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Revenue recognition

Date recorded:

Costs of products manufactured for delivery under long-term production programs

The staff have received recent questions about the effect, if any, of the revenue project on how an entity should account for the costs of products manufactured for delivery under long-term production programs. Those questions have been raised as part of the revenue project because accounting for production costs affects the profit margin an entity recognises upon fulfilment of a contract with a customer.

The staff noted that as part of the revenue recognition project, the Boards have developed a set of cost guidance, with a very limited scope, with the purpose of ensuring that the issuance of a final revenue standard does not create any gaps in existing standards as a result of the final standard replacing existing revenue standards that contain limited cost guidance. Hence, the Boards developed cost guidance in the revenue project for the following: (a) setup costs for services contracts, (b) precontract costs, and (c) inventory of a services provider. For other costs to fulfil a contract, an entity would apply other guidance such as existing standards on inventory, PP&E, and intangible assets. Production costs incurred under a long-term production program are not the types of costs for which the Boards developed cost guidance.

Several Board members suggested that they would prefer to have more consistency and expressed concern that there were diverse current practices in US GAAP and IFRSs when accounting for the costs of products manufactured for delivery under long-term production programs.

The Boards tentatively agreed that the accounting for costs of products manufactured for delivery under long-term production programs (transferred to a customer at a point in time) is not in the scope of the revenue project and that these costs relate to accounting for inventory and intangible assets.

The Boards tentatively decided that these topics should be addressed either at a later time or as part of a separate project.

At the meetings in June, the Boards intend to consider: (a) application of the revenue model to the telecommunications industry, (b) transition, and (c) whether re-exposure is necessary.

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