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Revenue Recognition

Date recorded:


The Boards considered the scope of the proposed revenue recognition model. The staff presented a flow chart that provided the decision criteria to determine whether a contract is in scope of the proposed revenue recognition model.

The Board agreed that performance obligations for the transfer of goods and services that are within the scope of other standards should be accounted for in accordance with those standards rather than under the proposed model. Those performance obligations would include contractual obligations to provide the customer with financial instruments, insurance coverage, leased assets, or guarantees.

Some Board members questioned the application of the proposed scope when the contract is partly outside of scope of the proposed revenue recognition model, in particular using the 'residual method' (that is, allocate transaction price to all performance obligations equalled to fair value if those performance obligations are initially measured at fair value by the other standards, with the remaining balance allocated to all other performance obligations based on relative selling price).

Some Board members expressed concerns about how this principle would be operationalised and which guidance on bundling and unbundling is to be applied first if potentially inconsistent criteria are to be applied across some of the projects (such as revenue recognition and insurance).

Other Board members were concerned that the notion of interdependence was not properly defined within the project. A Board member raised the question of application of other Standards to some of the longstanding issues (such as volumetric optionality contracts) and noted that simply referring to another Standard would not solve those issues. Therefore, he argued that the staff should perform additional analysis.

An FASB member asked the staff for additional analysis how the interdependencies would be captured in interaction with other contracts. Finally, the Boards asked the staff for additional analyses on the definition of interdependencies and allocation method. These will be discussed at a future joint meeting.


Transition requirements

The Boards discussed the possible transition requirements for the new guidance. From the start of the discussion it was clear that a clear majority of the Boards preferred full retrospective application, given the importance of the revenue figures in the financial statements. Although, some Board members raised concerns about the potential use of hindsight, the Boards decided to propose a full retrospective application and to require transition disclosures in accordance with general requirements of IAS 8 (IFRSs) and ASC 250 (US GAAP).


Effective date

The Boards continued their discussion by considering whether or not to permit early adoption of the proposed Standard.

The FASB members made it clear that the FASB did not intend to allow early adoption because of the importance of the comparability of performance of various reporting entities. Nonetheless, as the IASB Chairman noted, the IASB was in a more difficult position. Even though the comparability argument was acknowledged, given the history of allowing early adoption, some IASB members were reluctant to prohibit early adoption of a Standard that was perceived as improvement to financial reporting. On voting, for existing IFRS users the IASB was evenly split whether to prohibit or allow early adoption.

One Board member noted that given the amount of new Standards and scope of the changes in financial reporting expected to result from the current convergence efforts, the Boards should align the transition requirements, effective dates, and application to first-time adopters among the new Standards. Another Board member highlighted the need for consistency by relating to the scope discussion and implied complexities when effective dates and transition requirements were not aligned.

The IASB proceeded to discuss the application for first-time adopters. The IASB Chairman noted that prohibiting early adoption for first-time adopters would be politically unsustainable, especially for jurisdiction that would have to change revenue recognition systems twice in a very short period of time. The Board discussed the possibility of allowing early adoption only to jurisdiction adopting IFRSs in the following years, but on balance the majority of the Board thought that such limitation would not be enforceable. Therefore, the Board agreed to allow early adoption of the proposed guidance for the first-time adopters.


Summary of proposed model

The staff presented a summary of the proposed revenue recognition model and asked the Boards for comments on the document that would be used as basis for writing of the Exposure Draft. Due to time constraints, it was decided that any comments Board members had would be dealt with offline.

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