract (including pricing). The Board agreed.

One Board member raised the question if this 'expected basis' approach should not be conceptually consistent with the estimation of the standalone selling price of that option. The staff will analyse that issue further.

Discussion at the October 2009 Joint IASB-FASB Meeting

Project Timetable

The staff began the meeting by discussing the timetable of this project. The Boards plan to issue an exposure draft in the second quarter of 2010, and a final standard in June 2011.

Segmentation of a Contract

The staff then explained that the purpose of the discussion was to decide on further guidance to clarify the recognition and measurement provisions outlined in the discussion paper. The primary concern relates to the extent to which an entity would be required to identify separate performance obligations and allocate consideration to each performance obligation (that is, segmentation of a contract). The model in the discussion paper directs entities to separate (or segment) contracts on the basis of when the promised goods and services are transferred to the customer.

The staff noted that comment letters indicated that the model as articulated in the Discussion Paper is not operational for contracts with many performance obligations (for example, does a performance obligation exist for each brick, nail, and labor hour?). The staff indicated that the discussion paper did not adequately convey the Boards intent and that clarifying language regarding segmentation will be necessary in the exposure draft.

The staff explained that segmentation is about measurement rather than recognition. An entity would identify the performance obligations and then aggregate based on established criteria. The staff proposed that the transaction price should be allocated to the segments of a contract rather than to individual performance obligations in the contract. Entities should separate contracts into segments when there is evidence that a market exists for those segments on a standalone basis. Standalone value as described in US GAAP is not a consideration in determining when segments exist. Rather, the entity should consider materiality, when goods and services are transferred, and the margins of the promised goods and services in determining the segments that exist within an arrangement.

While the Boards generally agreed with the staff's approach, they expressed concern that the segmentation model would add complexity to the model. Some board members requested more clarity on how an entity would determine the market to use in determining segments when multiple markets exist. For instance, two markets exist for a particular segment. One market consists of two performance obligations, and the other consists of six performance obligations. The staff noted that in this circumstance, the entity should use the market with the highest level of performance obligations (that is, the market consisting of two performance obligations).

One FASB member noted that the model should take a 'bottom up' approach. Under that approach, entities would first identify performance obligations and then determine whether or not these performance obligations should be aggregated into segments. The staff agreed that 'segmentation of contracts' could be better described as 'aggregation of performance obligations'. The Boards directed the staff members to further refine and articulate the model with respect to segmentation.

The staff proposed that allocation of the transaction price to the different segments within a contract should be based on the stand-alone selling price of the segment. If the standalone selling price is not directly observable, the entity should estimate the selling price of the segment. The staff further noted that when estimating selling price, entities should maximise the use of observable inputs, but the model should not prescribe any specific method of estimating selling price.

The staff also proposed that the residual method is not an acceptable allocation method. Instead, any discount should be allocated on the basis of the relative stand-alone selling price to the segments in the arrangement. Residual value may be used only as an input and not as a method of allocating a discount to segments within an arrangement.

The Boards agreed with the staff's recommendations. Several members of the Boards noted that the selling price hierarchy in Issue 08-1 [ASU 2009-13] should be included in this model to provide a framework for estimating selling price. Additionally, the Boards noted that robust disclosures would be needed. While the Boards agreed to that the residual method should not be used as an allocation method, several members expressed concern that if the residual method is allowed as an input, entities may not consider other inputs in allocating transaction price.

Recognising Revenue in a Segment of a Contract

The staff members proposed that an entity should exercise judgment and select from various methods of measuring goods and services transferred to a customer in a segment of a contract. The Boards agreed with the staff and instructed them to clarify that, while the general concept of recognising revenue is based on the transfer of control, as a practical consideration, methods such as units of output, units of input, etc, may be used as a proxy in determining whether control has transferred to the customer. Once a method for recognising revenue for a particular segment is determined, that method should be used consistently for that segment within the contract and within other contracts.

Discussion at the November 2009 Joint IASB-FASB Meeting

Contracts in which an entity grants a licence to a customer

The Boards discussed identification and satisfaction of performance obligation and the pattern of revenue recognition in contracts in which an entity grants a licence to a customer.

The Boards discussed the staff proposal to base the recognition pattern on the distinction between an exclusive and non-exclusive licence and tested the proposal by applying it to various industries. After a significant debate, the Boards concluded that while an exclusive versus non-exclusive distinction might work for some contracts, it would not work for others. Finally, a consensus emerged on a principle that would ensure that:

• Full revenue is recognised if the customer controls the licence (the contract would be more akin to a sale rather than a licence) or the reporting entity fully satisfies the performance obligation.
• If the performance is to be provided continuously (more akin to a lease), revenue would be recognised ratably.
• Moreover, if the entity is unable to separate the licence from other performance obligations, revenues should be recognised ratably over time.

The Boards asked the project team to better articulate guidance underpinning these principles.

Subsequent measurement of performance obligation

The Boards reaffirmed their preliminary view that all performance obligations in the scope of the revenue recognition standard should be re-measured after contract inception only when they are onerous.

Some FASB Board members were concerned that the Boards might be going too far in scope of the project as this issue relates also to cost, but a majority of both Boards noted that it is part of the project because the project relates to customer contracts.

Onerous performance obligations

The Boards continued their discussions on measurement of onerous contracts. The Boards discussed the unit of account for the 'onerous test' and agreed that a contract segment level was appropriate. Accordingly, the Boards decided that a contract segment is onerous if the expected costs to satisfy the remaining performance obligations in that segment exceed the amount of the transaction price allocated to those performance obligations. Moreover, the Boards agreed that subsequently, measurement of the obligation for onerous contracts (that is, the liability) should be updated at each reporting date.

Some IASB members were unhappy with this outcome as they believed that its might not be indicative of the economic reality, such as in case of discounts on multiple performance obligations. The staff will analyse the effects the approved principle on various scenarios.

Finally, the Boards discussed at length the proposed measurement of the onerous test. The IASB was split between the margin approach and a cost-based measurement, and the FASB supported the cost-based measurement. In the end, the Boards preferred the cost-based approach, with the cost defined as direct and incremental cost.

Cost guidance associated with contracts with customers

The Boards agreed that revenue recognition project should not address existing guidance outside IAS 11, IAS 18, and ASC Topic 605.

One IASB member noted that if the cost guidance that is in IAS 11 or IAS 18 is useful, it could be retained in another 'carrier' Standard. Nonetheless, the Boards agreed that costs should be recognised as expenses when incurred unless eligible for capitalisation in accordance with other Standards.

The FASB directed the staff to analyse the need for guidance in ASC Topic 605.

Discussion at the December 2009 IASB Meeting

Obligations for product warranties and product liability

The Boards considered two matters arising from the comment letters on the Discussion Paper (DP) Preliminary Views on Revenue Recognition in Contracts with Customers. These matters related to whether:

• all product warranties give rise to separate performance obligations; and
• product liability laws give rise to performance obligations.

Product warranties

While the DP proposed that all product warranties give rise to a separate performance obligation, most respondents to the DP disagreed. In deliberating the comments received, the Boards considered whether a distinction can be made between a warranty in which the objective is to provide the customer with cover for manufacturing defects (quality assurance warranty) and a warranty that provides cover for faults that arises after the product is transferred to the customer (insurance warranty).

Several Board members agreed that there is a difference between the warranties. One Board member noted that the discussion is similar to what was considered in the IAS 37 project on what constitutes an obligation.

The Boards agreed that:

• an insurance warranty constitutes a performance obligation
• some portion of the transaction price should be allocated to the separate performance obligation based on the standalone selling price of the warranty, and
• revenue should be recognised over time as the warranty coverage is provided.

The Boards then turned the discussion to whether a quality assurance warranty gives rise to a performance obligation. In their deliberations, the Boards considered several practical examples across various industries and agreed that a warranty provided against defects at the time of the transaction does not give rise to a separate performance obligation. An entity would therefore have to determine at the end of each reporting period the likelihood and extent of defects in assets sold and account for the unsatisfied performance obligation as follows:

• if the entity is required to replace the defective assets, no revenue is recognised for the sale of those assets until the warranty expires;
• if the entity is required to repair the defective assets, a portion of the revenue that can be attributed to the components that need to be replaced should not be recognised until the warranty expires.

One Board member questioned what would happen if an entity sold a product with both types of warranties in place. After a short discussion, it was decided that such a situation should be treated similar to an insurance warranty.

Another Board member questioned what the other side of the entry would be and whether inventory should be released when revenue is not recognised. It was agreed that to the extent that full revenue from a sale has not been recognised, inventory should not be released. The Boards agreed that the exposure draft should provide guidance on how inventory should be accounted for in such situations.

Product liability

The Board considered a related issue on whether product liability laws give rise to performance obligations. As an example, staff presented an example of an entity that would be liable for damages if one of their products caused damage to property or harm to people (for example, a television set that were to explode). The Boards unanimously agreed that the past event that gives rise to the liability is not the sale of the product but the default that occurred and that such obligations should be accounted for in accordance with IAS 37.

Sale of goods with the right to return

In considering the comments received on the DP in relation to the sale of goods with the right to return, the Boards were presented with a revised analysis of the recommended accounting treatment for a right to return. The revised approach presented by the FASB staff is summarised as follows:

• revenue should not be recognised for the goods that are expected to be returned; instead, a refund liability should be recognised for the expected amount of refunds;
• the refund liability should subsequently be updated for changes in expectations about the amount of refunds;
• an asset should be recognised for the right to recover goods from customers on settling the refund liability; and
• the promised return service meets the definition of a performance obligation, and a portion of the transaction price should be allocated to the performance obligation when it is material.

The Boards deliberated the revised approach. Several Board members expressed concerns that a return service should be regarded as a performance obligation if it is material. The staff responded by explaining the as not all transactions are accompanied by a right to return; the return service is separable from the sale of the goods and should be recognised as a separate performance obligation.

Board members still did not think that it would be useful to allocate a portion of the transaction price to a performance obligation and questioned what the entry would be on the asset side.

When put to a vote, the Boards agreed in principle with the staff's revised approach; however, the majority of Board members disagreed with the proposal to treat the return service as a separate performance obligation if material. One Board member explained that in certain legal environments there is no difference between a right to return and a quality assurance warranty and questioned why there should be a difference in accounting. The Boards agreed that there should be consistency between the treatment of quality assurance warranties and the right to return.

Estimates of uncertain consideration

The Boards were reminded of their previous decisions with regards to the determination of the transaction price and the recognition of revenue when a customer promises an uncertain amount of consideration, being:

• at contract inception, the transaction price is the probability-weighted estimate of consideration to be received;
• after inception, changes in transaction prices should be allocated to all performance obligations and recognised as revenue in the period of change; and
• recognition of revenue should be constrained if the entity cannot reliably estimate the consideration amount.

The staff explained that although the DP did not consider the effects of uncertain consideration, the Boards reached tentative decisions before the end of the comment period and, hence, some respondents also commented on those decisions. A majority of the respondents supported the Boards' tentative decisions.

To provide guidance on what a 'reliable' estimate is in the context of revenue recognition, the Boards considered to the following two criteria:

• an estimate can only be reliable if an entity has previous experience with identical or similar transactions or can reference to the experience of other entities in the same business; and
• the previous experience is only relevant if circumstances surrounding the contract are not likely to change significantly.

One Board member questioned what the difference is between uncertain consideration and unrecoverability of receivables. The Boards deliberated the matter for some time and considered whether the same principles should apply to both situations. It was agreed, however, to remove recoverability from the discussion as it stems from a violation of contractual terms and only to focus on situations where there is uncertainty about the total amount of consideration to be received as a result of the contractual terms.

When asked to vote on the matter, a majority of Board members agreed with the proposed approach and criteria for reliable estimates and reiterated that any situation involving uncertain consideration would involve judgement based on all facts and circumstances.

Discussion at the January 2010 Joint IASB-FASB Meeting

The Boards discussed what revenue disclosures should be proposed in the forthcoming exposure draft (ED).

Disclosure objective

The Boards discussed whether the ED should contain a disclosure objective similar to that in IFRS 7. While not agreeing explicitly to provide such an objective, the Boards did not support the approach suggested by the staff and requested that any disclosure objective should tie disclosure to the drivers of revenue-generation in the business: what affected the timing, nature, and amount of revenue; significant estimation uncertainty; etc.

Nature of and accounting policies applicable to contracts with customers

The Boards discussed but did not approve a staff suggestion related to the disclosure of the nature of and accounting policies applicable to contracts with customers. Board members thought the staff suggestions were too vague to be operational.

Linking performance with financial position

The Boards agreed that an entity should disclose a roll-forward of opening and closing balances of the net contract position. In doing so, Board members were extremely concerned that the Boards would be forcing on preparers meaningless disclosures that would not be useful to users and urged that greater clarity be provided. The staff should find a way to ensure that the disclosure was required only when the movement in the net contract position was a meaningful measure – such as in the aeroplane manufacture or shipbuilding industries, in which the order book was as important as the annual performance.

Onerous contracts

The Board referred a proposal that an entity should disclose a roll-forward of the opening and closing balances of the additional liability for onerous contracts back to the staff. Board members noted that any such disclosure had to integrate a larger data set: what was included in onerous contracts; what was added to the category and what was removed; information about similar contracts in the same class as those classified as onerous; etc.

Level of disaggregation

The Boards discussed but did not conclude on the level of disaggregation of revenue recognised during a financial period and how it should be achieved. The staff proposed an approach that would require disaggregation for each category of significant goods and services identified in its accounting policies. Board members thought that the economic characteristics of the goods and services should be a determining factor, not the accounting policies. Other Board members were concerned that the staff needed to be more rigorous in its analysis before adding more disclosures.

Extent of judgement exercised

The Boards discussed but did not conclude on a disclosure principle for significant judgements with the objective in ASC Topic 605-25-50 (Multiple Element Arrangements: Disclosures).

The Chairman asked the staff to work with a team of three IASB and two FASB advisors to develop revised proposals for revenue disclosures in general.

Discussion at the February 2010 Joint IASB-FASB Meeting

Scope

The Boards considered the scope of the proposed revenue recognition model. The staff presented a flow chart that provided the decision criteria to determine whether a contract is in scope of the proposed revenue recognition model.

The Board agreed that performance obligations for the transfer of goods and services that are within the scope of other standards should be accounted for in accordance with those standards rather than under the proposed model. Those performance obligations would include contractual obligations to provide the customer with financial instruments, insurance coverage, leased assets, or guarantees.

Some Board members questioned the application of the proposed scope when the contract is partly outside of scope of the proposed revenue recognition model, in particular using the 'residual method' (that is, allocate transaction price to all performance obligations equalled to fair value if those performance obligations are initially measured at fair value by the other standards, with the remaining balance allocated to all other performance obligations based on relative selling price).

Some Board members expressed concerns about how this principle would be operationalised and which guidance on bundling and unbundling is to be applied first if potentially inconsistent criteria are to be applied across some of the projects (such as revenue recognition and insurance).

Other Board members were concerned that the notion of interdependence was not properly defined within the project. A Board member raised the question of application of other Standards to some of the longstanding issues (such as volumetric optionality contracts) and noted that simply referring to another Standard would not solve those issues. Therefore, he argued that the staff should perform additional analysis.

An FASB member asked the staff for additional analysis how the interdependencies would be captured in interaction with other contracts. Finally, the Boards asked the staff for additional analyses on the definition of interdependencies and allocation method. These will be discussed at a future joint meeting.

Transition requirements

The Boards discussed the possible transition requirements for the new guidance. From the start of the discussion it was clear that a clear majority of the Boards preferred full retrospective application, given the importance of the revenue figures in the financial statements. Although, some Board members raised concerns about the potential use of hindsight, the Boards decided to propose a full retrospective application and to require transition disclosures in accordance with general requirements of IAS 8 (IFRSs) and ASC 250 (US GAAP).

Effective date

The Boards continued their discussion by considering whether or not to permit early adoption of the proposed Standard.

The FASB members made it clear that the FASB did not intend to allow early adoption because of the importance of the comparability of performance of various reporting entities. Nonetheless, as the IASB Chairman noted, the IASB was in a more difficult position. Even though the comparability argument was acknowledged, given the history of allowing early adoption, some IASB members were reluctant to prohibit early adoption of a Standard that was perceived as improvement to financial reporting. On voting, for existing IFRS users the IASB was evenly split whether to prohibit or allow early adoption.

One Board member noted that given the amount of new Standards and scope of the changes in financial reporting expected to result from the current convergence efforts, the Boards should align the transition requirements, effective dates, and application to first-time adopters among the new Standards. Another Board member highlighted the need for consistency by relating to the scope discussion and implied complexities when effective dates and transition requirements were not aligned.

The IASB proceeded to discuss the application for first-time adopters. The IASB Chairman noted that prohibiting early adoption for first-time adopters would be politically unsustainable, especially for jurisdiction that would have to change revenue recognition systems twice in a very short period of time. The Board discussed the possibility of allowing early adoption only to jurisdiction adopting IFRSs in the following years, but on balance the majority of the Board thought that such limitation would not be enforceable. Therefore, the Board agreed to allow early adoption of the proposed guidance for the first-time adopters.

Summary of proposed model

The staff presented a summary of the proposed revenue recognition model and asked the Boards for comments on the document that would be used as basis for writing of the Exposure Draft. Due to time constraints, it was decided that any comments Board members had would be dealt with offline.

Discussion at the March 2010 Joint IASB-FASB Meeting

The Boards continued their deliberations on the proposed ED on Revenue Recognition.

Disclosure

Disaggregation

At the January meeting, the Boards expressed some concerns about the proposed disaggregation principles and how it interacts with the requirements in the FSP project. The Boards were also concerned about the volume and usefulness of the disclosure package.

Staff presented the Boards with revised disclosure requirements following consultations with selected Board members. The main changes to the disclosure package presented in the Appendix to the agenda paper include:

• revised disclosure objective;
• streamlined risk disclosures;
• enhanced disclosures on onerous contracts;
• eliminating the requirement to disaggregate revenue; and
• requirement to disclose amount and expected timing of satisfaction of performance obligation.

The Boards considered the requirements of IFRS 8 and ASC Topic 280 which require the disclosure of revenue for each operating segment and to disaggregate the total reported revenue by products/services and geography. Furthermore the FSP project include a core principle that requires disaggregate information that is useful in assessing financial position and performance as well as timing and uncertainty of cash flows. In the light of this, the Boards deliberated whether the exposure draft on revenue recognition should require further disaggregation of revenue.

One Board member made the remark that analysts constantly comment that disaggregation in financial statements are insufficient and that eliminating disaggregation of revenue from the exposure draft would not be a popular decision. Another Board member was of the opinion that as the exposure draft deals with revenue, it should include all aspects dealing with revenue, including disclosure requirements. It was suggested that the requirements on disaggregation of revenue included in IFRS 8 par 32 be incorporated in the exposure draft and removed from IFRS 8. Several Board members objected to the relocation of disclosure requirements between standards.

A Board member suggested that a minimum level of disaggregation is needed in the exposure draft, but noted that it would be a challenge coming up with the right balance.

Another Board member recommended expanding the disclosure objective by including a reference to the future cash flows related to the revenue. Another Board member added that the objective of the disclosures is to help users understand the quantity as well as quality of revenue and was supportive of expanding the proposed objective.

The Boards asked the staff to refine the disclosure objective by considering the comments made by the various Board members. The Boards also tentatively agreed to include a minimum level of disaggregation in the exposure draft, but provide a linkage with revenue information disclosed in accordance with other standards.

Maturity analysis

The Boards tentatively decided at the January meeting to require the disclosure of the amount and expected timing of the satisfaction of the remaining performance obligations. Subsequent feedback from constituents indicated that the information would be more useful for long-term service arrangements and certain industries such as construction. The Boards deliberated whether to limit the requirement to performance obligations:

• expected to be fulfilled after more than one year from reporting date;
• expected to be fulfilled after more than one year from date of contract inception; or
• that expose the entity to significant risk.

The Boards were supportive of limiting the maturity analysis to contracts with an original fulfilment period of more than 12 months.

One Board member asked staff to confirm what will happen with a contract with performance obligations originally expected to be fulfilled after more than a year from the date of contract inception, but is getting close the end of the contract term. Would such a contract be excluded from the maturity analysis because the remaining performance obligations are expected to be fulfilled in less than a year? Staff confirmed that a contract with an original performance period of more than 12 months will be included in the maturity analysis until all performance obligations have been satisfied.

It was agreed that any other comments and corrections will be dealt with off-line by the staff.

Accounting for costs in contracts with customers

The Boards considered the matter separately.

FASB

At the February meeting, the FASB tentatively decided that the costs of obtaining a contract with a customer should be expensed and to develop guidance on when an asset should be recognised for costs incurred to fulfil a contract with a customer.

The staff presented the FASB with two alternatives to provide guidance on the costs of fulfilling a contract; either codify parts of IFRS or develop new guidance. The staff presented an analysis of the advantages and disadvantages of each alternative.

The FASB discuss the codification of IFRSs and was concerned that the limited guidance provided by IAS 2 would not adequately address the lack of guidance in US GAAP. There were also concerns about the risk of unintended consequences by codifying IAS 38 on a piecemeal basis when guidance was developed in a broader context.

The FASB agreed to develop new guidance which would only apply to contracts with customers. One FASB member expressed some concern over being too definitive about the costs that should be expensed. After a short deliberation, the FASB agreed in principle with the staff's proposal for developing new guidance with an impairment model akin to onerous test.

IASB

In accordance with the IASB's previous decision, an entity would evaluate whether the costs incurred in fulfilling a contract have resulted in inventory, an intangible asset or item of property, plant and equipment in accordance with IAS 2, IAS 16 and IAS 38 respectively.

Subsequently, the Board became aware of practical issues with IAS 2 and as the cost guidance in IAS 11 will be withdrawn, entities would have to rely more heavily on the guidance in IAS 2. The Board was presented with three alternatives for addressing the matter:

• confirm the tentative decision to use judgement in determining which standard to apply; or
• improve existing IFRSs by
  • incorporate the same guidance proposed for US GAAP in the revenue standard; or
  • withdrawing the guidance on service provider inventories from IAS 2 and require entities to apply IAS 38 to such assets.

One Board member acknowledged that there are difficulties for service providers in applying IAS 2, but do not agree that IAS 38 is the appropriate Standard to account for those costs. Although this Board member prefer to incorporate new guidance, it would be better for the Board to focus its efforts on revenue recognition only and address this matter at a later stage.

Another Board member questioned how the incorporation of the new guidance will affect the publication of the exposure draft and whether the guidance will be principle-based. The staff confirmed that the guidance will definitely be principle-based and that the timing of publication will not be adversely affected.

The Board also questioned which impairment model would apply when the new guidance has been incorporated. Staff responded that IAS 36 is the logical model to apply, however several Board members did not share this sentiment. After a short discussion of the various impairment models, the Board tentatively agreed to incorporate the same impairment model (onerous test) as that proposed under the US GAAP guidance.

Scope

The Boards discussed how an entity should account for a contract that includes some performance obligations that are within the scope of the revenue model and other performance obligations that are within the scope of other standards (e.g. leases, insurance contracts, financial instruments and guarantees).

After a brief discussion both Boards agreed that that an entity should apply the following hierarchy to separate and measure a component of a contract that is within the scope of another standard:

1. (a) Level A-If the other standard addresses both separation and measurement of a component of a contract, apply that standard to separate the contract and measure that component.
2. (b) Level B-If the other standard addresses only separation but not measurement, apply that standard to identify the separate component within that contract and use the revenue model to measure that component (ie by allocating transaction price to it on the basis of relative standalone selling prices).
3. (c) Level C-If the other standard does not address separation or measurement, apply the revenue model.

This hierarchy is consistent with the guidance currently in US GAAP and based on feedback from constituents is working relatively well.

Discussion at the May 2010 Joint IASB-FASB Meeting

Repurchase agreements

At the FASB only meeting on 5 May, the FASB considered the potential effects of the proposed model on the accounting for real estate contracts. FASB questioned how an entity would determine whether a buyer obtains control of an asset in a contract with a repurchase agreement. Because an assessment of control is critical to the application of the proposed revenue recognition model, the matter was raised at the joint meeting to gain the insight of the IASB as well.

The Boards agreed to add some implementation guidance to the forthcoming ED and considered whether the guidance should clarify that:

• when a buyer has the unconditional right to require the seller to repurchase the asset (put option), the buyer controls the asset and the seller should account for the transaction similar to a sale of a product with a right to return; and
• when the seller has an unconditional obligation or right to repurchase the asset, the seller retains control of the asset and should account for the transaction as either a financing arrangement or a lease, rather than as a sale.

When deliberating the buyer's unconditional right to require the seller to repurchase the asset, the Boards were presented with two alternatives:

• View A – the sale of an asset with a right of return, although an entity might not recognise any revenue upon the sale of the asset; or
• View B – the sale of an asset with a right of return except when the put option is economically similar to a forward.

In response to an enquiry by one Board member on what the differences between the two alternatives were, the staff acknowledged that both alternatives would result in the same accounting for most put options that are similar to a right of return, even when view B views the option as economically similar to a forward. The benefit of view A over B, according to the staff, is that the Boards would not need to specify when a put option is economically similar to a forward.

One Board member commented that the Boards have already considered and rejected the notion of an option being economically similar to a forward and expressed surprise at that being presented as an alternative. Some other Board members questioned the journal entries to apply view A and were concerned about the fact that an entity may end up not recognising any revenue although the transaction has qualified as a sale and, as a result, report negative gross profit margins.

The majority of Board members supported the staff recommendation of view A, but they requested the staff to provide an analysis to distinguish and compare the alternatives. It was agreed to discuss the matter further offline.

The Boards also agreed to include implementation guidance for situations when a repurchase agreement is a financing arrangement that will converge US GAAP and IFRSs. The proposed guidance will specify that the seller:

• continue to recognise the asset;
• recognise a financial liability for any consideration received; and
• recognise the difference between the consideration received and the amount of consideration paid to the buyer as interest.

As the proposed implementation guidance addresses the issues in FASB Subtopic 470-40 Product Financing Arrangements, the FASB unanimously agreed to withdraw it.

Sales of assets that are not an output of an entity's ordinary activities

At a recent FASB only meeting, it was noted that there is a lack of guidance for gain transactions in US GAAP whereas IAS 16, 38, and 40 refer to the recognition guidance in IAS 18 to determine the timing of gain recognition although such gains cannot be classified as revenue. The Boards were asked to consider whether the recognition and measurement requirements of the proposed revenue model should be applied to contracts for the sale of non-financial assets.

A few Board members had serious concerns about 'scope creep' of the revenue project and noted that gains and other income do not form part of the scope of the project and should not be included in the forthcoming ED. Other Board members responded that existing IAS 16, 38, and 40 currently refer to IAS 18 and since the revenue measurement principles are being changed, it may require consequential amendments to the other standards as a result.

In response to several Board members expressing concern with including guidance on the sale of non-financial assets in the revenue recognition standard, one Board member noted that if the revenue recognition standard is silent on the matter, constituents will analogise to the revenue standard in anyway because of the general lack the guidance on the matter.

Another Board member suggested to incorporate the application guidance in the revenue ED and to acknowledge the scope creep in the introduction to the ED and include a specific question in the invitation to comment on whether constituents view this as the an appropriate analogy. The majority of the Board members agreed with this proposal.

June 2010: Exposure Draft Issued

The IASB and FASB have jointly published for public comment an exposure draft (ED) on Revenue from Contracts with Customers. If adopted, the proposals would supersede IAS 11 Construction Contracts and IAS 18 Revenue and related interpretations. The core principle proposed in the ED would require an entity to recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to receive in exchange for those goods or services. To apply that principle, an entity would:

• Identify the contract(s) with a customer. Normally each revenue transaction is a single contract, but sometimes the elements of a multiple-element contract must be accounted for separately or, less commonly, two contracts are combined.
• Identify the separate performance obligations in the contract. If an entity promises to provide more than one good or service, it would account for each promised good or service as a separate performance obligation only if the good or service is distinct – that is, it is or could be sold separately.
• Determine the transaction price. Transaction price is the probability-weighted amount of consideration that an entity expects to receive. This would take into account collectibility, the time value of money, the fair value of noncash consideration, and consideration payable to a customer.
• Allocate the transaction price to the separate performance obligations in proportion to the standalone selling prices of the goods or services underlying each performance obligation.
• Recognise revenue when the entity satisfies each performance obligation by transferring the promised good or service to the customer. A contract for the development of an asset (for example, construction, manufacturing, and customised software) would result in continuous revenue recognition only if the customer controls the asset as it is developed.

The ED also specifies the accounting for contract costs. Costs of obtaining a contract are charged to expense when incurred. If the costs incurred in fulfilling a contract are not eligible for capitalisation in accordance with other standards (for example, IAS 2 Inventories), an entity would recognise an asset only if those costs:

• relate directly to a contract (or a specific contract under negotiation);
• generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and
• are expected to be recovered.

For many companies the new approach will not change the amount or timing of revenue recognition. However, in some cases there could be a significant impact. For example, the standard would require separate up-front recognition of revenue from providing a mobile phone that is bundled, without a separate charge, as part of a contract for mobile phone services. Comment deadline on the ED Revenue from Contracts with Customers is 22 October 2010. Click for IASB Press Release (PDF 116k).

Discussion at the November 2010 IASB Meeting

The Boards' provided an overview of the outreach activities performed since the exposure draft was issued, the primary issues raised by constituents during these activities, and the preliminary plan as they work toward a final standard.

Since the exposure draft was issued in June, the Boards' have performed extensive outreach activities. These activities included field visits with individual companies, industry group meetings, discussion forums, targeted webcasts, round-table discussions, and review of comment letters received. Close to 1,000 comment letters were received on the exposure draft from a variety of industries. These letters are still being analyzed and will be summarised to the Boards' in their December meeting. However, these activities have resulted in the emergence of two fundamental issues with the proposed model and a number of other common concerns and themes.

The two fundamental issues highlighted relate to the application of the guidance on "control" and "separation." As currently described in the exposure draft, constituents believe the notion of control is not sufficiently clear to allow entities to determine when control has transferred to the customer (and therefore when revenue should be recognised). It was noted that this concept is significantly more difficult to implement for entities in service and construction industries.

The second fundamental issue relates to the identification of separate performance obligations (accounting units) within a contract. Many constituents believe the guidance in the exposure draft is impractical and may not result in useful information. Specifically, they commented that the exposure draft may result in identifying units of accounting that are too detailed and not consistent with how entities' activities are viewed by management or other users.

Other concerns or themes focused on the practicality and cost/benefits of certain provisions such as the probability-weighting of contingent consideration, adjustments to the transaction price for collectibility and time value of money, onerous performance obligation tests, disclosures, and retrospective application.

In December, the Boards' will review a final summary of the comment letters and will finalise the plan as they work to complete this project. Currently, they plan to redeliberate the two fundamental issues (control and separation) in the January's Board meeting and the other issues in February's Board meeting. The staff will continue its outreach to constituents and will coordinate with other joint project teams on common issues identified (e.g., probability-weight). Additional resources have been added to this project to analyze issues raise on the cost guidance in the exposure draft and to develop additional implementation guidance.

During the end of the discussion, a concern was raised that some constituents (specifically noted in the United States) were requesting that no changes be made to the current revenue recognition models. (This was not consistent with the strong support during the roundtable discussions internationally to continue toward one, comprehensive model.) The Boards' plan to continue their extensive outreach activities to ensure any changes to specific industries' current practice are specifically discussed by the Boards so well informed decisions are made (which will include education sessions for the Boards).

Discussion at the December 2010 IASB Meeting

Initial comment letter analysis

The staff provided the Board with a preliminary analysis of 986 respondents' comment letters as well as feedback received from outreach activities conducted on the Exposure Draft Revenue Recognition.

The staff explained that most respondents were supportive of the core principles and acknowledged the progress made by the IASB and FASB since the discussion paper. However, respondents identified the followings for further clarification of the operation of those principles:

• concept of control and indicators of control to the service contracts and continuous transfer of work-in-progress
• the principle of distinct goods or service for identifying separate performance obligations.

Further, many respondents were concerned that the proposals as written could be difficult to apply consistently across a wide range of industries and may produce accounting outcomes that do not faithfully portray the economic substance of the entity's contracts with customers.

Because of those concerns, many respondents are concerned that applying the proposed requirements would impose costs on prepares in excess of the benefits of having a single revenue recognition model applying equally to all contracts with customers.

The two main issues identified for re-deliberation based on the comment received were:

• separating/segmenting a contract
• the application of the control approach.

Other issues also identified for re-deliberation include:

• transaction price and variable consideration
• credit risk
• time value of money
• onerous contracts
• transaction costs
• disclosure
• application guidance
• transition.

The Boards considered a preliminary timeline to re-deliberate the above issues and agreed to focus on the two main issues at the January meeting, with the other issues to be considered at future meetings.

Discussion at the January 2011 IASB Meeting

Wednesday, 19 January 2011

The IASB and FASB began redeliberations on the proposals within their respective exposure drafts (for the IASB ED/2010/6 Revenue from Contracts with Customers) after receiving a summary of comment letter feedback during the December 2010 joint meeting.

The staffs began the discussions by providing a flowchart diagram of their intentions for the flow of the decision making process for recognising revenue when goods or services are transferred to a customer. From the flowchart, one would first identify whether separate performance obligations exist within a contract and then determine whether the performance obligation meets the description of a service. If the performance obligation is a good then one would perform the Exposure Drafts guidance on control. If the performance obligation is a service, then one would apply the Exposure Drafts guidance on continuous transfer of goods or services. The deliberations during this meeting would focus on these components of the revenue recognition model.

Determining the transfer of goods and services

The Exposure Draft proposed that a good or service is transferred when the customer obtains control of the good or service. However, nearly all respondents felt that the proposed guidance on control was insufficient and would result in significant diversity in practice. Respondents were concerned with the removal of "risk and rewards of ownership" as a consideration for transfer of control. Respondents also overwhelmingly felt that the control guidance was insufficient for service and construction-type contracts and requested specific indicators for continuous-transfer contracts.

To address these concerns, the staffs recommended that the Boards develop separate recognition requirements for service arrangements. The staffs proposed that in order to determine if the performance of a task transfers a benefit to a customer and would meet the description of a service 1) the task would not need to be reperformed if the obligation were transferred to another entity, 2) the customer owns the work-in-process, or 3) the performance of the task would not create an asset independent of the contract and the customer cannot avoid paying for performance of the task (any of these conditions would be indicative of a task meeting the description of a service).

The Boards were supportive of supplementing the guidance in the Exposure Draft with separate recognition requirements for service arrangements. However, certain Board members expressed concerns with the proposals by introducing various example transactions ranging from commercial aircraft production to a financial statement audit engagement. One FASB member mentioned he thought many of these concerns were related more towards the method of recognising revenue under a services continuous transfer approach rather than whether the performance is a service. The staffs also clarified that the proposed continuous recognition approach for services does not automatically result in a straight-line recognition pattern, but rather the appropriate recognition method (using the output method, the input method or the passage of time method) will be based on facts and circumstances.

The Board also discussed whether reasonably measuring progress towards completion should be a requirement in order to recognise revenue for a service under the continuous transfer approach. The staffs provided the Board with three examples of services where measurement towards completion could, or could not, be reasonably measured. As part of this discussion, the Board discussed the recognition methods under the continuous transfer approach (the output method, the input method or the passage of time method). One FASB member mentioned concern over permitting a policy choice over the recognition method. An IASB member mentioned research performed during development of the SME standard. From that research it was noted that a majority of companies utilise an input approach because it is easier to apply.

The Boards tentatively agreed to provide separate recognition requirements for services and generally supported the concept of a service being based on any of the following type of criteria existing: 1) the task would not need to be reperformed if the obligation were transferred to another entity 2) the customer owns the work-in-process, or 3) the performance of the task would not create an asset independent of the contract and the customer cannot avoid paying for performance of the task.

The staffs agreed to further refine these criteria based on the feedback provided during the meeting. The Boards also tentatively agreed to the requirement that the progress towards completion be reasonably measurable in order to recognise revenue under the continuous transfer approach. The Boards requested the staffs to further develop guidance around which recognition approach (the output method, the input method or the passage of time method) would be applied under various circumstances.

The Boards also discussed the requirements in the Exposure Draft around transfer of a good under the control notion. Some comment letter respondents were concerned about the use of control and the interrelations with control concepts in other sources of GAAP (lease accounting, derecognition and consolidation). Additionally, respondents questioned the removal of "risk and rewards" from the control indicators and questioned the inclusion of the indicator related to the "design or function of the good or service is customer-specific".

The staffs recommended retaining the control notion but describing rather than defining control. Additionally, the staffs recommended that "risk and rewards" be included as an indicator of control and removing "design or function of the good or service is customer-specific" as an indicator. One IASB member questioned why control would not be defined referencing paragraph 26 from the Exposure Draft and the control discussion within that paragraph. The staffs clarified this language would be retained, and their proposal is that control would not be a defined term in the glossary of terms within the final Standard. The Board tentatively agreed with the staffs proposals.

The final topic discussed under transfers of goods or services related to contracts that involve the transfer of both goods and services. With the decision to provide separate recognition requirements for services, the Boards now need to provide guidance on which approach an entity would apply when a contract includes the bundling of goods and services. The Boards tentatively agreed that an entity would first need to assess whether the goods and services were distinct for purposes of identifying separate performance obligations. If the goods and services are distinct, the entity would account for them as separate performance obligations but if the goods and services were not distinct, then the entity would account for the bundle as a service.

Separating a contract

The Exposure Draft proposed that a contract would be separated under a two-step process. First, a contract would be separated if the prices of some goods or services are independent of other goods or services in the contract in order to "ring fence" allocations of the transaction price. Then, an entity would identify any separate performance obligations within a contract.

Comment letter responses felt the two-step process was confusing and unnecessary. Respondents felt that the principle for segmenting a contract overlaps the criteria used to identify separate performance obligations and that segmenting a contract would be unnecessary if the Boards clarified how an entity should allocate discounts and changes in the transaction price.

The staffs clarified that the discussion on allocating discounts and changes in the transaction price was not part of the current discussion and would be discussed separately during a future Board meeting. The Boards tentatively agreed to require separation of a contract in a one-step process rather than segmenting a contract for price allocation purposes as well as identifying separate performance obligations.

Identifying separate performance obligations

The Exposure Draft proposes that an entity should identify the performance obligations to be accounted for separately based on the good or service being distinct. The Exposure Draft included guidance on what constitutes distinct, specifically that 1) the entity, or another party, sells an identical or similar good or service separately, or 2) the entity could sell the good or service separately because it has a distinct function and distinct profit margin.

The comment letter respondents generally agreed with the principle of "distinct goods or services" for identifying separate performance obligations. However, they also did not interpret the proposed criteria in the manner intended by the Boards.

The Boards tentatively agreed to retain the principle of "distinct goods or services" for identifying separate performance obligations but to emphasise the objective for identifying separate performance obligations in order to address the confusion of constituents. The staffs mentioned that the Basis for Conclusions of the Exposure Draft included the following:

"the boards objective was to develop requirements that would result in an entity recognising revenue and profit margins in a manner that faithfully depicts the transfer of goods or services to the customer and that would be practical."

The Boards tentatively agreed to move this language into the body of the final Standard to help emphasise the objective of identifying separate performance obligations.

Comment letter respondents also had concerns over the proposal on a good or service being distinct if another entity sells an identical or similar good or service separately, or the entity could sell the good or service separately because it has a distinct function and distinct profit margin. In particular, they felt these criteria would result in the requirement to account for performance obligations at a level that does not accurately characterise the economics of a contract.

In considering these comments, the staffs reconsidered the distinct criteria in the Exposure Draft of having a distinct function and distinct profit margin and thought that criteria of a distinct function, distinct risks and distinct timing of transfer may be more appropriate. Additionally, the staffs provided the Boards with indicators that may assist constituents in applying judgment as to whether a good or service is distinct, rather than the Exposure Drafts proposals that had specific criteria in making the determination. Those indicators included:

• The goods or services are clearly specified in the contract or there is other evidence available that suggests that the customer considers the good or service to be a distinct component of the contract.
• The promised good or service was negotiated separately and the customer could have chosen to purchase, or not purchase, that good or service without materially affecting the scope and pricing of the remainder of the contract.
• The entity sells identical or virtually identical goods or services separately.
• Another entity sells the good or service separately.
• A reasonable basis exists for estimating the standalone selling price for the good or service.

The Boards had various concerns with both the distinct criteria (distinct function, distinct risks and distinct timing of transfer) and the indicators provided. One FASB member mentioned that the guidance needs to emphasise that the assessment would be a top-down approach considering all the criteria rather than a criterion-by-criterion assessment. He also had concerns with including the indicator of goods or services provided by another entity as they would not necessarily be subject to the same risks as the entity performing the revenue recognition assessment (using the example of a home builder, he questioned the fact that hardware stores sell lumber and nails separately, therefore would the home builder need to look at the hardware store business model in making the distinct assessment).

Other Board members raised additional examples of a security business that manufactures, installs and monitors security systems and telecom companies that sell smartphone devices and cellular service contracts. The staff emphasised that the analysis would depend on whether those items outside of the continuous service arrangements are distinct. One IASB member mentioned that perhaps rather than distinct risks they should focus on rewards (benefits) being provided to the customer. Other IASB Board members also had concerns with the distinct risk criterion and how it would be applied.

The staff concluded the discussion by stating they would take the feedback from this meeting and further refine the proposals. In particular, there seemed to be broad agreement over the distinct function criterion, and then they would look at overlaying the distinct risk and perhaps the distinct timing criteria on to the distinct function component. They will bring back the revised proposals at a future meeting along with the analysis applied to different examples.

Thursday, 20 January 2011

Perfunctory obligations, incidental obligations and marketing incentives

The Boards continued their discussions on revenue recognition from Wednesday. The Exposure Draft did not include specific guidance on inconsequential or perfunctory obligations as contained in U.S. GAAP's ASC 605-10-S99. A few comment letter respondents requested retaining the guidance on incidental or perfunctory obligations in the final Standard. That guidance provides that if an entity's remaining performance obligation is inconsequential or perfunctory then the entity could conclude it has met the delivery or performance criteria. A few respondents also commented that entities should not identify separate performance obligations for goods and services provided as marketing incentives. Additionally, a few respondents (primarily from the telecommunications industry) requested that incidental obligations be excluded in identifying the performance obligation (e.g., discounted headsets with contract service).

However, the Board tentatively agreed to retain their prior decision in the Exposure Draft not to provide specific guidance related to incidental or perfunctory obligations or marketing incentives. For inconsequential or perfunctory obligations, the Boards had concerns over the view that some have which equates inconsequential or perfunctory obligations to a materiality assessment. They also felt that incorporating guidance on inconsequential or perfunctory obligations may also require including guidance on costing. For marketing incentives, the Boards felt that all goods and services provided to a customer give rise to performance obligations as they were a component of the negotiated exchange with the customer. And finally, with respect to incidental obligations, the Boards felt that the concerns here primarily related to the allocation of revenue which will be addressed when the Boards discuss allocation of the transaction price.

Determining the transfer of goods and services

The Boards also continued their discussions from Wednesday on determining the criteria for a performance obligation being a service rather than a good. The staffs provided the Boards with revised language on the description of a service. Yesterday, the staffs proposed criteria for a performance obligation being a service if any of the following exist:

• the task would not need to be reperformed if the obligation were transferred to another entity
• the customer owns the work-in-process, or
• the performance of the task would not create an asset independent of the contract and the customer cannot avoid paying for performance of the task.

The staffs' revised language changes the criteria for work-in-process from "owns" to "controls" and added to the criteria of avoiding payment to read "the customer cannot avoid paying for performance of the task to date".

The Boards discussed the revised criteria provided by the staffs. The discussion was intended to focus solely on the criteria of what performance obligations represent a service; however, the Boards had difficulty in separating the discussion between what constitutes a service and over what period revenue should be recognised. The Boards used various examples in their discussion but primarily focused on the example of a financial statement audit engagement because of the fact the tangible "benefit" being transferred to the client only occurs at the end of the engagement when the audit opinion is issued. However, many Board members felt that benefits were actually being provided throughout the engagement period. The Board eventually took a poll to gauge views on the example of the audit engagement and whether revenue should be recognised as a continuous transfer of benefit or whether revenue should only be recognised upon the eventual benefit of the issuance of the audit opinion. A majority of both Boards were in favour of the continuous transfer of benefit approach with one FASB member and three IASB members instead believing that revenue should not be recognised until the end of the engagement. The FASB member with this view clarified that he viewed the audit opinion as the delivery of a good rather than delivery of a service under the criteria provided by the staffs.

The staffs will take the feedback provided during the two days of discussions to further refine the criteria around a service and will bring the issue back to the Boards at a future meeting.

Discussion at the 1-2 February 2011 Special IASB Meeting

Tuesday, 1 February 2011

Considering whether an entity should allocate revenue to all product warranties and, if not, to which warranties an entity should allocate revenue

As part of the IASB and FASB's continued redeliberations on the feedback received on their revenue recognition proposals, the Boards discussed accounting for product warranties. In the Exposure Draft, Revenue from Contracts with Customers, the Boards proposed that entities would assess whether the objective of a warranty was to provide coverage for either quality assurance or an insurance warranty. The quality assurance warranty protects against defaults which existed as part of production and would not give rise to a separate performance obligation but instead would represent a lack of fulfilment of the original performance obligation. An insurance warranty protects against future events and therefore would give rise to a separate performance obligation.

Almost all comment letter respondents stated that in practice it may be difficult to determine when a fault in a product has arisen (i.e., whether it relates to original production or future use). Additionally, some felt that because revenue would be deferred in any case under the proposals distinguishing between the two would not be cost beneficial. Some also commented that revenue deferral does not represent the underlying economics for some warranty arrangements, in particular standard warranties, which those respondents felt cost recognition was more appropriate than revenue deferral.

The Boards discussed the feedback received and acknowledged the concerns expressed over the operational complexity. The Boards tentatively agreed that some warranty arrangements should be a separate warranty obligation rather than a performance obligation. As a separate warranty obligation, there would be no revenue deferred and instead a warranty obligation and warranty expense would be recognised upon transfer. The Boards also discussed which warranty arrangements should meet this criteria as a separate warranty obligation (and conversely which would be considered a separate performance obligation and result in revenue deferral).

The IASB and FASB staff had proposed a step-criteria where if the customer has the opportunity to purchase the product warranty separately then the warranty would have a separate performance obligation (revenue deferral). If the customer does not have an option to separately purchase a product warranty, then judgment would be needed to determine if the warranty provides a service to the customer and would represent a separate performance obligation or whether the warranty represents a separate warranty obligation (cost accrual).

A FASB member questioned whether the separate purchase consideration would only be from the supplier or whether a third party would also be considered. The staffs responded that third parties would be considered under their recommendation but would have to be for the same product and same time period. Multiple IASB and FASB members had concern over the consideration of warranties offered by third parties. One IASB member referenced research he had performed on automobile warranties and that there were countless options all differing by level of coverage and length of term. He referenced the difficulties an entity would have in performing due diligence on the warranty products offered by competitors.

Several IASB and FASB members generally supported the proposals by the staff but requested the staff to supplement the proposed approach with additional application guidance. In particular, they noted examples of warranty arrangements which included service components (e.g., automobile warranties which include oil changes or brake replacements). The staff will take the feedback received during the meeting to further develop the proposals for a vote at a future meeting.

Wednesday, 2 February 2011

Accounting for costs of obtaining a contract

The Exposure Draft, Revenue from Contracts with Customers proposes that all costs incurred in obtaining a contract be expensed as incurred as the asset resulting from the costs of obtaining a contract is primarily the contract asset. Some comment letter respondents disagreed with this proposal because they felt 1) the proposed guidance is inconsistent with other accounting literature and other exposure drafts, 2) cost guidance should not be included in a revenue recognition standard, and 3) some costs of obtaining a contract result in future benefits that represent an asset.

The Boards discussed the topic of costs of obtaining a contract in the context of revenue recognition and frequently compared these issues with how they are being handled in the leasing and insurance projects. The Boards first tentatively agreed that the revenue recognition project should not comprehensively address all cost guidance during redeliberations, but rather only the guidance that would be affected by withdrawing existing revenue recognition guidance.

The discussion then centered on whether to reverse the proposal in the exposure draft to expense all costs as incurred and recognise certain costs as assets. The staff agreed with the comment letter responses that stated in certain instances, costs from obtaining a contract result in the creation of an asset that should be recognised. Additionally, the staff acknowledged that the proposals for recognition of costs are inconsistent with other exposure drafts such as lease accounting, insurance contracts and the FASB�s proposals on financial instruments. However, the staff also believes that each project has its own objectives.

The staff provided the Boards with two alternatives for addressing constituent concerns on the treatment of costs of obtaining contracts. Alternative 1 would recognise an asset for the incremental costs (i.e., costs directly attributable to obtaining a contract and would not have been incurred if the contract had not been obtained) that are expected to be recovered. Alternative 2 would recognise all costs of obtaining a contract as expenses except for those guaranteed to be recovered which would be recognised as assets.

Both Boards were generally supportive of Alternative 1, although one Board member from each Board supported Alternative 2. Additionally, several Board members were not enthused with their support for Alternative 1, some preferring direct expense of costs instead. The discussion around Alternative 1 focused on what would be considered incremental costs of a contract. Specifically mentioned were questions on costs incurred at a "portfolio" level such as salary expense and whether successful execution of contract was required to recognise the associated costs as an asset. The staff clarified the proposal in Alternative 1 would only apply to successful efforts. The Boards tentatively agreed to require an asset to be recognised for the incremental costs of obtaining a contract that are expected to be recovered. The Boards also requested the staff develop additional guidance and/or examples on what constitutes incremental costs as there were differing interpretations among the Board members based on the language in the proposal.

Discussion at the February 2011 IASB Meeting

Wednesday, 16 February 2011

Identifying Separate Performance Obligations

The Boards continued their discussion on identification of performance obligations from the January 2011 Board meetings. During that meeting, the Boards had asked the staff to further clarify the attributes for a distinct good or service and apply those attributes to example scenarios.

The staffs presented the Boards with a revised objective and criteria for identifying separate performance obligations. The objective for identifying separate performance obligations would be to faithfully depict an entity's performance by recognising revenue at an amount that reflects the profit margin that is attributable to the goods or services that have been transferred to the customer. Under the staffs' proposal, a separate performance obligation would occur when 1) the good or service is distinct and 2) the good or service is transferred to the customer at a different time from the transfer of other goods or services promised in the contract, or for contracts with multiple services are transferred continuously to the customer over the same period of time, the entity selects different methods to best depict the transfer of those services to the customer.

The staffs also clarified that a good or service is distinct if it has a distinct function or is subject to separate risks and provided additional details on each of those criteria. A distinct function would occur when a good or service is either sold separately or the customer can use the good or service either on its own or together with resources that are readily available to the customer. Separate risks would occur when the risks the entity assumes in providing the good or service are largely independent of the risks of providing the customer with the other goods or services promised in the contract. The staffs also suggested indicators for identifying separate risks including 1) the entity selling the good or service separately, 2) the entity and the customer negotiated the sale of good or service separately from the other goods or services promised in the contract, and 3) the entity manages its promise to provide the good or service to the customer independently from its promise to provide other goods or services to the customer.

The staffs also developed various examples in which the above concepts were applied to determine whether separate performance obligations existed.

Several Board members expressed concern with the incorporation of a profit margin concept in the objective for identifying separate performance obligations. One Board member mentioned the focus should be on timing of revenues than on the profit margin itself. The staff acknowledged based on the comments received by various Board members they would consider removing the mention of profit margin from the objective.

The Board was in general agreement that the criteria for identifying a separate performance obligation would be if the pattern of transfer of the good or service is different from other promised goods or services and the good or service is distinct. However, when discussing the criteria for what would constitute a distinct good or service the Boards were less supportive of the staff proposals. Members from each Board raised the issue that the indicators for separate risk contain duplicative concepts to the distinct function criteria (e.g., selling the good or service separately). They suggested the removal of the separate risks criteria and instead combine the concept under the distinct function criteria. Other Board members also expressed concern with the separate risk criteria, including the use of the term risk as they envisioned this may result in confusion during application.

One FASB Board member asked the staffs if they could consider some alternative language for distinct goods or services and the Boards could continue their discussion during Thursday's scheduled revenue recognition session.

Revenue Recognition for Services

Determining whether a performance obligation is satisfied continuously

The Boards also continued their discussion over revenue recognition for service arrangements from the January 2011 Board meetings. During that meeting, the staffs had proposed that a performance obligation would be satisfied continuously if 1) the customer controls the work-in-process, 2) another entity would not need to reperform the task if that other entity were required to fulfil the remaining obligation to the customer, or 3) the entity has a right to payment for the performed task and the entity's performance to date does not have an alternative use to the entity. After the January meetings, the staffs performed outreach on these criteria to see whether they could be applied and found that while preparers supported the general direction, there were various concerns with each of the three criteria.

Based on the feedback received, the staff suggested revised criteria for when a performance obligation is satisfied continuously. The proposed criteria are that 1) the entity's performance creates or enhances as asset that the customer controls or 2) the entity's performance does not create an asset with alternative use to the entity and at least one of the following is met: a) customer immediately receives a benefit from each task that the entity performs, b) another entity would not need to reperform the task performed to date if that other entity were to fulfil the remaining obligation to the customer, or c) the entity has a right to payment for performance to date even if the customer could cancel the contract for convenience.

One IASB member questioned why the first criteria needed the term 'immediately'. The staff mentioned the term was included to reinforce the concept of continuous rather than the benefit is received only upon completion. The FASB Chairman suggested language of "the customer receives a benefit as each task is performed" rather than using the term immediately to which the IASB member and staff seemed to agree would address both of their concerns.

One FASB Board member suggested revising the language on the first criteria to read "the entity's performance creates or enhances an asset that the customer controls as the asset is being created or enhanced" to also reinforce the sense of continuous service.

The Boards both tentatively agreed to the staff proposals subject to language modifications as discussed during the meeting.

Measuring progress toward complete satisfaction of a performance obligation

After the determination is made that a performance obligation is satisfied continuously, an entity would select the appropriate method for recognising revenue by measuring the progress towards completion. During the January 2011 Board meetings, the Boards asked the staffs to provide additional guidance around what circumstances would one method be preferable to another.

During this meeting, the Boards tentatively agreed that the staffs would carryforward the guidance in the Exposure Draft as well as emphasise the objective of measuring progress towards completion is to faithfully depict the entity's performance and enhance the description of the output and input methods.

Measuring progress for uninstalled materials

The Boards discussed the recognition method for those instances when materials are delivered to the customer but a significant delay occurs before the service occurs (i.e., installation). The staffs presented three possible scenarios for the Boards to consider based on current practice. The first method would have the entity measure progress based on a labour hours input method (effectively resulting in no recognition of revenue as the service has not yet occurred). The second method would have the entity measure progress based on a cost-based input method (effectively resulting in a contract wide profit margin recognised for transferring the materials). The third method would have the entity measure progress on a modified cost-based method (effectively resulting in recognising revenue for the transfer of the materials in an amount equal to the cost of the materials).

The staffs had recommended the use of the third method (modified cost-based method) as they felt the first method would result in the entity retaining inventory even though transfer has occurred. They also felt that recognition of a profit margin in the second method was not appropriate.

The Boards viewed the third approach as an exception and disagreed with the staff recommendation. The Boards preferred that for uninstalled materials they frame the issue as a clarification of how to use the input method rather which could permit entities to recognise a profit margin for uninstalled materials.

Combining Contracts

The Exposure Draft on revenue recognition included guidance on when multiple contracts should be combined and accounted for as a single contract. The guidance used the principle of 'price interdependence' in making this assessment. However, some respondents to the Exposure Draft felt the concept of 'price interdependence' was confusing. Some suggested using the principle in IAS 18 that contracts "are linked in such a way that the commercial effect cannot be understood without reference to the series of a transaction as a whole". A few respondents also raised the concern that it could be difficult to determine whether a discount for a particular contract was a result of price interdependency with another contract or because of a pre-existing customer relationship.

Based on consideration of the feedback received, the staffs proposed the final standard include a principle on when multiple contracts should be combined and accounted for as a single contract, supported by a list of indicators for when it may be appropriate to combine contracts. The principle they proposed was that an entity would account for two or more contracts as a single contract if the contracts were entered into at or near the same time and the amount of revenue recognition would differ depending on whether the entity accounts for the contracts together or separately.

One FASB member felt that the proposed principle involved a level of circularity; you have to determine if the revenue would be recognised differently to determine whether the contracts should be combined, in order to determine how the revenue should be recognised. He recommended that the principle and the indicators be combined. Other Board members agreed and suggested that the indicator of contracts being with the same, or a related party should also be included in the lead-in to the indicators.

Both Boards tentatively agreed on a principle of contracts that are interrelated should be combined, if they are entered into at the same time and generally with the same party (or a related party). Indicators of an interrelationship could include 1) the contracts were negotiated as a package with a single commercial objective, 2) the amount of consideration received in one contract depends on the performance of the other contract, or the goods and services in the contracts are closely interrelated or interdependent in terms of design, technology, or function.

Modifications of Contracts

The Exposure Draft also included the concept of 'price interdependence' for determining whether to account for a contract modification as a separate contract or as part of the original contract. However, many comment letter respondents felt the proposals guidance on 'price interdependence' was confusing and would not be capable of being applied consistently.

Based on the comments received, the staff recommended an approach where if the modification only related to price, then the change would be allocated to the transaction price. However, if the contract modification added goods or services that are 1) distinct and 2) priced at their standalone selling price then those would be accounted for as additional goods or services. If those two criteria are not met, then the entity would re-evaluate all performance obligations and reallocate the transaction price.

The Boards generally had issues with the staffs' recommendation. One IASB Board member questioned what was meant by 'standalone selling price'. The staffs referenced the agenda paper which provided that a standalone selling price would consider an entity's relationship with a particular customer. Several Board members questioned whether that is truly a standalone sales price if customer relationships are taken into consideration.

The Boards then discussed an example of a home builder who is asked to build a separate stand alone garage and whether that would be considered a modification or a separate contract. The Boards mentioned there may be a variety of reasons that the home builder may charge the customer less then he would another party. A variation of that example was also discussed where the homeowner requested a modification in the plans to the house and the homebuilder was able to charge a premium based on the modifications.

One FASB member suggested that the performance obligation concept should be utilised rather than price interdependence. The Boards generally supported incorporation of the performance obligation concept and requested the staff to further consider the criteria based on indicators previously agreed upon for combining contracts.

Thursday, 17 February 2011

Identification of Separate Performance Obligations

Continuing the previous days' discussion on how to identify separate performance obligations, the staffs provided the Boards with two additional alternatives in additional to the proposal discussed yesterday.

The first alternative would account for a good or service, or a bundle of goods or services, as a separate performance obligation if 1) the good or service is distinct and 2) the good or service has a different pattern of transfer to the customer. This alternative would provide a list of indicators of when a good or service may be distinct including 1) the entity regularly sells the good or service separately, 2) the customer can use the good or service either on its own or together with resources that are readily available to the customer, 3) the entity and the customer negotiated the sale of goods or services separately, or the entity is not providing a significant service of integrating the promised goods or services into a single item that the entity provides to the customer.

The second alternative would account for a good or service, or a bundle of goods or services, as a separate performance obligation if 1) the good or service has a different pattern of transfer to the customer and 2) the customer can use the good or service either on its own or together with resources that are readily available to the customer. However, one would account for a bundle of promised goods or services as one performance obligation if the entity provides a service of integrating those goods or services into a single item that the entity provides to the customer.

The Boards generally viewed the two alternatives as more favourable to the original staff proposals (only one FASB member expressed support for the original staff proposals). However, several members from each Board preferred certain aspects from each of the models rather than one model in its entirety. Specifically mentioned was the overriding requirement from the second alternative that one would account for a bundle of promised goods or services as one performance obligation if the entity provides a service of integrating those goods or services into a single item that the entity provides to the customer rather than having a similar criteria as only an indicator in the first alternative. However, there was support for the first alternative because it incorporated the concept of distinct which many felt preparers could understand and apply.

The Boards tentatively agreed to incorporate aspects of both alternatives into the model for identifying a separate performance obligation. The model would first consider if the entity provides a service of integrating a bundle of goods or services into a single item that the entity provides to the customer. If so, the entity would account for the bundle as a single performance obligation. If not, the entity would account for a promised good or service as a separate performance obligation if 1) the good or service is distinct and 2) the good or service has a different pattern of transfer to the customer. The model would also include indicators of what would be considered distinct, including 1) the entity regularly sells the good or service separately, 2) the customer can use the good or service either on its own or together with resources that are readily available to the customer, and 3) the entity is not providing a significant service of integrating the promised goods or services into a single item that the entity provides to the customer.

Existence of a Contract and Definition of a Performance Obligation

The revenue recognition exposure draft defined a performance obligation as "an enforceable promise (whether explicit or implicit) in a contract with a customer to transfer a good or service to the customer". Certain comment letter respondents questioned the inclusion of the term 'enforceable promise' as that could result in an entity not accounting for promised goods or services that the customer reasonably expects to receive. They recommended expanding the definition of a performance obligation to include constructive obligations where an entity's specific statements or past practices establish a valid expectation that performance will occur.

The Boards discussed the example of as software provider who provides both 'bug' fixes as well as software updates to its customers. One IASB member mentioned that the 'bug' fixes would only be bringing the product back to its original specification and therefore would not be a separate performance obligation. However, other Board members acknowledged that the providing of 'updates' could be viewed as delivery of a separate performance obligation even though no contractual requirement may be in place.

The Boards tentatively agreed to remove the term enforceable from the definition of a performance obligation to provide clarity that other non-contractual arrangements could be identified as performance obligations.

Breakage and Prepayments

The Boards also discussed the topic of breakage on prepayments (i.e. how to recognise revenue for unused gift cards or other prepaid services). The revenue recognition exposure draft provided that an entity would recognise a contract liability upon receipt of any prepayment from a customer for its performance obligation to provide goods or services in the future and derecognise the liability (and recognise revenue) when the good or service is transferred.

While, the exposure draft did not specifically address how to recognise revenue for breakage on prepayment, the staffs believe the accounting is similar to the proposals for contract options for additional goods or services. Under those proposals, an option is accounted for a separate performance obligation only if the option provides the customer with a material right that the customer would not receive without entering into that contract. If the option provided a material right, then the entity recognises revenue when it transfers those future goods or services or when the option expires. The exposure draft also included an example (example 26) that illustrated the guidance in the context of a customer loyalty programme and how an entity would recognise revenue based on a pattern of redemption of the loyalty points.

The staffs proposed that revenue for breakage should be recognised in proportion to the pattern of rights being exercised by the customer (the proportional model), but if an entity cannot reasonably estimate breakage then revenue should be recognised when the likelihood of the customer exercising their right becomes remote (the remote model). The staffs believe this is consistent with the guidance on options already included in the exposure draft.

The Boards discussion on breakage began with most Board members seemingly opposed to the staffs' recommendation. Some preferred only permitting the remote method while others preferred recognising immediately if an amount can be reasonably estimated and utilising the remote method when an estimate cannot be reasonably estimated. Some also preferred that recognition of breakage be classified as a 'gain' rather than as revenue.

The staffs reiterated their position that the proposal is consistent with the Boards position on the accounting for options. They also commented that classification as a 'gain' would result in reporting that is significantly more difficult that what is included in the exposure draft and over current practice.

The Boards were ultimately swayed by the staffs' arguments. The IASB tentatively agreed with 10 Board members supporting the proposal for the proportional method when a pattern can be estimated but the remote model in other instances. The FASB did not reach a majority supporting the proposal (2 votes) but 4 Board members agreed "not to object".

Onerous Performance Obligations

The Boards also began discussions on onerous performance obligations. Because of time limitations, the Boards were only able to address the first topic of whether the onerous test should be performed at the contract of performance obligation level. The Boards were not able to discuss the topics of whether subsequent contracts should be linked in determining whether to recognise an onerous liability and what costs should be included in the onerous test. Both of these issues will be addressed at a future joint board meeting.

The revenue recognition exposure draft proposed that an onerous liability be recognised when the present value of the probability weighted costs that relate directly to satisfying that performance obligation exceeds the amount of the transaction price allocated to that performance obligation. The Boards proposed that the onerous test be performed at the performance obligation level in order to provide transparency for margins on each performance obligation and to provide timely information by recognising changes in circumstances impacting a performance obligation at the time it becomes loss-making.

Almost all comment letter respondents who commented on the onerous test opposed the proposals in the exposure draft that the test be performed at the performance obligation level. They cited various reasons for performing the test at a higher level unit of account than the performance obligation, including that items are often not priced at the performance obligation level, it is misleading to recognise a loss on a part of the contract when the overall contract is profitable, and that costs are not necessarily tracked at the performance obligation level which would make the test difficult to apply.

The staffs believe that some of these issues may be addressed through other changes to the revenue recognition proposals currently under discussion. However, they also acknowledged the issues identified by comment letter respondents. The staffs proposed that the onerous test be performed at the contract level and clarify that would be the remaining performance obligations in the contract.

A few members from each Board opposed the staff recommendation but the majority of both Boards seemed supportive of the proposals. One IASB member asked the staff what disclosures were planned to supplement the decision to apply the onerous test at the contract level. The staff responded that the exposure draft included disclosures for onerous contracts but that all disclosures would be reassessed as part of the current discussions.

The Boards tentatively decided that the onerous test would be performed at the contract level rather than the performance obligation level as was proposed in the exposure draft (twelve IASB members and three FASB members supported the decision).

Discussion at the additional 1-2 March 2011 Joint IASB-FASB Meeting

The IASB and FASB continued their discussions from the 17 February meeting on onerous performance obligations. At that meeting, the Boards had tentatively decided that the onerous performance test should be performed at the contract level (considering the remaining performance obligations in the contract) rather than at the individual performance obligation level as proposed in ED/2010/6 Revenue from Contracts with Customers.

During this meeting, the Boards discussed:

• whether to exclude contracts entered into as a "loss leader" (a contact entered into at a loss with the intention of profitable margins on future contracts with the customer)
• what costs should be included in the onerous test and in measuring an onerous performance liability.

Exception for "Loss-Leader" Contracts

In considering whether to exclude contracts entered into as a "loss leader", the staffs raised two alternatives. The first alternative would apply the onerous test only after contract inception such that only adverse changes in circumstances since execution of the contract are identified. The second alternative would exclude contracts identified as loss leaders from the onerous test at inception of the contract.

However, the Boards had little interest in providing an exception for "loss leader" contracts (only one IASB member and no FASB members expressed support). One IASB Board member raised an alternative model of recognising an intangible asset for loss leading arrangements, but that also received little support. Several Board members raised the issue that the Boards had tentatively allowed for contracts that meet specific criteria to be combined but could not support allowing linkage between an existing contract and a potential future contract.

Costs Included in the Onerous Contract Test

ED/2010/6 proposed that the onerous contract test consider 'the costs that relate directly to satisfying the performance obligation'. The exposure draft provided that those costs would include direct labour, direct materials, allocations of costs that relate to the contract, costs explicitly chargeable to the customer under the contract, and other costs incurred because of entering into the contract.

However, some comment letter respondents expressed concern with the proposals and felt that only incremental costs to fulfil performance obligations should be included in the onerous contract test. Additionally, some comment letter respondents had concerns over application of the test to individual contracts not designed to recover all the directly attributable costs of fulfilling the performance obligation (e.g. the purchase of a single airline ticket and the entire cost of operating the flight being considered 'the costs that relate directly to satisfying the performance obligation').

The staffs proposed that the costs to be included in the onerous contract test would be the lower of 1) the costs that relate directly to the contracts (the exposure draft proposal) and 2) the amount that would be incurred to pay as compensation for cancelling the contract.

The Boards generally supported the portion of the staff proposal not to consider only incremental costs as part of the onerous test contract but to allow for contract breakage. However, the Boards were less supportive of approaching the recognition and measurement of onerous contracts as a lower of test. Several members of both Boards felt management's intent should drive the determination and that the loss to be incurred is what should be recognised, whether that is the onerous costs for the remaining performance obligation or the costs involved to terminate the contract if that decision is made. The Boards also felt that once a contract is terminated, the contract would move outside of revenue recognition and into accounting for contingencies (IAS 37 or FAS 5).

The Boards tentatively agreed that for purposes of (a) determining if a contract is onerous and (b) the amount of the onerous liability, an entity should consider the costs that "directly" relate to satisfying the contract. However, an entity would use the amount that would be incurred to cancel the contract if all of the following conditions are met:

The Boards tentatively decided that the cancellation of the contract would be within the scope of IAS 37 rather than the revenue recognition standard when the settlement terms are not explicit in the contract.

Discussion at the March 2011 Joint IASB-FASB Meeting

MONDAY, 21 MARCH 2011

Collectibility

In discussing collectibility, the staffs sought the boards views on how an entity should account for the effects of a customer's credit risk, and changes in that risk, in a contract with a customer. Feedback received through comment letters indicated that preparers were generally concerned that the proposals in the ED would significantly change existing practices and be costly to implement. The first question asked of the boards was whether an entity should initially measure the transaction price � and therefore revenue � at a net amount, gross amount, or a combination approach. The boards generally supported measurement at a gross amount.

The staffs then recommended that the boards consider whether there should be a separate recognition threshold for collectibility. The staffs did not believe the final revenue standard should specify a recognition threshold for collectibility in addition to the criteria for determining whether a contract exists for purposes of applying the revenue model. The boards discussed this question at length and no consensus was reached.

Time Value of Money

In discussing time value of money, the staffs presented the boards with two questions:

• When the transaction price for a contract with a customer should reflect the time value of money of the promised consideration
• How to account for the time value of money component of the promised consideration, including the selection of an appropriate discount rate.

The staffs recommended that the boards affirm the proposal in the ED related to time value of money. The staffs also recommended that the boards clarify that a financing component is significant only if two conditions are met 1) the effects of the time value of money are significant and 2) the contractual payment terms have the dominant purpose of providing financing either to the customer or to the entity. It was also recommended that the boards consider a practical expedient that entities should not have to reflect time value of money if the period between payment by the customer and the transfer of the promised goods or services is less than one year.

The boards discussed the staffs' recommendations. There was support for the principle that time value of money should be included in an entity's calculation when it is material/significant. There was discussion about the staffs' use of the words material and significant, however, it was determined that the discussion of the specific wording would be handled at a later meeting. There was also support to provide implementation guidance around the concept of material/significant. The boards supported the staffs' recommendations to include the following � the effects of the time value of money are significant because: 1) there is a significant timing difference between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services; 2) the interest rate that is explicit or implicit within the contract is significant; 3) the amount of customer consideration would be substantially different if the customer paid in cash at the time of transfer of the goods or service.

In general, the boards supported the staffs' recommendation for a practical expedient. There was concern, however, that this would be contradictory with decisions made for other projects.

WEDNESDAY, 23 MARCH 2011

Collectibility

The boards continued their discussion on collectibility from their meeting on March 21, 2011. The staffs presented the boards with three questions and recommendations.

For the first question, the boards discussed the elements that make up a contract. It was determined that having the ability to pay was not consistent with the general criteria for existence of a contract. The boards agreed there was no support for adding this criteria to the contract guidance.

For the second question, the boards concluded there was no support for adding a recognition threshold for collectibility in the final standard. However, the boards' later discussion on uncertain consideration raised uncertainty if they will reassess this tentative decision.

For the third question, the boards discussed whether impairment losses should be presented separately from revenue for both an entity's initial estimate of losses and subsequent adjustments to that estimate. Several board members noted that they conceptually agreed with the guidance in the exposure draft (ED); however, they appreciated the concerns that respondents raised (e.g., did not like netting within revenue for initial estimates and the presentation of subsequent adjustments through a separate line item). The boards tentatively agreed that the best solution was having a gross revenue line and then a separate line item adjacent to revenue to show both the initial estimate and subsequent adjustments. These two line items would then total to present a net balance.

Uncertain Consideration

The boards' discussion focused on three topics relative to uncertain consideration: (1) existence of a right to consideration, (2) measurement, and (3) constraining revenue. The boards did not reach any tentative decisions regarding these topics; however, identified areas for additional discussion as well as cross-cutting issues that need to be considered with the leasing project.

Existence of a Right to Consideration

The first paper discussed by the boards dealt whether the right to an uncertain amount of consideration should exist before an entity would be required to measure that right. The staffs proposed that the final standard should clarify that a right to consideration must exist before an entity can estimate that right (and thus, recognise revenue).

Related to this issue, the staffs provided a summary of a royalty agreement whereby an entity's future cash flows from a sale are subject to that customer reselling to an end-customer and paying the entity a percentage of that sale (e.g., a royalty agreement). While the staffs felt the easiest way to recognise revenue for this usage-based royalty contract would be when the entity's customer makes sale to the end-customer (i.e., a recognition requirement), they proposed that the pattern of revenue recognition should be included as a measurement issue rather than a recognition issue to be consistent with the tentative decisions reached in the lease project.

The boards express various views on this issue and continued to discuss this issue in the context of the other two topics; however, they did not reach any tentative decisions.

Measurement

The staffs reported on their analysis of three models to measure (uncertain) consideration in a contract with customer: probability-weighted, maximum amount more likely than not to occur, and management's best estimate. This analysis led to their recommendation of a principle that, when the amount of consideration is uncertain, an entity should estimate the consideration as the (maximum amount) more likely than not to be received from the customer. However, when the consideration is frequently occurring and homogenous, an entity should used a probability-weighted method to determine the transaction price.

Board members individually expressed support for probability-weighted and more likely than not-based models based on various examples. However, the staffs' recommendation generated significant discussion by the boards on specific scenarios and potential issues with the staffs' recommendations. The boards subsequently determined that this issue could not be resolved in isolation but needed to be considered in the context of the other two topics.

Constraining Revenue

The staffs' first recommendation was to clarify that an entity should constrain the amount of cumulative revenue recognised to date rather than the amount of consideration allocated to all performance obligations. This was in response to two concerns when the amount is constrained to all performance obligations:

The boards seemed to support the idea of fixing these unintended consequences. However, after further discussion with the other issues in this topic, the issues identified related to constraining revenue remain open.

Next, the staffs suggested that amendments should be made to paragraphs 38 and 39 of the ED. They proposed to amend paragraph 38 to include a condition to supplement an entity's experience of "other persuasive evidence, such as evidence from extensive testing procedures, to support the estimate transaction price" (this was intended to include new product offers or new entities into the conditions). The staffs proposed to either clarify in the factors listed in paragraph 39 or provide implementation guidance for scenarios of uncertain revenues dependent upon action of a customer or third party (e.g., film license dependent on movie theatre's customers, royalties from reseller on per-unit shipped). There were many concerns raised and views shared by the boards. Some of those concerns included establishing a threshold for uncertain revenues of "reasonably assured" or "virtually certain" (trying to define each and consider if each should be included as part of the measurement threshold for uncertainty), inconsistencies with tentative decisions reached in the lease project for lessor accounting, and inconsistency in practice for applying the principles being discussed.

There were no tentative decisions reached. Due to the cross-cutting issues, the boards' decided it may be useful to redeliberate this topic at the same time as the lessor accounting model at a future meeting.

Discussion at the April 2011 IASB meeting

TUESDAY, 12 APRIL 2011

Uncertain consideration

The Boards discussion focused how an entity should determine the transaction price and recognise revenue when the customer promises an amount of consideration that is uncertain. The answer depends on various issues such as the nature of an entity's contractual rights and obligations, and an entity's ability to estimate the outcome of uncertain future events.

The Boards had previously discussed these issues at length in March 2011 and had not made any decisions due to the lack of clarity on the interaction of the various aspects of the revenue model. The staff presented three steps to apply the proposed revenue model. The staff clarified that the pattern of revenue recognition should be included as a measurement issue rather than a recognition issue to be consistent with the tentative decisions reached in the leases project.

Most respondents supported a constraint on revenue recognition but the staffs' recommendations generated significant discussion by the Boards on the ways in which to constrain revenue and there were many concerns raised and viewed shared by the Boards. Some of those concerns included inconsistencies with tentative decisions reached in the lease project for lessor accounting, and inconsistency in practice for applying the principles being discussed as well as the situations where amounts would be recognised in determining the overall transaction price but not recognised due to constraints on revenue resulting in potential contingent assets/liabilities. The staff clarified that if there is significant uncertainty, this third revenue constraint would minimise truing up revenue in the future. The staff noted that this would need to be disclosed in the financial statements but that this would be addressed at a future meeting. The Boards tentatively agreed to Step 3 point 1 and 2 and in principle with point 3 but asked the staff to build up point 3 further and to add wording around whether the circumstances are within an entity's control. The Boards also asked the staff to ensure that the revenue recognition principles were consistent with principles of lessor accounting.

WEDNESDAY, 13 APRIL 2011

Allocating the transaction price

The staff discussed that the underlying principle of the ED is that an entity should allocate to each separate performance obligation the amount of consideration the entity expects to receive in exchange for satisfying that performance obligation. The staff recommended that to apply this core principle, an entity should allocate the transaction price on a relative standalone selling price basis (using estimated selling prices if necessary) except in the following circumstances in which an entity should be permitted to use an alternative allocation method:

The staffs' recommendations with respect to the alternative methods generated significant discussion by the Boards and there were many concerns raised and views shared by the Boards. Some of the concerns centred on whether (a) was specifically tailored to the software industry and whether there was a difference between residual method and residual technique. Concerns around (b) centred on the ability to choose between two methods and that there was a lack of clarity around what costs were involved in determining the profit margin and situations where loss leaders would be able to use alternative methods to allocate revenue.

• The Boards tentatively agreed to change the wording on (a) to note that the residual method would be appropriate technique where there is a variable performance obligation. This is not a choice but a technique to meet the core principle of the ED.
• The staff clarified that exception (b) related to situations where there are normally profitable components on a contract which as a result of the allocation of a discount based on the relative selling price now has some loss making components which is not representative of the economics of the product/service. Several Board members noted that the exception (b) was not sufficiently clear or narrow enough. The Boards were spilt on agreeing to exception (b) and neither of the Boards agreed to a more narrow interpretation of exception (b). Consequently, the Boards tentatively agreed in principle to drop exception (b) and revert to an allocation based on relative selling price.

Allocating subsequent changes in the transaction price

The staff recommended that an entity should allocate changes in the transaction price on a relative standalone selling price basis to all performance obligations in the contract, except when a change in the transaction price relates entirely to one performance obligation. That would be the case if both of the following conditions are met:

• The contingent payment terms of the contract relate specifically to the entity's efforts to satisfy that performance obligation or a specific outcome from satisfying that separate performance obligation; and
• The amount allocated (including the change in the transaction price) to that particular performance obligation is reasonable relative to all of the performance obligations and payment terms (including other potential contingent payments) in the contract).

The Boards tentatively agreed with the staff's recommendation.

Licences and rights to use intangible assets

The Boards re-deliberated whether the revenue standard should distinguish between different types of licenses following feedback from respondents who mainly disagreed that entity should distinguish between an exclusive and a non-exclusive license as the majority of the respondents felt that exclusivity does not affect the nature of an entity's performance obligation, and therefore is counterintuitive to have different patterns of revenue recognition depending on whether a license is exclusive. The Boards tentatively agreed with the staff's recommendation that the revenue standard should not distinguish between the types of licenses. The Boards also clarified that licenses and rights to use intangible assets had been scoped out of the lease standard (in particular, from a vendor perspective).

The Boards considered two alternatives to accounting for a contract in which the entity grants a license to a customer. Under Alternative A, an entity would apply the overall revenue model when accounting for a contract in which the entity grants the customer rights to use the entity's intellectual property. As such, an entity satisfies its performance obligation (and therefore, recognises revenue), when the customer is able to use and benefit from the promised rights (i.e. when the customer obtains control). Under Alternative B, an entity satisfies its performance obligation and recognises revenue over the period in which the customer has the right to use to underlying assets. This alternative could significantly change current practice for accounting for various transactions. The Boards tentatively agreed with the staff's recommendation that in a contract in which an entity grants a license to a customer, the promised asset is the license and the promise to grant that license represents a single performance obligation that the entity satisfies when the customer is able to use and benefit from the license (i.e. Alternative A).

Fulfilment costs

The Boards had previously discussed the issues relating to the costs of obtaining a contract at the February 2011 meeting and tentatively decided that an entity should recognise an asset for the incremental costs of obtaining a contract that the entity expects to recover. Incremental costs of obtaining a contract are costs that the entity would not have incurred if the contract had not been obtained.

This meeting considered improvements to the proposed guidance in the ED on accounting for the costs incurred to fulfil a contract with a customer. Certain Board members expressed reservation that costs were addressed in the ED. However, some Board members noted that this guidance would provide more clarification, consistency, and improve convergence that it was not possible to develop a comprehensive revenue standard without addressing some cost guidance as was requested by respondents. The Boards tentatively agreed with the majority staff view and recommendation to retain the existing scope in the ED for the fulfilment cost guidance rather than addressing costs comprehensively.

The Boards tentatively affirmed the proposal in the ED that an entity should first apply the requirements of other standards (e.g. on inventory, PP&E, and intangibles) to account for the costs of fulfilling a contract. The Boards discussed and tentatively concurred that the definition of "standards" referred to official literature.

If an entity incurs costs to fulfil a contract and those costs are not in the scope of another standard, the entity should recognise an asset arising from fulfilment costs if all of the following conditions are met: a) the costs relate directly to a contract; b) the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future, and c) the costs are expected to be recovered. Certain Board members felt that this definition was vague and the staff agreed to draft wording to make the criteria/definition of an asset clearer. The Boards tentatively agreed in principle to the staff's proposal. There was some discussion that this could lead to unintended consequences where some costs that were previously expensed would be capitalised.

The Boards tentatively concurred with the staff's clarification that "costs relating directly to a contract" include pre-contract fulfilment costs that relate directly to a specific anticipated contract. Specifically, the staff clarified that pre-contract costs are fulfilment costs that an entity incurs prior to obtaining a contract, such as the costs of mobilization, engineering and design, architectural or other fulfilment costs incurred on the basis of commitments or other indications of interest in negotiating a contract.

The Boards considered the staff's proposal to clarify what was meant by "abnormal costs". The Boards tentatively agreed to use the language in the ED asked the staff to add some clarity but not to over engineer the wording.

The Boards tentatively agreed to the staff's proposal to provide a few more examples of allocations of costs that relate directly to a contract but that these should be limited.

Some respondents had questioned how to apply the proposed revenue model to account for the effects of learning costs in a contract with a customer. The Board tentatively agreed and asked the staff to draft an illustrative example.

THURSDAY, 14 APRIL 2011

Sale and repurchase agreements — put options (paper 2E)

The Boards continued their deliberations on the revenue ED and made the following tentative decision as summarised below:

• The Boards tentatively agreed with the recommendation that if a customer has the unconditional right to require the entity to repurchase the asset (a put option) and the repurchase price is below the original sales price and the customer obtains the control of the assets, the sale and repurchase agreement should be accounted for as a lease) but asked the staff to revise the wording to add clarity by including references to a time factor and that there should be a significant economic incentive for the customer to return the asset.

Sale and repurchase agreements — put option

The ED currently provides that if a customer has the unconditional right to require the entity to repurchase the asset (a put option), the customer obtains the control of the asset, and the entity should account for the agreement similarly to the sale of the product with a right of return. The staff recommended that a sale and repurchase agreement with a put option and a repurchase price below the original sales price should be accounted for as a lease. When the repurchase price is at the original sales price, the staff recommended that the put option should be accounted for as a sale with a right of return.

This was in response to some of the respondents� comments that the repurchase price of a put option is not always at, or near to the original sales price and that in some industries, this arises because the put option is not exercisable until a reasonable period of time after the original sale and that in some instances, the repurchase price is lower than the original sales price, because the asset will not be returned in the same condition it was sold. Therefore the customer can be viewed as having a right to use the asset until the put option becomes exercisable, at which point the customer can choose to keep the asset or sell it back to the entity. Such instances would appear economically to be more like a lease than a right of return. The staff raised concerns that there might currently be an arbitrage between the lease standard and the revenue standard. Several Board members expressed concerns that the staffs� recommended wording did not explicitly cover a time factor or wear and tear factor or circumstances where the repurchase price was clearly below estimated market value which would indicate that there was a sale rather than a lease transaction. The Boards tentatively agreed with the recommendation in principle but asked the staff to revise the wording to add clarity by including references to a time factor and that there should be a significant economic incentive for the customer to return the asset. In such circumstances, the revenue standard would then require the entity to apply the leasing model in the lease standard. Certain Board members noted that this may give rise to situations in which the revenue standard would refer the entity to the lease standard even though the entity�s products/services (such as intangible assets) are scoped out of the lease standard. In such circumstances, the revenue standard would take precedence and the entity would apply the leasing model in the lease standard.

Discussion at the May 2011 Special Joint IASB-FASB meeting

WEDNESDAY, 11 MAY 2011

The Boards hosted an education session in which members of the telecommunications industry presented concerns they have with the Board's proposals in the exposure draft and subsequent decisions to date. The Boards were also presented an opportunity to ask questions to the industry participants.

The presentations were made by representatives from Deutsche Telekom, TeliaSonera and Sprint Nextel (representing the US wireless industry also including AT&T and Verizon).

In the telecommunications industry, providers will often offer customers subsidised handsets when the customer enters into a minimum term service contract. These entities will typically incur losses on the handsets (the cost will exceed the price paid by the customer) in order to secure the periodic service contract of the customer as the profit margin in the service contract will more than recover the loss incurred on the handset.

Two of the presenting groups had fairly similar concerns with the proposals feeling they would (1) not accurately portray the economics of the transactions involved, (2) reduce comparability within the industry, (3) result in increased complexity because of the requirement to assess at the contract level, and (4) result in significant implementation costs. With respect to the economics not being accurately portrayed, they felt that the proposed model and its allocation of revenue to performance obligations based on the relative stand alone selling price would misrepresent revenue when the customer acquires the handset (when in fact the entity has incurred an economic loss at that point) and would then understate revenue throughout the contract life. However, the other participant's concerns on this issue were not as significant as their current revenue recognition approach aligns closer to the proposals in the exposure draft (they allocate the discounts offered in a bundling service arrangement based on their relative fair values).

All three participants had some concerns over the requirement to assess at the individual contract level. The one participant using an approach that aligns to the current proposal currently allocates any associated discount using a portfolio approach rather than a specific contract approach. The participants noted that contracts within the initial contract period are often modified. The participants also noted that their billing systems were tied into the accounting systems at an aggregated level and not at the individual contract level. As such, the costs to implement the proposals would result in significant systems overhauls.

No decisions were made during this session.

Discussion at the May 2011 IASB Meeting

TUESDAY, 17 MAY 2011

Disclosure and presentation requirements

As part of its continued deliberations surrounding the Exposure Draft Revenue from Contracts with Customers (Revenue ED), the Boards deliberated on disclosure and presentation requirements.

The Boards made a number of tentative decisions in the conduct of these deliberations, which included retention of the disclosures proposed in paragraphs 69-83 of the Revenue ED, subject to the following clarifications and changes:

In the disaggregation of revenues, the final standard should:

• include additional examples of potential categories (e.g., contract duration, timing of transfer and sales channel) of which to disaggregate but should not prescribe how an entity should disaggregate revenue
• require an entity to use several categories to disaggregate revenue if necessary to meet the disaggregation objectives outlined in the Revenue ED
• not require an entity to disaggregate any expected impairment loss
• permit an entity to disaggregate revenues either on the face of the statement of comprehensive income or in the notes to the financial statements.

In the presentation of contract assets and liabilities, the final standard should:

• require the presentation of net contract assets and net contract liabilities as separate line items in the statement of financial position
• permit providing additional detail about contract assets and receivables either on the face of the financial statements or in the notes
• permit the use of labels other than 'contract asset' or 'contract liability' on the statement of financial position in describing these balances, assuming sufficient information is available to users to distinguish between conditional and unconditional rights to consideration
• require a reconciliation of contract assets and contract liabilities during the period.

Regarding remaining performance obligations as of period end, the final standard should:

• require a maturity analysis of remaining performance obligations from contracts with an original expected duration of more than one year on the basis of the transaction price determined under the proposed model.

Regarding assets derived from acquisition and fulfilment costs, the final standard should:

• require reconciliation of the carrying amount of an asset arising from the costs to acquire or fulfil a contact with a customer, by major classification, at the beginning and end of the period, in conjunction with separate disclosure of additions, amortisation, impairments and impairment losses reversed.

The IASB and FASB staffs presented a proposal to retain the disclosures proposed in paragraphs 69-83 of the Revenue ED, absent certain clarifications and changes regarding disclosure and presentation in the disaggregation of revenues, contract assets and liabilities and assets from acquisition and fulfilment costs.

Disaggregation of revenues

Regarding the disaggregation of revenues, the Boards consider disclosures proposed in paragraph 74 of the Revenue ED which required disaggregation of revenue into various categories that reflect how revenue and cash flows are affected by economic factors.

Multiple Board members requested more prescription in relevant disclosures of revenue disaggregation in highlighting that current accounting guidance, such as IFRS 8 Operating Segments already specifies certain minimum disclosure requirements surrounding disclosure of different types of products and services from which each reportable segment derives its revenues. Likewise, two Board members noted that more prescriptive guidance exists in disaggregating expenses in the statement of comprehensive income than that of the revenues. The staffs discussed that it was not their intention to override current disclosure requirements regarding disaggregation, but rather, provide additional disaggregation platforms for preparers to consider.

The majority of the Boards believed that disaggregation requirements should be based on a principle that clearly identifies the purpose of the disaggregation rather than listing prescribed categories that might provide disaggregation that is useful in some, but not all, cases. These Board members cited a need to provide appropriate flexibility considering different industries and business environments.

As a result, the Boards tentatively decided that the final standard should include additional examples of potential categories for disaggregation (e.g., contract duration, timing of transfer and sales channel) but should not prescribe how an entity should disaggregate revenue.

Responding to outreach feedback requesting clarification as to whether revenue should be disaggregated into one category or several categories (i.e., to disaggregate revenue by type of good and by geography), the Boards tentatively decided that an entity should be required to use several categories to disaggregate revenue streams if multiple disaggregations are necessary to meet the objectives of disaggregation expressed in the Revenue ED (e.g., to best depict how the amount, timing and uncertainty of revenue and cash flows are affected by economic factors).

Following the Boards' March 2011 decision to require an entity to present an allowance for any expected impairment loss adjacent to revenue in the statement of comprehensive income, the staffs recommended that a separate line item for that allowance should not be subject to disaggregation in the context of paragraph 74 of the Revenue ED. One Board member expressed concern in not disaggregating impairment or allowances to highlight relevant future uncertainties, but the Boards tentatively decided not to require an entity to disaggregate any expected impairment loss.

Regarding the location of the disaggregation requirements in either the statement of comprehensive income or the notes to the financial statements, the majority of the Boards did not think it necessary to prescribe whether an entity should present the disaggregation of revenue on the face of the financial statements or in the notes. One FASB member expressed a desire to require distinction of continuance service revenues from point-in-time revenues on the face of the financial statements and highlighted that U.S. SEC guidance for U.S. public companies prescribes distinction of product and service revenues.

Contract assets and liabilities

The staffs proposed that contract assets and contract liabilities should be disclosed in accordance with existing requirements in IFRSs and U.S. GAAP, whereby separate presentation is required for each material class of similar items as well as items of dissimilar nature or function unless they are immaterial. The Boards, in considering this proposal, tentatively decided to require the presentation of net contract assets and net contract liabilities as separate line items in the statement of financial position (i.e., contract assets and contract liabilities cannot be netted, and absent separate disclosure of material contract assets and / or contract liabilities on the face of the financial statements, separate disclosure of such balances would be required in the notes to the financial statements), permit entities to provide additional detail about contract assets and receivables (e.g., billed and unbilled receivables) either on the face of the financial statements or in the notes, and permit entities to use labels other than 'contract asset' or 'contract liability' on the statement of financial position in describing these balances, assuming sufficient information is available for users to distinguish between conditional and unconditional rights to consideration.

Board members also discussed the isolation of revenue from other working capital balances in considering the need to reconcile contract assets and liabilities from the opening to closing balance, and the majority of the Boards noted that a reconciliation requirement is consistent with the disclosure objectives of providing information to understand the amounts arising from contracts with customers that have been recognised in the financial statements. Thus, the Boards tentatively decided to require an entity to disclose a reconciliation of contract assets and contract liabilities.

Remaining performance obligations

Paragraph 78 of the Revenue ED proposed disclosure of the amount of the transaction price allocated to the performance obligation remaining at the end of the reporting period and the expected timing of the satisfaction of those performance obligations (e.g., a maturity analysis). Outreach feedback received on this disclosure was mixed, but considered by many to be costly and result in consequences related to disclosing forward-looking information.

Multiple Board members cited the relevance of this information to investors who are attempting to project revenues, and likewise, noted that many industries regularly communicate this information in press releases to highlight booking and backlog information, although such Board members also noted that the disclosure is generally industry specific. Opposing Board members highlighted that the disclosure is prone to error or change in circumstances, and may therefore lead to litigation risk.

One Board member proposed the retention of a maturity analysis disclosure remaining performance obligations from contracts with an original expected duration of more than one year on the basis of the transaction price determined under the proposed model. His proposal did not recommend the retention of one-year time bands for relevant performance obligation disclosure, but rather, he proposed a quantitative and qualitative disclosure which operated at a level of specificity which was considered appropriate given the underlying business environment. The Boards tentatively decided to apply the proposal suggested by this particular Board member.

Assets from acquisition and fulfilment costs

The Boards considered disclosure requirements surrounding an asset arising from the costs of acquiring a contract with a customer as well as information about an asset arising from the costs of fulfilling a contract with a customer, following a March 2011 decision to recognise an asset for the incremental costs of obtaining a contract.

The Boards considered a disclosure requirement which would require a reconciliation of the carrying amount of the major classifications of assets arising from the costs of acquiring or fulfilling a contract at the beginning and end of the period, showing additions (including the nature of the amount), expenses recognised in satisfaction of performance obligations (and the method used to determine that amount), impairments and impairment losses reversed, in conjunction with circumstances that led to the reversal of a write-down of an asset as well as the method used to determine the amortisation amount for the period, similar to current reconciliation disclosures in IAS 2, IAS 38 and ASC Topic 350.

One Board member did not like the naming convention of fulfilment costs, given that the costs within the scope of this discussion were limited to the pre-contract costs incurred in obtaining a contract as opposed to all costs necessary to fulfil a contract (including inventory and fixed asset costs), and the definition of fulfilment costs as applied herein was inconsistent with fulfilment costs in the insurance project. Other Board members highlighted the consistency of the above proposal with IAS 11 in accounting for construction contracts. As a result, the Boards tentatively decided to require the full package of disclosures as outlined above.

Way forward

Certain members of the Boards requested that outreach activities should be performed surrounding overall disclosures, but other Board members noted that the responses to outreach are expected to be consistent with previous feedback (e.g., preparers believe it is disclosure overload while users approve of the additional disclosures). Other Board members hoped to see a practical example of what the financial statements would look like in meeting the tentative disclosure requirements in order to assess potential disclosure overload.

WEDNESDAY, 17 MAY 2011

As part of its continued deliberations surrounding the Revenue ED, the Boards deliberated on:

• amortisation and impairment of an asset recognised from the costs incurred to acquire or fulfil a contract with a customer
• onerous contracts.

Amortisation and Impairment

In consideration of the costs incurred to acquire/fulfil a contract with a customer, and the related amortisation and impairment considerations surrounding these capitalised costs, several Board members continued to deliberate whether an entity should recognise an asset arising from the incremental costs incurred to obtain a contract with a customer. Specifically, Board members opposing recognition of capitalised acquisition and fulfilment costs questioned how preparers could assess the recoverability of incremental costs underlying a contract when such a contract may be in the early stages of the negotiation process (i.e., precontract cost environment), and as such, a contract would not be available for purposes of determination and allocation of the transaction price to separate performance obligations under the revenue model. The staffs noted that the basis of recognition of capitalised acquisition and fulfilment is based on a specific anticipated contract, and as such, it was anticipated that application of the general revenue model would be possible to an appropriate level of precision in which to develop an expectation of consideration.

The FASB Chairman questioned whether the Boards were interested in pursuing a practical expedient for contracts with an expected duration of one year or less, whereby preparers would be permitted to recognise contract acquisition costs as a period cost (as opposed to a capitalised cost) for contracts with an expected duration of one year or less. Several Board members supported this view given that capitalisation of costs could be time-consuming for a balance which is unlikely to be material, but other Board members opposed this expedient as contrary to the basic principle of asset recognition. After debate, the Boards tentatively decided to permit recognition of contract acquisition costs as a period cost (as opposed to a capitalised cost) for contracts with an expected duration of one year or less.

The Boards examined the amortisation period for capitalised contract costs while considering the Revenue ED which required amortisation on a systematic basis consistent with the pattern of transfer of goods or services to which the asset relates. As a result of outreach activity requesting clarification as to whether an asset arising from the cost of fulfilling a contract with a customer should be amortised based on goods or services transferred in an existing contract, or whether those goods or services could relate to more than one contract (and possibly, future contracts), several Board members cited the need to recognise obvious contractual investments (i.e., recognise future contract renewals), when contract pricing reflects the obvious intent of an investment in a longer-term relationship. Examples discussed included the existence of a non-refundable upfront fee for a gym membership which would not be required in future renewals. It was believed by many Board members that a customer�s willingness to enter into the original contract at a relatively greater annual fee (includes the upfront fee) would generally lead to an expectation of future membership renewal at a reduced annual fee (excludes the upfront fee).

Several Board members expressed concern with extending the amortisation period beyond the initial contract given uncertainties regarding future contract renewals. These Board members cited inconsistencies which would develop as to the level of assurance required in recognition of potential renewals and they requested clarification as to whether relevant assurance assessment in renewals should be based on historic evidence on a portfolio basis (i.e., does this type contract generally lead to renewals with other customers of the entity), or limited to specific customer experience. As a result, the majority of the Boards supported only permitting an entity to look forward beyond the initial contract period if the entity has demonstrated that it has sufficient historical experience indicating that the contract will be renewed with the same customer.

The Boards then considered the wording of the impairment model in the ED for such acquisition and fulfilment capitalised contract costs. The Boards tentatively decided that an impairment loss should be recognised to the extent that the carrying amount of the asset recognised from total costs to acquire or fulfil a contract exceeds its recoverable amount. In application of recoverable amounts, the staffs had classified the recoverable amount of the asset as the amount of consideration the entity expects to receive in exchange for the good or service to which the asset relates, less the costs that relate directly to providing those goods or services. Board members immediately clarified that the amount of consideration would be the total transaction price allocated to performance obligations under the proposed model.

In application of the definition of the recoverable amount, several Board members expressed uncertainty as to how a preparer would allocate any determined impairment loss to the assets subject to the impairment test, and to this end, asked that the staffs prepare additional guidance on this topic for a future meeting.

Following from the above tentative decision, the Boards considered whether it was appropriate to reverse impairment losses derived through the above impairment model if there has been a change in the estimates used to determine the asset�s recoverable amount since the last impairment loss was recognised. The Boards noted divergence in current practice between IFRSs and US GAAP in this area, whereby IAS 12 Inventories and IAS 36 Impairment of Assets require an entity to reverse previous impairments (limited to the original carrying amount prior to impairment) if specified criteria are met, while ASC Topic 330 and 360 Property, Plant and Equipment prohibit reversal of impairments. Given the interdependence of this decision on other standards, both Boards tentatively decided to retain current guidance in their relevant jurisdictions regarding the reversal of impairment losses (i.e., the IASB would require the reversal of an impairment loss where relevant, while the FASB would prohibit the reversal of impairment loss), and thus, a convergence variance will exist in this area.

Onerous Contracts

Following tentative decisions of the Boards in February and March 2011 that the onerous test should be applied to the remaining performance obligation in a contract, the costs to be included in the onerous test are those that relate directly to fulfilling the contract and the onerous test should not include an exception for loss-leaders, the Boards reconsidered the application of the onerous test.

The Boards discussed the potential modification of the onerous test such that when more than one contract is satisfied at the same time by a single act (e.g., contracts to individual customers for airline tickets and entertainment events), an entity would recognise an onerous liability only when those contracts are collectively expected to be onerous.

Several Board members expressed concern in recognising onerous contract liabilities in isolation of one particular contract. For example, one Board member highlighted an example of an entertainment event that was being performed at multiple venues, but one particular event operated at a loss (although covering variable costs). While the particular event operated at a loss on a standalone basis, collectively, the entertainment events operated profitably. This Board member noted concern with an isolated contract onerous test in recognising liabilities for contracts which contribute to fixed costs. Other Board members questioned the appropriate unit of account if contracts were viewed collectively, whereby a decision to look at airline tickets on a particular flight could be extended to look at connecting flights before and after an individual flight as all contributing to the overhead costs of the airline.

One Board member expressed a desire to limit the scope of the onerous contract test to long-term service contracts, in which the definition of long-term would be discussed at a future meeting. For example, contracts to individual customers for airline tickets and entertainment events would not be subject to an onerous contract test. An entity would be required to separate goods and long-term services from a single contract and apply the onerous contract test to the long-term services using the allocated transaction price. The Boards tentatively agreed with this exception, and thus, the onerous test, as discussed in previous joint meetings, would be applied to long-term service contracts. The FASB also agreed that when a not-for-profit entity enters into a contract with a customer for a social benefit or charitable purpose, those contracts are exempted from applying the onerous test, but the IASB did not deliberate on this particular circumstance.

Discussion at the special 31 May-2 June 2011 IASB-FASB meeting

Costs of products manufactured for delivery under long-term production programs

The staff have received recent questions about the effect, if any, of the revenue project on how an entity should account for the costs of products manufactured for delivery under long-term production programs. Those questions have been raised as part of the revenue project because accounting for production costs affects the profit margin an entity recognises upon fulfilment of a contract with a customer.

The staff noted that as part of the revenue recognition project, the Boards have developed a set of cost guidance, with a very limited scope, with the purpose of ensuring that the issuance of a final revenue standard does not create any gaps in existing standards as a result of the final standard replacing existing revenue standards that contain limited cost guidance. Hence, the Boards developed cost guidance in the revenue project for the following: (a) setup costs for services contracts, (b) precontract costs, and (c) inventory of a services provider. For other costs to fulfil a contract, an entity would apply other guidance such as existing standards on inventory, PP&E, and intangible assets. Production costs incurred under a long-term production program are not the types of costs for which the Boards developed cost guidance.

Several Board members suggested that they would prefer to have more consistency and expressed concern that there were diverse current practices in US GAAP and IFRSs when accounting for the costs of products manufactured for delivery under long-term production programs.

The Boards tentatively agreed that the accounting for costs of products manufactured for delivery under long-term production programs (transferred to a customer at a point in time) is not in the scope of the revenue project and that these costs relate to accounting for inventory and intangible assets.

The Boards tentatively decided that these topics should be addressed either at a later time or as part of a separate project.

At the meetings in June, the Boards intend to consider: (a) application of the revenue model to the telecommunications industry, (b) transition, and (c) whether re-exposure is necessary.

Discussion at the June 2011 IASB Meeting

TUESDAY, 14 JUNE 2011

As part of its continual deliberations surrounding the Exposure Draft Revenue from Contracts with Customers (Revenue ED), the Boards deliberated on the following topics:

• Effect of the proposed model on telecoms (and other) companies
• Transition requirements
   

Effect of the proposed model on telecoms (and other) companies

The staff noted that constituents in the telecommunications industry (and other industries with similar concerns) have provided feedback on the effects of the proposed model. At the May 11, 2011 education session, the Boards received input directly from select representatives of the telecommunications industry. The Boards heard that the feedback from the telecommunications industry has been mixed but that the vast majority of constituents have significant concerns about the effect of the proposed revenue recognition model. The main concerns include:

• allocating consideration to a handset on a standalone selling price basis does not provide useful information because it results in an entity recognising revenue for the network service at an amount that is less than the amount of cash received for ongoing network services
• key metrics currently monitored by users (e.g. average revenue per user) would be less predictive of future earnings. Hence, if the proposed model is implemented, users would request that companies provide the same financial information as under current practice
• applying the proposed model would be complex and costly because of the high volume of contracts and the various potential configurations of handsets and service plans. An entity would need to significantly modify its systems and processes.

Most constituents in the telecommunications industries suggested that the Boards introduce the contingent revenue cap of existing US GAAP. The staff were not unanimous about whether to revise the proposed model but recommended that if the Boards decided to revise the proposed model, the staff would prefer allowing a broader use of the residual technique rather than introducing the contingent revenue cap of US GAAP. The staff thought that the contingent revenue cap would have a much greater risk of unintended adverse consequences. In addition, the staff noted that the Boards had already tentatively decided to permit the use of a residual technique in some circumstances. Applying the technique to the telecommunications industry (and to similar contracts in other industries) would specify additional circumstances in which an entity would use that technique.

Although the decision was not unanimous, the Boards tentatively agreed that the proposed model should not be revised to address some of the concerns raised by constituents in the telecommunications industry (and other industries with similar concerns). Several Board members noted that the objective of the revenue project was to create a single model that would be applied consistently across various transactions and industries and that it would not be possible to achieve that objective without affecting the accounting for some transactions and industries. In addition, other Board members noted that if they were to revise the proposed model in response to concerns from a particular industry, other industries might expect the Boards to revise the proposed model in response to their concerns.

Transition requirements

The Boards unanimously rejected the proposal that the ED should be applied prospectively. The Boards tentatively decided that an entity should apply the revenue standard on a retrospective basis either through:

a)	adopting a full retrospective application, or
b)	adopting a retrospective application subject to the following reliefs to reduce the burden to preparers of transitioning to the new requirements:
	1.	not require restatement of contracts that begin and end within the same prior accounting period to be restated
	2.	allow the use of hindsight in estimating variable consideration
	3.	not require recognition as assets of fulfilment and acquisition costs recognised as an expense in prior periods
	4.	not require the onerous test to be performed in comparative periods but only at the effective date unless an onerous contract liability was recognised previously
	5.	in the first year of application not require disclosure for prior periods of the maturity analyses of remaining performance obligations.

The Boards tentatively decided that if an entity adopts a retrospective application subject to any of the above reliefs, it would be required to:

a)	to state which reliefs have been employed by the entity
b)	a qualitative assessment of the likely effect of applying those reliefs.

WEDNESDAY, 15 JUNE 2011

Re-exposure of proposals

As the Boards have substantially completed their redeliberations surrounding the Revenue ED, the Boards considered whether re-exposure of the proposed revenue standard would be necessary.

The Boards made the following tentative decisions, as summarised below:

• The Boards tentatively decided that the core principles in the ED have remained largely intact and that the changes to the ED mostly clarified or simplified the application of these principles, and therefore, a re-exposure of the ED was not required based on the re-exposure criteria set out in the Boards' manuals
• However, the Boards felt that given the importance of the revenue project and the volume of changes that have been proposed, it would be appropriate to re-expose the draft. The Boards tentatively decided that the re-exposure draft would focus on seeking comments from constituents on the understandability, clarity, operationality, interaction of paragraphs and wording of the overall re-exposure draft. The Boards also tentatively decided to invite comments on four specific areas where constituents generally have not had the opportunity to comment on the revised requirements:
  

  a)	Determining when a performance obligation is satisfied over time (i.e., the additional guidance in response to concerns about control and services)
  b)	Presenting the effects of credit risk adjacent to revenue
  c)	Constraining the cumulative amount of revenue recognised to amounts that are reasonably assured (rather than constraining the transaction price to amounts that can be reasonably estimated)
  d)	Applying the onerous test to a performance obligation satisfied over a long period of time.

Discussion at Special 28 July 2011 IASB Meeting

During the June 2011 joint Board meetings, the Boards tentatively decided to require retrospective application of the revenue recognition standard to ensure comparability across reporting periods. However, in considering constituent concerns over the burden of full retrospective application, the Boards tentatively decided to grant the following four transitional reliefs to full retrospective application:

• An entity should not be required to restate contracts that begin and end within the same annual reporting period;
• An entity should be permitted to use hindsight in estimating variable consideration in the comparative reporting periods;
• An entity should be require to perform the onerous test only at the effective date unless an onerous contract liability was recognised previously in a comparative period; and
• An entity should not be required to disclose the maturity analyses of remaining performance obligations for prior periods.

Under IFRS 1, the transitional provisions in other IFRSs do not apply to a first-time adopter transitioning to IFRS. As a result, the Board discussed whether any specific exemptions should be added to IFRS 1 with respect to the revenue standard.

The staff recommended not providing any relief to first time adopters of IFRS as they believed the reliefs provided for retrospective application would not significantly help first-time adopters in accounting for all transactions in accordance with IFRSs from the transition date. However, several of the IASB members expressed sympathy and preferred granting the relief on an optional basis. One of the Board members mentioned that some jurisdictions transitioning to IFRS currently have revenue recognition guidance similar to existing IFRS and therefore may not result in the duplicative exercise the staff was concerned about. Ultimately the Board tentatively decided [in a 6-4 vote] to provide the same relief to first-time adopters as provided to other preparers on an optional basis.

August 2011: EFRAG invites companies to participate in the field-testing of the forthcoming revised proposals on Revenue Recognition

The European Financial Reporting Advisory Group (EFRAG), in partnership with European National Standard Setters and in close coordination with the IASB, will conduct field-testing of the revised IASB proposals on revenue recognition, which are expected to be published by the end of September 2011. The purpose of the field-testing is to identify potential implementation and application concerns, and to estimate the effort required to implement and apply the proposals. Please click for EFRAG press release (link to EFRAG website).

Discussion at the October 2011 IASB Meeting

Disclosures in Interim Reporting Periods

At their October 19, 2011 joint meeting, the FASB and IASB (the "boards") discussed the application of certain of the disclosure requirements proposed in their revenue recognition project to both interim and annual financial statements. The boards' staff recommended in their staff paper that in addition to information that has changed significantly from prior financial statements, entities should only be required to provide certain disclosures as of interim reporting periods, including the following "quantitative" disclosures:

1. a disaggregation of revenue;
2. a tabular reconciliation of the movements in the aggregate balance of contract assets and contract liabilities for the current reporting period;
3. a maturity analysis of remaining performance obligations;
4. information on onerous performance obligations and a tabular reconciliation of the movements in the corresponding onerous liability for the current reporting period; and
5. a tabular reconciliation of the movements of the assets recognised from the costs to obtain or fulfill a contract with a customer.

The boards debated whether specific requirements for interim financial statements were necessary, but they tentatively agreed with the staffs' recommendation; however, the boards decided to include a question in their forthcoming exposure draft asking constituents to provide input on the costs and benefits of requiring the specific disclosures in interim financial statements. The boards plan to continue outreach activities as well to evaluate the proposal's cost-benefit relationship.

In addition, the FASB tentatively concluded not to amend ASC 270, Interim Reporting, to specify interim disclosures on revenue or contracts with customers for nonpublic entities.

November 2011: Exposure Draft Reissued

The IASB and FASB published for comment Exposure Draft: Revenue from Contracts with Customers, a revised draft standard that converges the revenue recognition standard for IFRSs and US GAAP. The goals of the exposure draft are to (1) improve financial reporting by creating a single revenue recognition standard, (2) clarify the principles for recognising revenue, and (3) create consistent principles that can be applied across various transactions, industries and capital markets.

The core principles of the 2010 exposure draft have remain largely unchanged. However, the boards have clarified and simplified the proposal in a number of areas:

• amending the principle for identifying separate performance obligations in a contract
• adding criteria to determine when a performance obligation is satisfied over time and, hence, when revenue is recognised over time
• simplifying the measurement of the transaction price
• aligning the accounting for product warranties more closely with existing requirements
• limiting the scope of the onerous test
• adding practical expedients for retrospective application of the proposals
• specifying the disclosures required for interim financial reports

Comment letters on the revised exposure draft are due by 13 March 2012.

Please click for:

• IASB press release (link to IASB website)
• Exposure Draft: A revision of ED/2010/6 Revenue from Contracts with Customers (PDF 470k, link to IASB website)
• Our newsletter: IFRS in Focus — IASB issues revised exposure draft on revenue recognition