Revenue Recognition — Contract boundaries
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.