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.
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