Revenue Recognition

Date recorded:

Repurchase agreements

At the FASB only meeting on 5 May, the FASB considered the potential effects of the proposed model on the accounting for real estate contracts. FASB questioned how an entity would determine whether a buyer obtains control of an asset in a contract with a repurchase agreement. Because an assessment of control is critical to the application of the proposed revenue recognition model, the matter was raised at the joint meeting to gain the insight of the IASB as well.

The Boards agreed to add some implementation guidance to the forthcoming ED and considered whether the guidance should clarify that:

  • when a buyer has the unconditional right to require the seller to repurchase the asset (put option), the buyer controls the asset and the seller should account for the transaction similar to a sale of a product with a right to return; and
  • when the seller has an unconditional obligation or right to repurchase the asset, the seller retains control of the asset and should account for the transaction as either a financing arrangement or a lease, rather than as a sale.

When deliberating the buyer's unconditional right to require the seller to repurchase the asset, the Boards were presented with two alternatives:

  • View A - the sale of an asset with a right of return, although an entity might not recognise any revenue upon the sale of the asset; or
  • View B - the sale of an asset with a right of return except when the put option is economically similar to a forward.

In response to an enquiry by one Board member on what the differences between the two alternatives were, the staff acknowledged that both alternatives would result in the same accounting for most put options that are similar to a right of return, even when view B views the option as economically similar to a forward. The benefit of view A over B, according to the staff, is that the Boards would not need to specify when a put option is economically similar to a forward.

One Board member commented that the Boards have already considered and rejected the notion of an option being economically similar to a forward and expressed surprise at that being presented as an alternative. Some other Board members questioned the journal entries to apply view A and were concerned about the fact that an entity may end up not recognising any revenue although the transaction has qualified as a sale and, as a result, report negative gross profit margins.

The majority of Board members supported the staff recommendation of view A, but they requested the staff to provide an analysis to distinguish and compare the alternatives. It was agreed to discuss the matter further offline.

The Boards also agreed to include implementation guidance for situations when a repurchase agreement is a financing arrangement that will converge US GAAP and IFRSs. The proposed guidance will specify that the seller:

  • continue to recognise the asset;
  • recognise a financial liability for any consideration received; and
  • recognise the difference between the consideration received and the amount of consideration paid to the buyer as interest.

As the proposed implementation guidance addresses the issues in FASB Subtopic 470-40 Product Financing Arrangements, the FASB unanimously agreed to withdraw it.

Sales of assets that are not an output of an entity's ordinary activities

At a recent FASB only meeting, it was noted that there is a lack of guidance for gain transactions in US GAAP whereas IAS 16, 38, and 40 refer to the recognition guidance in IAS 18 to determine the timing of gain recognition although such gains cannot be classified as revenue. The Boards were asked to consider whether the recognition and measurement requirements of the proposed revenue model should be applied to contracts for the sale of non-financial assets.

A few Board members had serious concerns about 'scope creep' of the revenue project and noted that gains and other income do not form part of the scope of the project and should not be included in the forthcoming ED. Other Board members responded that existing IAS 16, 38, and 40 currently refer to IAS 18 and since the revenue measurement principles are being changed, it may require consequential amendments to the other standards as a result.

In response to several Board members expressing concern with including guidance on the sale of non-financial assets in the revenue recognition standard, one Board member noted that if the revenue recognition standard is silent on the matter, constituents will analogise to the revenue standard in anyway because of the general lack the guidance on the matter.

Another Board member suggested to incorporate the application guidance in the revenue ED and to acknowledge the scope creep in the introduction to the ED and include a specific question in the invitation to comment on whether constituents view this as the an appropriate analogy. The majority of the Board members agreed with this proposal.

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