The Boards discussed the following as part of their redeliberations of the proposals including in the 2011 ED:
- The impact of collectibility on presentation;
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- Clarifications to the time value of money requirement;
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- Contract combinations and distribution networks.
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The Boards continued their deliberations from 24 September 2012 on possible refinements to the revenue model to clarify the proposals on the presentation of the impairment loss line item. The staffs presented three illustrative examples of presentation alternatives.
- Approach A — consistent with current IFRSs/US GAAP, whereby impairment losses are recognised as expenses.
- Approach B — more akin to the 2011 ED, presented impairment losses for trade receivables consistent with the substance of the arrangement (that is, based on whether a contract has a significant financing component). An entity would present the impairment loss line item adjacent to revenue for those contracts without a significant financing component, while contracts with a significant financing component would be bifurcated between the revenue component and financing component. Impairment losses on financing receivables would be recognised as expenses.
- Approach C — recognised all impairment losses, whether related to revenue or financing components, adjacent to revenue.
In discussing these alternatives, varying levels of support were expressed:
Some supported Approach A based on either ease in application or the fact that they did not believe impairment losses should be recognised adjacent to revenue. However, others were concerned that gross margins would be overstated in applying this approach. They noted that under the proposals, revenue is no longer subject to a collectibility threshold, and therefore, they preferred that impairment losses be recognised adjacent to revenue to better capture the revenue an entity expects to collect.
Some supported Approach B because it was consistent with feedback from outreach activities and bifurcated impairment losses between revenue and financing components. However, others were concerned with the mixed presentation of Approach B (a portion of impairment losses are reflected adjacent to revenue, while others are recognised as expenses).
Some supported Approach C given that it clearly presented impairment losses and responded to constituent requests for adjacent presentation. However, others were concerned this presentation did not appropriately capture the substance of contracts containing both revenue and financing components.
Others expressed support for variations of the above alternatives, including:
- Applying Approach A but including a collectibility threshold (although some Board members were concerned that this changed the core principle of the project);
- Applying Approach A but requiring disclosure of impairment losses attributable to revenue and financing components; and
- Applying Approach A, but including a collectibility threshold for presentation purposes whereby any Day 1 impairment losses are recognised adjacent to revenue.
When put to a vote, the FASB tentatively supported Approach C (four votes), with two supporting Approach A and one supporting Approach B. The IASB, taking two separate votes, tentatively supported Approach B (eight votes), with seven supporting Approach A.
Given the mixed views amongst Board members, the Boards requested that the staffs perform additional research on the following alternatives for discussion at a future meeting:
- Approach A, above, both with and without a collectibility threshold. In the absence of a collectibility threshold, the staffs were asked to suggest impairment disclosure which could supplement the presentation.
- Approach A, but including a collectibility threshold for presentation purposes whereby any Day 1 impairment losses are recognised adjacent to revenue.
- Approach C, as the IASB noted they would consider this alternative for the sake of convergence if the approach can be made operational to reflect the economics of different contracts.
To give the staffs further direction, the Boards discussed whether the impairment loss line item should include both Day 1 and Day 2 losses collectively, or those losses should be bifurcated. Both Boards tentatively decided that those losses should be presented collectively given the complexity caused in bifurcating.
The Boards discussed when an entity should adjust the promised amount of consideration to account for the time value of money and clarified the application of the time value of money requirement.
The staffs noted that outreach activities to the 2011 ED revealed general support for the inclusion of requirements to account for time value of money (because of the reasons outlined in paragraph BC145 of the 2011 ED). However, many respondents explained that they thought the proposals were still too broad and would require an adjustment for financing on too many transactions. Those respondents explained that they thought it would be inappropriate to adjust for financing when the payment terms were agreed for reasons other than financing. This is because although the deferred or advance payment terms provide either the customer or the entity with the implicit financing, that benefit is generally expected to be a consequence of the primary reason for the entity and the customer agreeing to those payment terms. This may occur, for example, when an entity and customer agree payment terms to provide security for future delivery of a product. Additionally, some respondents raised specific concerns about the requirement to account for the effects of financing when the customer has paid in advance (i.e., prepayment).
As a result of this feedback, the staffs recommended that the Boards affirm the proposal in the 2011 ED that an entity should adjust the amount of promised consideration to reflect the time value of money. In addition, the staff recommended the Boards clarify and refine the principles as follows:
- narrow the application of the proposals to require an entity to adjust the promised amount of consideration to reflect the time value of money when:
- the primary purpose of the payment terms is to provide financing (to either the customer or the entity); and
- that financing component is significant to the contract.
- clarify in the revenue standard that an entity need not reflect the effects of time value of money for goods or services paid for in advance when the “transfer of those goods or services to the customer is at the discretion of the customer” (paragraph BC144 of the 2011 ED);
- retain the practical expedient to exempt entities from adjusting for financing when the timing between payment and performance will be one year or less, and clarify its application to contracts with a term of greater than one year; and
- clarify that the proposals do not preclude interest income from being presented as revenue.
While Board members generally agreed with the above recommendations, specific concerns were expressed on a) and b) above.
Regarding a), many Board members preferred retention of the wording in paragraphs 58 and 59 of the 2011 ED instead of introducing the concept of ‘primary purpose’. In addition to a lack of clarity as to how ‘primary purpose’ should be applied, they expressed concern that it was a subjective concept and invited structuring. The staffs noted that the purpose of the proposed amendment was to exclude from the time value of money requirements contracts that include goods or services that are paid for in advance where the purpose of the payment is not for financing (e.g., security deposits, retentions and payments from the customer for acquisition of resources). However, many Board members believed that guidance in paragraphs 58 and 59 of the 2011 ED, as well as BC147 were sufficient for this purpose.
Regarding b), several FASB members believed that the staffs’ recommendation did not sufficiently narrow the scope. Instead of the staff recommendation, they wished to completely scope out the effects of time value of money for goods or services paid for in advance based on the fact that the time value component, in advance payment transactions, would only be reflected on the revenue side and not the cost side (introducing comparability concerns). However, IASB members were concerned with completely scoping out advance payments for the reasons expressed in paragraph BC144 of the 2011 ED. After a lengthy debate, the FASB tentatively agreed with the IASB’s tentative view for the sake of convergence.
As a result of the above discussions, the Boards tentatively agreed with the staffs’ recommendations except that the guidance in paragraphs 58 and 59 of the 2011 ED would be retained instead of applying the proposals noted in a) above. However, the Boards directed the staffs to draft implementation guidance for discussion at a future meeting which summarises application of paragraphs 58 and 59 in a variety of situations such as those outlined above.
The Boards were then asked to discuss how to apply the 2011 ED to distribution arrangements under which an entity promises to transfer goods or services to its customer’s customer. Under some of those arrangements, the promise to transfer goods or services to the customer’s customer forms part of the original negotiated exchange between the entity and its customer; whereas in others, the promise to the customer’s customer is made subsequent to the original negotiated exchange (i.e., the date of contract inception). The staffs raised this issue to the Boards as a result of feedback questioning whether and how to apply the 2011 ED to the above arrangement types, and specifically:
- whether the contracts that make up those arrangements should be combined because they are economically-linked; and
- the identification of performance obligations in the contracts that make up those arrangements.
While considering the applicability of this issue to many distribution networks, the staffs analysis was primarily focused on sales incentives. The staffs noted that entities frequently make promises to transfer goods or services to third parties (i.e., the customer’s customer) to encourage movement of inventory through a distribution channel. Some respondents questioned whether the 2011 ED should apply to promised goods or services that they view as sales incentives. In their view, those promises should not be accounted for in the same manner as performance obligations.
Based on the feedback, the staffs acknowledged that the wording in the 2011 ED about whether all promises by an entity to provide goods or services are performance obligations is arguably unclear. Consequently, the staffs recommended that the wording in the 2011 ED should be modified to reinforce the notion previously communicated by the Boards in paragraph BC65. Specifically, the wording of paragraph 26 of the 2011 ED should be modified (see below, added text is underlined) to include the following in the listing of possible promises in a contract with a customer:
Depending on the contract, promised goods or services may include, but are not limited to, the following…
(g) Granting options to purchase additional goods or services (when those options provide the customer with a material right as discussed in paragraphs IG20 – IG22), including granting options that the customer can resell to its customer.
The staffs also recommended that the Boards reaffirm their previous tentative decision (as explained in paragraph BC65) that all goods or services promised to a customer as a result of a contract are performance obligations because they are part of the negotiated exchange between the entity and its customer.
A couple of Board members expressed concern with leaping to a conclusion that all promises in a contract should be accounted for in the same way. For example, they saw a transaction of providing cash to another party to perform services on their behalf as a cost instead of a performance obligation. However, others noted that the Boards previously tentatively decided that entities should not differentiate between types of promises primarily because doing so would be arbitrary and could lead to inconsistencies. They also noted that promises to transfer goods or services to a party other than the end customer are performance obligations because in making those promises, the entity transfers to the customer a right to package the promise of goods or services with the entity’s product as part of the customer’s sale to its customer.
When put to a vote, most Board members supported the direction of the proposal (i.e., application of the principle in paragraph BC65). However, many were uncomfortable with the proposed amendments to paragraph 26. Most of the concern was expressed in the use of the term ‘options’. Therefore, the Boards asked that amendments to the 2011 ED be limited to reinforcing the principle in BC65. The staffs noted that further work would be performed on the amendment wording.