• 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

Timetable

• Click for IASB Project Timetable

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 recognized 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 recognized 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 recognized 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 recognized 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 recognize 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 postdelivery 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 collectability. 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 recognized 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 recognized (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.