As part of its continued deliberations surrounding the Revenue ED, the Boards deliberated on:
- amortisation and impairment of an asset recognised from the costs incurred to acquire or fulfil a contract with a customer
- onerous contracts.
The Boards made a number of tentative decisions in the conduct of these deliberations, including:
Amortisation and impairment of assets recognised from costs incurred to acquire/fulfil a contract with a customer
Amortisation and impairment
In consideration of the costs incurred to acquire/fulfil a contract with a customer, and the related amortisation and impairment considerations surrounding these capitalised costs, several Board members continued to deliberate whether an entity should recognise an asset arising from the incremental costs incurred to obtain a contract with a customer. Specifically, Board members opposing recognition of capitalised acquisition and fulfilment costs questioned how preparers could assess the recoverability of incremental costs underlying a contract when such a contract may be in the early stages of the negotiation process (i.e., precontract cost environment), and as such, a contract would not be available for purposes of determination and allocation of the transaction price to separate performance obligations under the revenue model. The staffs noted that the basis of recognition of capitalised acquisition and fulfilment is based on a specific anticipated contract, and as such, it was anticipated that application of the general revenue model would be possible to an appropriate level of precision in which to develop an expectation of consideration.
The FASB Chairman questioned whether the Boards were interested in pursuing a practical expedient for contracts with an expected duration of one year or less, whereby preparers would be permitted to recognise contract acquisition costs as a period cost (as opposed to a capitalised cost) for contracts with an expected duration of one year or less. Several Board members supported this view given that capitalisation of costs could be time-consuming for a balance which is unlikely to be material, but other Board members opposed this expedient as contrary to the basic principle of asset recognition. After debate, the Boards tentatively decided to permit recognition of contract acquisition costs as a period cost (as opposed to a capitalised cost) for contracts with an expected duration of one year or less.
The Boards examined the amortisation period for capitalised contract costs while considering the Revenue ED which required amortisation on a systematic basis consistent with the pattern of transfer of goods or services to which the asset relates. As a result of outreach activity requesting clarification as to whether an asset arising from the cost of fulfilling a contract with a customer should be amortised based on goods or services transferred in an existing contract, or whether those goods or services could relate to more than one contract (and possibly, future contracts), several Board members cited the need to recognise obvious contractual investments (i.e., recognise future contract renewals), when contract pricing reflects the obvious intent of an investment in a longer-term relationship. Examples discussed included the existence of a non-refundable upfront fee for a gym membership which would not be required in future renewals. It was believed by many Board members that a customer's willingness to enter into the original contract at a relatively greater annual fee (includes the upfront fee) would generally lead to an expectation of future membership renewal at a reduced annual fee (excludes the upfront fee).
Several Board members expressed concern with extending the amortisation period beyond the initial contract given uncertainties regarding future contract renewals. These Board members cited inconsistencies which would develop as to the level of assurance required in recognition of potential renewals and they requested clarification as to whether relevant assurance assessment in renewals should be based on historic evidence on a portfolio basis (i.e., does this type contract generally lead to renewals with other customers of the entity), or limited to specific customer experience. As a result, the majority of the Boards supported only permitting an entity to look forward beyond the initial contract period if the entity has demonstrated that it has sufficient historical experience indicating that the contract will be renewed with the same customer.
The Boards then considered the wording of the impairment model in the ED for such acquisition and fulfilment capitalised contract costs. The Boards tentatively decided that an impairment loss should be recognised to the extent that the carrying amount of the asset recognised from total costs to acquire or fulfil a contract exceeds its recoverable amount. In application of recoverable amounts, the staffs had classified the recoverable amount of the asset as the amount of consideration the entity expects to receive in exchange for the good or service to which the asset relates, less the costs that relate directly to providing those goods or services. Board members immediately clarified that the amount of consideration would be the total transaction price allocated to performance obligations under the proposed model.
In application of the definition of the recoverable amount, several Board members expressed uncertainty as to how a preparer would allocate any determined impairment loss to the assets subject to the impairment test, and to this end, asked that the staffs prepare additional guidance on this topic for a future meeting.
Following from the above tentative decision, the Boards considered whether it was appropriate to reverse impairment losses derived through the above impairment model if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. The Boards noted divergence in current practice between IFRSs and US GAAP in this area, whereby IAS 12 Inventories and IAS 36 Impairment of Assets require an entity to reverse previous impairments (limited to the original carrying amount prior to impairment) if specified criteria are met, while ASC Topic 330 and 360 Property, Plant and Equipment prohibit reversal of impairments. Given the interdependence of this decision on other standards, both Boards tentatively decided to retain current guidance in their relevant jurisdictions regarding the reversal of impairment losses (i.e., the IASB would require the reversal of an impairment loss where relevant, while the FASB would prohibit the reversal of impairment loss), and thus, a convergence variance will exist in this area.
Following tentative decisions of the Boards in February and March 2011 that the onerous test should be applied to the remaining performance obligation in a contract, the costs to be included in the onerous test are those that relate directly to fulfilling the contract and the onerous test should not include an exception for loss-leaders, the Boards reconsidered the application of the onerous test.
The Boards discussed the potential modification of the onerous test such that when more than one contract is satisfied at the same time by a single act (e.g., contracts to individual customers for airline tickets and entertainment events), an entity would recognise an onerous liability only when those contracts are collectively expected to be onerous.
Several Board members expressed concern in recognising onerous contract liabilities in isolation of one particular contract. For example, one Board member highlighted an example of an entertainment event that was being performed at multiple venues, but one particular event operated at a loss (although covering variable costs). While the particular event operated at a loss on a standalone basis, collectively, the entertainment events operated profitably. This Board member noted concern with an isolated contract onerous test in recognising liabilities for contracts which contribute to fixed costs. Other Board members questioned the appropriate unit of account if contracts were viewed collectively, whereby a decision to look at airline tickets on a particular flight could be extended to look at connecting flights before and after an individual flight as all contributing to the overhead costs of the airline.
One Board member expressed a desire to limit the scope of the onerous contract test to long-term service contracts, in which the definition of long-term would be discussed at a future meeting. For example, contracts to individual customers for airline tickets and entertainment events would not be subject to an onerous contract test. An entity would be required to separate goods and long-term services from a single contract and apply the onerous contract test to the long-term services using the allocated transaction price. The Boards tentatively agreed with this exception, and thus, the onerous test, as discussed in previous joint meetings, would be applied to long-term service contracts. The FASB also agreed that when a not-for-profit entity enters into a contract with a customer for a social benefit or charitable purpose, those contracts are exempted from applying the onerous test, but the IASB did not deliberate on this particular circumstance.