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Revenue Recognition

Date recorded:

The Boards continued their deliberations on the proposed ED on Revenue Recognition.

Disclosure

Disaggregation

At the January meeting, the Boards expressed some concerns about the proposed disaggregation principles and how it interacts with the requirements in the FSP project. The Boards were also concerned about the volume and usefulness of the disclosure package.

Staff presented the Boards with revised disclosure requirements following consultations with selected Board members. The main changes to the disclosure package presented in the Appendix to the agenda paper include:

  • revised disclosure objective;
  • streamlined risk disclosures;
  • enhanced disclosures on onerous contracts;
  • eliminating the requirement to disaggregate revenue; and
  • requirement to disclose amount and expected timing of satisfaction of performance obligation.

The Boards considered the requirements of IFRS 8 and ASC Topic 280 which require the disclosure of revenue for each operating segment and to disaggregate the total reported revenue by products/services and geography. Furthermore the FSP project include a core principle that requires disaggregate information that is useful in assessing financial position and performance as well as timing and uncertainty of cash flows. In the light of this, the Boards deliberated whether the exposure draft on revenue recognition should require further disaggregation of revenue.

One Board member made the remark that analysts constantly comment that disaggregation in financial statements are insufficient and that eliminating disaggregation of revenue from the exposure draft would not be a popular decision. Another Board member was of the opinion that as the exposure draft deals with revenue, it should include all aspects dealing with revenue, including disclosure requirements. It was suggested that the requirements on disaggregation of revenue included in IFRS 8 par 32 be incorporated in the exposure draft and removed from IFRS 8. Several Board members objected to the relocation of disclosure requirements between standards.

A Board member suggested that a minimum level of disaggregation is needed in the exposure draft, but noted that it would be a challenge coming up with the right balance.

Another Board member recommended expanding the disclosure objective by including a reference to the future cash flows related to the revenue. Another Board member added that the objective of the disclosures is to help users understand the quantity as well as quality of revenue and was supportive of expanding the proposed objective.

The Boards asked the staff to refine the disclosure objective by considering the comments made by the various Board members. The Boards also tentatively agreed to include a minimum level of disaggregation in the exposure draft, but provide a linkage with revenue information disclosed in accordance with other standards.

Maturity analysis

The Boards tentatively decided at the January meeting to require the disclosure of the amount and expected timing of the satisfaction of the remaining performance obligations. Subsequent feedback from constituents indicated that the information would be more useful for long-term service arrangements and certain industries such as construction. The Boards deliberated whether to limit the requirement to performance obligations:

  • expected to be fulfilled after more than one year from reporting date;
  • expected to be fulfilled after more than one year from date of contract inception; or
  • that expose the entity to significant risk.

The Boards were supportive of limiting the maturity analysis to contracts with an original fulfilment period of more than 12 months.

One Board member asked staff to confirm what will happen with a contract with performance obligations originally expected to be fulfilled after more than a year from the date of contract inception, but is getting close the end of the contract term. Would such a contract be excluded from the maturity analysis because the remaining performance obligations are expected to be fulfilled in less than a year? Staff confirmed that a contract with an original performance period of more than 12 months will be included in the maturity analysis until all performance obligations have been satisfied.

It was agreed that any other comments and corrections will be dealt with off-line by the staff.

Accounting for costs in contracts with customers

The Boards considered the matter separately.

FASB

At the February meeting, the FASB tentatively decided that the costs of obtaining a contract with a customer should be expensed and to develop guidance on when an asset should be recognised for costs incurred to fulfil a contract with a customer.

The staff presented the FASB with two alternatives to provide guidance on the costs of fulfilling a contract; either codify parts of IFRS or develop new guidance. The staff presented an analysis of the advantages and disadvantages of each alternative.

The FASB discuss the codification of IFRSs and was concerned that the limited guidance provided by IAS 2 would not adequately address the lack of guidance in US GAAP. There were also concerns about the risk of unintended consequences by codifying IAS 38 on a piecemeal basis when guidance was developed in a broader context.

The FASB agreed to develop new guidance which would only apply to contracts with customers. One FASB member expressed some concern over being too definitive about the costs that should be expensed. After a short deliberation, the FASB agreed in principle with the staff's proposal for developing new guidance with an impairment model akin to onerous test.

IASB

In accordance with the IASB's previous decision, an entity would evaluate whether the costs incurred in fulfilling a contract have resulted in inventory, an intangible asset or item of property, plant and equipment in accordance with IAS 2, IAS 16 and IAS 38 respectively.

Subsequently, the Board became aware of practical issues with IAS 2 and as the cost guidance in IAS 11 will be withdrawn, entities would have to rely more heavily on the guidance in IAS 2. The Board was presented with three alternatives for addressing the matter:

  • confirm the tentative decision to use judgement in determining which standard to apply; or
  • improve existing IFRSs by
    • incorporate the same guidance proposed for US GAAP in the revenue standard; or
    • withdrawing the guidance on service provider inventories from IAS 2 and require entities to apply IAS 38 to such assets.

One Board member acknowledged that there are difficulties for service providers in applying IAS 2, but do not agree that IAS 38 is the appropriate Standard to account for those costs. Although this Board member prefer to incorporate new guidance, it would be better for the Board to focus its efforts on revenue recognition only and address this matter at a later stage.

Another Board member questioned how the incorporation of the new guidance will affect the publication of the exposure draft and whether the guidance will be principle-based. The staff confirmed that the guidance will definitely be principle-based and that the timing of publication will not be adversely affected.

The Board also questioned which impairment model would apply when the new guidance has been incorporated. Staff responded that IAS 36 is the logical model to apply, however several Board members did not share this sentiment. After a short discussion of the various impairment models, the Board tentatively agreed to incorporate the same impairment model (onerous test) as that proposed under the US GAAP guidance.

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