Revenue Recognition — 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.