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 or customer consideration (sales price)
- Remeasurement of the performance obligation: Remeasuring or locking in the measurement after contract inception
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.
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.
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.