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Revenue from contracts with customers

Date recorded:

The IASB issued an ED Clarifications to IFRS 15 to amend IFRS 15 Revenue from Contracts with Customers in July 2015, with a comment period that ended on 28 October 2015. In this session, the staff presented the feedback received from the comments letters and provided their recommendations on the topics discussed in the ED.  

The session covered agenda papers 7A-E and H. Agenda papers F and G will be covered in the joint the session to be held in October 16 2015.

Summary of feedback on Exposure Draft Clarifications to IFRS 15- Agenda paper 7A

The agenda paper covered feedback received on the general approach taken by the IASB to address the issues related to IFRS 15. At this stage the staff papers did not include any recommendations.  A summary of the feedback obtained is detailed below:

  • The high hurdle set by the IASB when considering amending IFRS 15:  The ED proposed that the IASB would consider amendments that were essential to clarifying the Boards intention when developing IFRS 15 or when convergence was view with greater benefit than amending the standard. The agenda paper explained that most of the respondents agreed with the IASB approach.
  • The status of convergence of IFRS 15 and Topic 606: The agenda paper indicated that many respondents expressed concerns that the IASB and the FASB were proposing different amendments.
  • Feedback from ASAF: The agenda paper indicated that ASAF members supported the IASB approach and highlighted the importance of maintaining convergence. ASAF members suggested that when convergence was not possible, that fact should be explained in the Basis for Conclusions.
  • Transition Resource Group (TRG) for Revenue Recognition: The majority of respondents supported the continuation of the TRG group until the mandatory effective date of the standard.
  • Other questions raised by respondents: There were additional comments received related to the interaction of IFRS 15 and IFRS 9.

Discussion:

 Some Board members expressed a concern that existence of the TRG could be preventing companies from implementing the standard. During the discussion it was suggested that there could be a “cut-off date” to ensure that any have suggestions from the TRG  are implemented by the IFRS 15 effective date, with any issues that come after that date being treated separately.

There was also discussion about the need to maintain convergence with US GAAP. In that regard some Board members argued that the high hurdle to changing IFRS 15 should be maintained because it the issues have already been discussed by the Board and supported in the comment letters; on the other hand, others indicated that when the outcome was expected to be similar, then the IASB and FASB should use the same words. The Chairman indicated that primarily it was the accounting firms who were asking to give convergence a priority, he said that if the outcome would be similar there should not be issues with having different wording, and if there were a risk for unintended consequences, that could be solved by exposing the draft and obtaining feedback.

The paper provided a general overview of the comments received, so no decisions were made.

Identifying Performance Obligations-feedback on ED Clarifications to IFRS 15 and re-deliberations- Agenda paper 7B

The staff proposed to discuss the responses to question 1 in the ED, and the staff proposals to address those comments. The topics were:

  • Identifying performance obligations

The TRG had raised concerns that there was potential diversity developing around how stakeholders understand the principle for determining whether promised goods or services were distinct.  To address those concerns the FASB exposed proposed amendments to the requirements.  In contrast, the IASB’s ED proposed that, rather than amending the requirements, illustrative examples would be added.   

A majority of respondents to the IASB agreed with adding the illustrative examples, although many raised concerns and sought further clarifications (for example the fact that it is not clear how the conclusions in the example have been reached). The staff identified two possible approaches to address the comments raised: amend paragraph 29 of IFRS 15 and the illustrative examples to align with the FASB wording.  In this case, the staff considered that the FASB amendments should be considered as a package; or revise the illustrative examples on the basis of the feedback received and add comments to the Basis for Conclusions. The staff recommends the second of these approaches.   

  • Promised goods or services that were immaterial in the context of a contract

The TRG discussed an implementation question about whether an entity should identify items or activities as promised goods or services that were not identified as deliverables or components under previous revenue Standards. The FASB proposed an amendment that would permit an entity not to identify promised goods or services that were immaterial in the context of a contract. The feedback received indicated that the amendments introduced by the FASB were not considered necessary and accordingly the staff proposed not to include in IFRS 15 the amendments introduced by the FASB on this matter. 

  • Shipping and handling activities

The ED did not propose including the accounting policy choice proposed by the FASB to account for shipping and handling activities that occur after the customer has obtained control of a good as fulfilment activities. The IASB decided not to propose this amendment because it would create an exception to the revenue recognition model and potentially reduce comparability. The majority of respondents to the IASB agreed, and consequently the staff proposed not to amend the Standard in relation to shipping and handling activities. 

  • Other matters

The FASB included a question in its proposals about whether the requirement to account for a series of distinct goods or services as a single performance obligation should be changed to an optional practical expedient. The IASB decided not to include a similar question on the ED. The FASB had concluded that an amendment was not required.  The agenda paper also indicated that the TGR discussed the accounting for a series of distinct goods or services and those discussions provided educational material for stakeholders. Accordingly, the staff did not recommend amending the existing guidance on this topic.

Discussion

There was general support for the staff recommendations and the Board approved the staff proposal with the exception of the first issue —identifying performance obligations.  For that issue the Board decided to converge with the wording exposed by the FASB. The Board did not vote regarding the illustrative examples because the staff will analyse whether those examples might need to be changed to reflect the new wording.  

The Board decided to move to the FASB wording because Board members thought that their wording was clearer.  There was significant discussion before this decision was reached, because some Board members pointed out that the majority of the comment letters agreed with the staff recommendation for not amending paragraph 29 of IFRS 15. The staff acknowledged that they were unable to conclude whether there could be unintended consequences or different outcomes if the IASB did not adopt the amendments introduced by the FASB.

Some Board members thought that the illustrative examples would help in the application of the standard. However, some Board members expressed caution, noting that there are already a significant number of illustrative examples and it would be impossible to cover every situation; one Board member commented that the standard should work with or without the clarifications introduced by the FASB.

There were no significant issues raised on the other topics in the paper.

Feedback on ED Clarifications to IFRS 15 and re-deliberations. Agenda paper 7C

The staff discussed the feedback obtained in relation to question 3- Licencing and their recommendations. Question 3 in the ED asked whether respondents agree the IASB approach to amending the application guidance and illustrative examples on determining the nature of the entity’s promise in granting a licence of intellectual property and the Application Guidance on the scope and applicability of the sales-based and usage-based royalties exception. The agenda paper indicated that most respondents agreed with the ED proposals. Many respondents expressed concern that the IASB and the FASB proposed different amendments on this topic; however, most respondents indicated a preference for the IASB approach. Accordingly, the staff recommended that the IASB confirm the proposals set out in the ED. The staff did not recommend adding the alternative approach proposed by the FASB for determining the nature of the entity’s promise in granting a licence of intellectual property, nor additional application guidance addressing (i) the effect of particular contractual restrictions in a licence; and (ii) when the guidance on determining the nature of the entity’s promise in granting a licence applied. The staff also recommended that the IASB conclude that the issues discussed in the November 2015 TRG meeting about licence renewals and identifying attributes of a single licence versus identifying additional licences were outside the scope of the ED.

The paper explored in detail the feedback in the comment letters received on (a) general comments on the ED regarding licencing; (b) determining the nature of the licence: (c) sales-based or usage based royalty (d) topics for which the IASB did not propose any clarification; (e) other matters raised by respondents; and (f) issues raised after the publication of the ED.

Discussion

Some Board members stated that it would not be appropriate to change the wording of the standard given that many companies had probably already started analysing their licencing contracts and changing the standard could cause those  companies to re-perform the analysis.

In relation to the use of the word “predominantly”, it was pointed out that the Board had discussed an issue with similar wording and it was concluded that it would mean “more than 75%”. If the staff had a different understanding in the context of the revenue standard, then it should be clarified. The staff responded that the FASB was using similar wording and they were not making any clarification.  It was also emphasised that there would always be a need for judgement in applying the standard, including how to apply this concept.  

The Board approved the staff recommendations.

Practical expedients on transition—feedback on ED Clarifications IFRS 15 and re-deliberations- Agenda Paper 7D

The agenda paper discussed the feedback received on the proposed practical expedients on transition set out in the ED. The ED proposed two practical expedients (i) to permit an entity electing to use the full retrospective method not to apply IFRS 15 retrospectively to completed contracts (as defined in paragraph C2) at the beginning of the earliest period presented; and (ii) to permit an entity to use hindsight in (i) identifying the satisfied and unsatisfied performance obligations in a contract that has been modified before the beginning of the earliest period presented; and (ii) determining the transaction price. There was broad support for the proposals included in the ED and accordingly, the staff recommended the IASB to confirm the proposals included in the ED.

The staff did not recommend amending the definition of a completed contract because some preparers had either already adopted or were planning to adopt IFRS 15.  However, the staff recommended including in the Basis for Conclusions a summary of the IASB discussion to provide entities more guidance on this topic.

Discussion

The Board agreed with the staff recommendations. No significant comments or issues were raised during the discussion.

Topics for which the IASB did not propose any clarifications — feedback on ED Clarifications to IFRS 15 and re-deliberations — Agenda paper 7E

The agenda paper discussed question 5 of the ED which asked respondents if they agreed with the IASB’s decision that amendments to IFRS 15 were not required on the following three topics for which the FASB was developing potential amendments: (a) collectability; (b) the measurement of non-cash consideration; and (c) the presentation of sales taxes. The staff recommended the IASB to confirm that it would not amend IFRS 15 for these matters—the majority of respondents agreed with that conclusion. 

The agenda paper provided further detail as to the reasoning from the IASB for not proposing amendments in those areas. In relation to collectability, the staff considered that the requirements in paragraph 9(e) and the supporting explanation in paragraph BC46 of IFRS 15 provided sufficient guidance. On the second issue, measurement of non-cash consideration, the staff indicateed that IFRS 15 required an entity to measure non-cash consideration at fair value although it did not specify the measurement date. The IASB did not propose additional clarifications because IFRSs generally  did not contain any specific requirements about the measurement date of non-cash considerations and the feedback obtained indicated that it was not expected significant diversity in practice.  In relation to the presentation of sales taxes, the staff indicated that if an entity’s sales were subject to sales taxes in different jurisdictions, then the entity should assess on a jurisdiction-by-jurisdiction basis whether it collected sales taxes on behalf of the tax collection authority in order to determine whether to include or exclude those taxes from the transaction price. The IASB decided not to propose an amendment to IFRS 15 to provide an accounting policy choice to exclude all sales taxes from the transaction price (as proposed by the FASB) because this could reduce comparability.  

Discussion

The Board agreed with the staff recommendations.

In relation to collectability, there were some concerns raised as to whether there could be different results derived from the changes introduced by the FASB. The staff indicated that they were unable to conclude because they were aware that the FASB received several comments that they had yet to discuss.

No significant comments were raised on the remaining topics.

Constraining estimates of variable consideration when the consideration varies based on a future market price- Agenda Paper 7H

The agenda paper discussed a question received from stakeholders regarding whether the requirements in IFRS 15 to constrain estimates of variable consideration must be applied to variability arising solely from changes in market prices such as commodity price. IFRS 15 required an entity to estimate the amount of consideration to which the entity would be entitled. The staff noted that in some cases the consideration was variable after the entity had satisfied its performance obligations (for example a contract to deliver a commodity with a price based on the market price on a date subsequent to delivery). The staff concluded that once the entity has completed its obligation (in this case delivery), the entity’s right to consideration was unconditional and the entity would recognise a receivable (under IFRS 9), and the variability considered in IFRS 15 related only to an entity’s performance and not to variability that aroused solely from changes in market prices. 

The staff clarified in the agenda paper that the determination of whether an entity was required to assess the existence of an embedded derivatives in a contract with a customer or whether the requirement for separation in IFRS 9 was met was not part of the scope of this analysis.

Discussion

The Board approved the staff recommendations. There was general agreement with the staff analysis and their conclusion. It was pointed out that it was not necessary to issue specific guidance at this stage.

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