Revenue recognition - collectibility and uncertain consideration
In discussing collectibility, the staffs sought the boards views on how an entity should account for the effects of a customer's credit risk, and changes in that risk, in a contract with a customer. Feedback received through comment letters indicated that preparers were generally concerned that the proposals in the ED would significantly change existing practices and be costly to implement. The first question asked of the boards was whether an entity should initially measure the transaction price — and therefore revenue — at a net amount, gross amount, or a combination approach. The boards generally supported measurement at a gross amount.
The staffs then recommended that the boards consider whether there should be a separate recognition threshold for collectibility. The staffs did not believe the final revenue standard should specify a recognition threshold for collectibility in addition to the criteria for determining whether a contract exists for purposes of applying the revenue model. The boards discussed this question at length and no consensus was reached.
Time value of money
In discussing time value of money, the staffs presented the boards with two questions:
- When the transaction price for a contract with a customer should reflect the time value of money of the promised consideration
- How to account for the time value of money component of the promised consideration, including the selection of an appropriate discount rate.
The staffs recommended that the boards affirm the proposal in the ED related to time value of money. The staffs also recommended that the boards clarify that a financing component is significant only if two conditions are met 1) the effects of the time value of money are significant and 2) the contractual payment terms have the dominant purpose of providing financing either to the customer or to the entity. It was also recommended that the boards consider a practical expedient that entities should not have to reflect time value of money if the period between payment by the customer and the transfer of the promised goods or services is less than one year.
The boards discussed the staffs' recommendations. There was support for the principle that time value of money should be included in an entity's calculation when it is material/significant. There was discussion about the staffs' use of the words material and significant, however, it was determined that the discussion of the specific wording would be handled at a later meeting. There was also support to provide implementation guidance around the concept of material/significant. The boards supported the staffs' recommendations to include the following — the effects of the time value of money are significant because: 1) there is a significant timing difference between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services; 2) the interest rate that is explicit or implicit within the contract is significant; 3) the amount of customer consideration would be substantially different if the customer paid in cash at the time of transfer of the goods or service.
In general, the boards supported the staffs' recommendation for a practical expedient. There was concern, however, that this would be contradictory with decisions made for other projects.