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Revenue recognition

Date recorded:

At their joint meeting, the IASB and FASB (“the Boards”) discussed several issues that were highlighted during joint IASB-FASB Revenue Transition Resource Group (TRG) discussions. The issues discussed related to licences of intellectual property and identifying performance obligations in contracts with customers, and were referred to the Boards to enable them to decide what, if any, action they would like to take at this stage to address the issues. Prior to the joint session, the IASB members discussed the implications of amending IFRS 15 before the mandatory effective date.

Implications of amending IFRS 15 before the mandatory effective date (IASB only)

The agenda paper provided background on the role and purpose of the TRG, the issues that have been referred to the Boards for further consideration, and a discussion on the ways in which such issues could be addressed by the Boards.   Also discussed were factors that should be taken into consideration by the Boards in deciding whether, and how, to address the issues emerging from the TRG, including risks associated with addressing or not addressing the issues, implications for convergence between IFRS 15 and Topic 606, and the timing of any resulting amendments.

The Technical Director introduced the agenda paper and noted that the staff had taken into consideration the factors set out in the agenda paper in developing the recommendations in agenda papers 7B and 7C on licencing and performance obligations respectively.  He noted that, in their recommendations, the staff had tried to balance the need for providing clarifications they believed were necessary to the IASB’s stakeholders, yet minimising the disruption to the implementation process; and that the staff believed the recommendations should result in financial reporting outcomes that are similar to those that would be achieved under the FASB’s recommendations.  He also highlighted the fact that at the end of the agenda paper the staff suggested that the implications of potentially amending IFRS 15 should be discussed with the IFRS Advisory Council and with ASAF.  He asked the IASB members whether they had any comments or questions on the considerations outlined in the agenda paper.

An IASB member noted that he did not believe it was a good idea for the IASB to be making changes to the Standard prior to the post-implementation review.  He expressed concerns with respect to the impact that making changes would have on companies who had chosen to early adopt the Standard, the precedence the IASB would be setting by making changes at this stage, and the potential for the process to delay the effective date of IFRS 15.  He cautioned that adding clarification in one area could lead to questions in another, and that he didn’t believe the IASB should be making changes to the Standard at this stage unless a fatal flaw was identified. 

Another IASB member expressed similar concerns, in particular with respect to the precedence the IASB might create by making changes at this stage.  He also expressed a preference for not making changes to the Standard before the post-implementation review, which would allow the IASB to see how practice had developed and to perform an assessment drawing on a broader evidence base.

A further IASB member reiterated that the risks expressed by the previous IASB members were real risks that the IASB needed to consider.  He also highlighted the risk of unintended consequences arising from making changes now – noting that even if the IASB went through a due process, the additional complications or issues that may arise could still remain unknown.  He observed that the TRG was set up so the Boards could understand from users what the real problems were, and that accordingly, the Boards needed to consider all issues coming out of the TRG.  However, he noted that there should be a “hierarchy” in dealing with issues, starting with a default position of making no changes, moving to providing non-authoritative guidance, such as educational materials; using other tools, such as Interpretations or Examples; clarifying what was already in the Standard by providing some additional information; and as an absolute last resort, changing the guidance in the Standard – which was where the risk of unintended consequences arose.  Accordingly, he noted that the only circumstance where the guidance should be changed would be if a fatal flaw was identified.

Another IASB member agreed with the comments made by other IASB members.  He noted that his preference was to leave the standard alone; however, noted that if the Boards were going to do anything, it was absolutely critical that they stayed synchronised, for a number of reasons, not the least of which was the cost to preparers and investors of, ultimately, having to understand where the Boards were going and to hire people and to get the necessary systems and processes in place over a protracted period of time to get the Standard in place.  He noted that if the Boards were trying to protect the interests of investors in the capital markets, the potential for becoming unsynchronised and going down different paths would be wholly unsatisfactory to a number of people.  He reminded everyone that there had already been a number of attempts over the years to word the guidance around licences, and each time, the Boards had received feedback that it was not operational, auditable, or clear; and cautioned that any wording changes now would not necessarily result in a better solution to the problem.   He noted that the IASB had a process that they should respect, and live with, and that otherwise, the IASB was creating additional disruption to capital markets in terms of additional costs, and that the IASB risked people not respecting the process going forward.

A further IASB member noted that his thoughts were that the IASB should do nothing, unless it related to an obvious fatal flaw.  He noted he was less in favour of making clarification related changes as there was no guarantee that changing words would not result in further questions.

Another IASB member noted that while he had sympathy for the concerns expressed by previous IASB members, he believed that the IASB needed to show some flexibility and understanding of the position the FASB had found itself in.  He noted that the IASB should not make changes to the Standard that resulted in a different outcome to what was intended, unless it was to fix a fatal flaw, and that the IASB should wait for the post-implementation review to do this.  However, he noted that with respect to providing clarity, the IASB should be a little more flexible.  He highlighted the importance of the IASB showing some flexibility in the interests of preserving the convergence that had been achieved, rather than approaching it in the same way it would one of its own standards.  He further observed that, had some of the changes being proposed been suggested at the drafting stage, the IASB would have had no qualms about making those changes to the pre-ballot draft to clarify, and such changes would not have been exposed.  He noted that any changes the IASB might propose in an Exposure Draft will be subject to more due process as they will be exposed.

A further IASB member agreed with the previous IASB member.  She highlighted that the TRG was set up with the objective of supporting people implementing the standard, and that the changes the IASB had been asked to consider were consistent with the whole purpose of the TRG.  She observed that it was known from the start that there were likely to be special challenges because of the different starting points the literature came from, which was why it was so important that the TRG comprised representatives from both bodies.  However, she noted that both Boards should set a high hurdle as to when they think changes should be made to the wording in the standard, as people were in the process of implementing the standard, and that the Boards should really be trying to make clarifications within the words.  She further noted that the reality of the situation was that, even if the IASB decided to do nothing, because this is a converged standard, and because of the hierarchy in IAS 8, people would be hesitating in their implementation because of actions the FASB might be taking anyway, and accordingly, noted that it was much better for the Boards to work together, to try and synchronise timing as much as possible, and stay as converged as possible.

Another IASB member also agreed that the IASB needed to show some flexibility rather than just taking the same approach to this Standard as it would to one of its own – not only because this was a converged Standard, but also because of the subject matter.  She believed that even if this wasn’t a converged standard, there would be a higher sense of concern around consistent application and adoption of a new standard on revenue than there might be for a standard that covered another area of the financial statements.  Like other IASB members, she agreed there should be a high hurdle for making changes, and that the costs vs. benefits of making changes should be carefully assessed.  She disagreed with a previous comment that the IASB should be committed to absolute synchronisation.  She believed it was very helpful that the Boards deliberated jointly, but noted that the Boards were hearing different things from their constituents, and did not believe the IASB should commit to timing and wording changes being the same as the FASB.  She further noted that she supported an approach whereby all possible amendments to IFRS 15 were addressed in a single package, rather than being drip fed to the market.

Several other IASB members also agreed with the need for some flexibility in the IASB’s approach.  However, one IASB member noted that this flexibility should be limited to what the IASB has clarity on by a certain specified date, so the Standard isn’t a continuing moving target for those trying to implement it.  Another IASB member also stressed that if the IASB was to do anything, it must be done quickly and the IASB must set a date at which point it will stop giving messages that there are going to be further changes, as people need certainty to be able to start preparing for transition.

The Vice-Chairman agreed with the need for the IASB to be flexible; however, cautioned that there were different levels of flexibility, ranging from agreeing that something needed to be done, to agreeing on the wording.  He noted that attaining synchronisation would be more challenging on the finer points.  He also suggested that one of the potential ramifications of the FASB issuing detailed changes and the IASB not, was that the IASB’s constituents would move across to the FASB’s guidance.

The Chairman expressed his frustration with the situation.  He acknowledged that an issued Standard was never perfect and that issues inevitably arose; but pointed out that these would normally be dealt with through the post-implementation review.  However, he accepted that this was a converged standard, and that the IASB needed to work with the FASB as well as they could to keep divergence to a minimum.  He also noted that the IASB needed to limit any changes to clarifications rather than modifications, and make this point clear to the market.

Licences of Intellectual Property

This session was devoted to discussing the specific issues relating to the application of the licensing guidance that were highlighted during the TRG discussions.

Determining the nature of an entity’s promise in granting a licence (right to access or right to use)

The Application Guidance in IFRS 15 requires an entity to assess whether the nature of the entity’s promise in granting a licence to a customer is to provide the customer with either a right to access the intellectual property as it exists throughout the licence period (revenue over time), or with a right to use the entity’s intellectual property as it exists at the point in time at which the licence is granted (revenue at a point in time).

Paragraph B58 [606-10-55-60] specifies three criteria that an entity should consider in assessing whether the nature of its promise in granting a licence is a promise to provide a right to access its intellectual property.  The first of these criteria is that “the contract requires, or the customer reasonably expects, that the entity will undertake activities that significantly affect the intellectual property to which the customer has rights”.

The main implementation question raised in this area relates to the determination of when the entity’s activitiessignificantly affect the intellectual property to which the customer has rights”, in particular, what attribute of the intellectual property i.e. form, functionality, value or all, should be significantly affected by the entity’s activities to conclude that the entity’s promise is to provide a right to access intellectual property.

In response to the issue raised, the FASB staff developed two articulations. Articulation A focuses on utility (i.e., “the ability to fulfil a desired role or function”) of the underlying IP to the customer. Articulation B centres on the nature of the licence as either “symbolic” or “functional.”  Under Articulation A, a licensor would first assess whether its activities will significantly affect the utility of the IP.  If the answer is yes, only then would the licensor need to determine the nature of the underlying IP (in accordance with Articulation B).

The FASB staff recommended that the FASB adopt the staff proposal in the manner of Articulation B as set out in paragraph 37 of the FASB memo (paragraph 32 of the IASB agenda paper).

The IASB staff recommended that the IASB explore proposing a limited amendment to IFRS 15 along the lines of Articulation A as set out in paragraph 30 of the agenda paper (paragraphs 35-36 of the FASB memo).

FASB

The FASB Project Lead introduced the memo and noted that the FASB staff recommended that the FASB pursued Articulation B.  He highlighted that that FASB staff believed, and had been told by outreach participants, that Articulation B would be more operable than Articulation A, even though the FASB staff believed an entity would reach the same over time vs. point in time conclusion in the vast majority of licensing arrangements under either articulation.  He explained that Articulation B was expected to be more operable than Articulation A because it eliminated the need for entities to assess and have controls in place to identify activities that might significantly affect the utility of the IP in most licence contracts, and that this was because of the presumption in Articulation B based on the IPs classification as either functional or symbolic.

Several FASB members noted that they agreed that the FASB needed to provide clarification as this was an issue that frequently arose in conversations, and the TRG process had clearly indicated that there was no consistent understanding of what the Boards had intended in the issued guidance.  One FASB member noted that he believed the FASB needed to adhere to the underlying principles in the guidance that had been issued, and that the FASB needed to focus on the operability and making the guidance such that it could be understood more easily and people could apply it, and that Articulation B did this in a clearer way.  Another FASB member also supported Articulation B.

Another FASB member noted that this issue had arisen primarily because what was agreed on in Topic 606 was a major compromise between the two Boards.  With respect to the path he preferred the FASB to take in addressing the issue, he noted that he would rather the FASB opened up the issue and fundamentally came up with a different view of licences that started with some type of presumption that revenue would be recognised over time and then dealt with different types of licences.  He also noted that his decision (whether Alternative A or B, or opening up the issue) depended on what the IASB would be willing to do, adding that if the IASB did not want to take the issue on, he would suggest that the FASB looked at whether to open up the issue to other considerations.

A further FASB member noted that it was clear that consideration of value or benefits was something that should be considered in determining whether a customer had a right to access, but noted that some examples in the Standard caused some confusion by looking at form and functionality rather than value, and that he could see how constituents had concerns regarding the Board’s intention.  Accordingly, he agreed this issue needed to be resolved.  He noted his preference to wait until he knew what the IASB was going to do before he voted, noting that if one articulation was more amenable to the IASB he would be willing to pursue that option in the interests of remaining converged.  He believed that both articulations had some challenges.  He noted that, while Articulation B might be more operable, he had concerns with respect to the inherent assumption that all licences that were symbolic had activities that would prolong the value or utility of that type of licence, adding that he was not sure this was necessarily the case.  He noted that Articulation A was not as popular as there was a belief that it required documentation of all activities undertaken by the entity.  He noted that if this was amended so this only had to be performed for significant activities, it would reduce the amount of work an entity had to perform, and he would be happy to pursue this approach if it would lead to convergence.  Finally, with respect to  Articulation B, he noted that he did not believe that licences needed to be labelled as symbolic or functional, noting that he believed the names could be removed and the same guidance provided to avoid arguments arising as to whether a licence really was symbolic or not.

The FASB Chairman noted that the FASB needed to act to avoid diversity in practice.  He believed both Articulation A and Articulation B would narrow diversity in practice, but that Articulation B was easier to understand.  He was supportive of moving forward with Articulation B because it had the greatest potential of meeting the objective of the project, which was to narrow diversity consistent with the original articulation and principles the Board had established.

Another FASB member questioned at what point the FASB would challenge a principle they had previously voted on.  He noted that, similar to a previous FASB member who had already spoken, he also preferred that the FASB went down a different path.  He noted that from an investor/user perspective, it was much easier to articulate this along the lines of “start with over time unless…” and he believed this would have been a much easier path for the FASB to have gone down originally.

The Project Lead explained that the staff preference for Alternative B was partly driven by the US environment, where the additional assessment of activities required by Alternative A would be subject to audit, judgement, scrutiny, controls, and testing of those controls. It seemed that creating a presumption of when those activities would reasonably be expected would reduce the judgement, complexity and unnecessary costs for preparers, which was why people thought Articulation B would be more operable.  In response to several comments with respect to going down a different path, he noted that he did not believe it would necessarily be any easier to create a presumption.   He further noted that most licences today were recognised at a point in time, and if new guidance required everyone to recognise over time, this could result in issues being raised by people who had not needed to ask questions previously.

IASB

One IASB member noted that he was not wholly persuaded that a clarification was necessary because he believed the existing guidance was clear.  He also stressed that exercising judgement was an important part of applying the guidance.

Another IASB member noted that even though he agreed that Alternative B was more operable, he agreed with the staff’s logic that Alternative A fitted inside the existing Standard more easily than Alternative B so he supported Alternative A.  He did not see a lot of difference in outcome between the two alternatives, and believed that the fewer words changed in the Standard, the better. 

Another IASB member acknowledged that the issue needed to be addressed but in a way that caused the least disruption possible – partly because early adopters were already starting to implement the Standard.  She noted that the IASB should do something which was as close as possible to the principles in IFRS 15, and accordingly, noted her preference for Alternative A.  She commented with respect to the use of the word ‘utility’ in proposed paragraph 59A [Alternative A – in paragraph 30 of the agenda paper], noting that not all definitions of the word captured value, so if the IASB was trying to capture value, this needed to be made clearer in paragraph 59A so the word utility was seen in the broader definition not just the form and function sense.  With respect to Alternative B, she noted that she worried about definitions of items where there was a choice of one or the other, and highlighted the fact that the definitions in Alternative B were not complete opposites of each other. 

Another IASB member stressed the importance of the IASB acting within the context of the Standard that was issued, and accordingly, supported Alternative A.  She suggested that a lot of explanation could be included in the Basis for Conclusions with respect to the purpose of the amendment and the rationale for the IASB’s course of action.  She also noted the importance of sending the message that the use of judgement was still important and required.

Another IASB member noted that he was generally against changing the Standard unless it was to correct a fatal flaw.  He agreed that clarification was needed on this issue but questioned whether it was required in the Standard or could be achieved through education materials/TRG papers etc.  He further noted he did not agree with Alternative B for reasons expressed by other IASB members.

A further IASB member stressed the importance of the IASB and FASB working together, noting that it was imperative that both Boards used the exact same words in their clarifications.  He suggested that the Boards tackled the debate discussed in paragraph 6 of the FASB memo and clarified what the debate was about without introducing new constructions.  He noted that he was not in favour of either the IASB’s or FASB’s proposed language, and noted that if the Boards went down the path of introducing a new construction to the issue it could raise unintended consequences.

An IASB member highlighted the fact that licences were a compromise, and the Boards had reached this compromise in the interests of a converged standard.  He stressed the importance of making every effort to retain that compromise and convergence.  He noted that Alternative B represented a change to the Standard and broke the compromise, whereas Alternative A maintained the compromise and provided clarity, which is why he supported standard-setting in this case.

Another IASB member also agreed that the presumption in Alternative B that “symbolic = over time” created a change in the compromise, noting that the Standard currently required the use of judgement and analysis of whether ongoing activities would create a change in value or not, but Alternative B would change this completely.  He noted his preference for Alternative A, noting that this alternative improved understanding of the thought process one would go through when making the required judgements, and was a helpful clarification.

Joint discussion

The FASB Chairman noted that he agreed with the desire to stay converged, but via Articulation B.  With respect to the preliminary question that Articulation A introduced, he observed the issues that had been raised with respect to clarifying ‘utility’ and ‘activities’, and noted that using these words introduced unnecessary complexity.  He observed that perhaps inserting this first step that Articulation A required was technically correct, but noted that if the Boards were struggling to agree on what was meant by utility and activities, stakeholders would also struggle, and that the additional complexity outweighed the benefit.  He noted that he preferred Articulation B because it most directly got to the heart of the matter and got the preparer to a place where they knew what to do and could actually apply the Standard in an efficient manner.

The FASB Project Lead commented on two points that arose in the IASB discussion.

He noted that both functionality and utility could be defined in a number of ways, which had been part of the problem of clarity that had been highlighted to the FASB.  He noted that the terms were defined in the FASB staff’s initial drafting of the articulations that were used in conducting outreach, and that in any guidance issued, such terms would be defined terms.

With respect to comments about Articulation B breaking the compromise, he acknowledged that Articulation B changed more words than Articulation A, but reiterated the fact that the differences between the outcomes were very minimal and were still based on the existing guidance in Topic 606 [IFRS 15].  He noted that, with Articulation B, the staff were simply creating a presumption on the decision within the same framework, largely because of the operability and control issues in the US, and that the staff did not believe either Articulation A or Articulation B broke the compromise.

A FASB member noted that either Articulation A or B would achieve the objective of clarifying the principle to narrow down diversity.  He believed Articulation A went far enough to clarify the principle and retain some flexibility, and that pursuing this option would allow the FASB to remain converged with the IASB.  Referring to a comment made by an IASB member, he observed that symbolic and functional in Articulation B were not complete opposites, which could result in some complexity in trying to determine whether IP was symbolic or functional in nature.  He noted that he did not believe Articulation A and B resulted in significant differences in outcomes, but noted that Articulation B did not just address the form, functionality and value issue, but had more of a cost benefit element by not requiring entities to have to think about activities in some cases.   He also noted that the majority of the top revenue accountants in the US had noted that Articulation B would significantly streamline the process.

Another FASB member noted that if the Boards were going to issue implementation guidance, it would be preferable to issue the same guidance, and given none of the IASB members supported Articulation B, noted his preference to explore Articulation A.  He noted that the words utility and functionality would be defined in Articulation A, and confirmed with the staff that the word utility would include the notion of value.  He noted that he believed the outcomes would be consistent under Articulations A and B, with very few exceptions.  He identified that in a situation where there was a symbolic licence and no ongoing activities the two Articulations would result in a different outcome, but he noted that the number of instances where this situation would arise would be so few that he was not concerned about this.  Finally, he observed the arguments made by other FASB members that Articulation B would be easier to apply, but noted that in paragraph 36b of the FASB memo one of the stipulations in the staff’s proposals was that the guidance would clarify that an entity’s ongoing activities do not significantly affect the utility of the IP to which the customer has rights when that IP has significant standalone functionality.  He emphasised that this point was key, because it resulted in the same answer under both articulations 99% of the time – and therefore, for the sake of retaining a converged standard, noted that he would support Articulation A.

Another FASB member acknowledged the additional work required to document all activities at the start under Articulation A.  To partially eliminate the burden on entities, he suggested that the FASB could change the wording to “significantly affect” so there was justification to not have to document incidental activities, which would not significantly affect the utility of the IP.  Referring to the flowchart in Appendix A to the FASB memo, he also suggested this issue could potentially be dealt with by moving the top box (requirement to document activities under Articulation A) further down the process, so an entity would still need to think about the range of activities, but would only have to document activities when they mattered, and that this would be a compromise between Articulation A and Articulation B that the staff could consider.  This type of approach was labelled A’.

The IASB Technical Director noted that he believed this was what the IASB was trying to get at with the last paragraph in proposed paragraph 59A (in paragraph 30 of the IASB agenda paper).  He noted that the FASB Project Lead had made the important point about Articulation B that there was a presumption that if it was determined that the IP was symbolic in nature, then an entity did not need to look at the activities.  He noted that the last sentence of the proposed additional paragraph that would be added to the Standard under Articulation A took some of the pressure off how far an entity would need to go with an assessment of the activities if it had determined that the IP had standalone functionality.  He further noted that he did not believe the assessment would need to be performed on a contract by contract basis, noting that contracts would fall into classes of contracts also, and that once assessments had been made, the accounting would follow from the particular class of contract.

An IASB member noted that he would support A’, noting that he saw it as a more operational articulation of paragraph 30.  Another IASB member also supported A’, also noting that paragraph 30 appeared to be what several FASB members had articulated – that when IP had significant standalone functionality, an entity did not need to make a whole lot of other assessments.  He noted that he believed that the revised flowchart that had been discussed by some of the FASB members could be made to work within the context of what had been drafted in proposed paragraph 59A (in paragraph 30 of the IASB agenda paper).

The FASB Chairman asked the IASB whether they agreed that the difference in outcome between Articulations A and B would only affect a small population.  The IASB Technical Director observed that the situation where there was a historic brand with no ongoing activities was the key example where a difference emerged; however, he noted that he did not know the size of that population, but that with most brands there would be ongoing activities so he believed that it would be a smaller set of contracts.  Finally, he noted that he had been working on the basis that if the IASB and FASB voted for different articulations, the financial reporting outcomes would be consistent in the majority of cases.

The FASB Chairman asked the IASB Chairman whether the IASB was ready to move forward on the issues that were discussed at this meeting.  The IASB Chairman noted that the IASB would not be finalising anything until the end of the process, noting that all the decisions the IASB would be making in the upcoming months would be tentative to allow time to consult with consultative groups.  He noted that the IASB was ready to make a tentative decision now, which would be subject to what might be heard at a later date. 

The IASB Technical Director noted that the IASB needed to avoid the risk of multiple consultations, so needed to think about the issues discussed in this meeting, but also leave the process open to capture items that would be coming out of the January and March 2015 TRG meetings.  He stated the IASB’s preference for a single exposure draft of improvements and clarifications to the Standard.  He noted that the staff would look to obtain IASB approval in June with a view to issuing an Exposure Draft shortly after that.

The FASB Chairman noted to the FASB members that if the FASB compromised and agreed to pursue Alternative A or A’, that would put the FASB in a position where they also would not issue an Exposure Draft until that time, which was not the FASB’s timing plan, and noted that this could also impact the individual FASB members’ views on the effective date.  He confirmed with the IASB that their timeline would result in completion by the end of the year.

The IASB Chairman questioned the FASB Chairman whether he envisaged the FASB putting out a whole series of Exposure Drafts as they went along.  The FASB Chairman noted that some of the changes needed to be understood by stakeholders so they could implement systems and controls, and the longer the FASB waited the more pressure it got on moving out the effective date.  

Tentative decisions

The FASB tentatively agreed with the FASB staff’s recommendation to update the Standard to include Articulation B, which would require an entity to characterise the nature of a licence as either functional or symbolic.  Four of the seven FASB members voted in favour.

The IASB tentatively agreed with the IASB staff’s recommendation to update the Standard to include Articulation A, which would potentially require an entity to assess the utility of a licence before characterising it as functional or symbolic.  Eleven of the fourteen IASB members voted in favour.

Determining when the exception to the general requirements for variable consideration for sales-based or usage-based royalties promised in exchange for a licence of intellectual property applies

The implementation question related to how the royalties constraint (in paragraph B63 of IFRS 15 or 606-10-55-65) should be applied when a contract included other promised goods or services in addition to a licence of intellectual property.

The FASB staff recommended that the FASB conclude that a royalty should not be split into a portion subject to the royalties constraint and a portion that is not subject to the royalties constraint, and if the FASB agreed with this recommendation, the staff recommended that the FASB pursued the alternative whereby the royalties constraint would apply whenever the predominant item to which the royalty related was a licence of intellectual property.

The IASB staff recommended that the IASB explore proposing a limited amendment to IFRS 15 along the lines of what was set out in paragraph 54 of the agenda paper.  The amendment would clarify that a sales-based or usage-based royalty is promised in exchange for a licence of intellectual property when it relates only to a licence or when the licence is the predominant item to which the royalty relates.

FASB

The FASB Project Lead introduced the memo and asked the FASB members whether they agreed with the staff recommendations set out in the memo.

A FASB member noted that he agreed with both staff recommendations.  He noted that, although it would not have occurred to him that a royalty would need to be split into two revenue streams and different revenue recognition patterns followed for each; he could understand why people looking at the Standard came to that answer, and accordingly, agreed that this was a good clarification.  He also agreed that the predominant item should drive the accounting.

Another FASB member also agreed with both staff recommendations.  He noted that he did not believe anyone was served best by these situations being split up, and that it was better for the FASB to require people to deal with the complexity of figuring out what predominant meant rather than deal with figuring out what the complexity of the general constraint meant.

The FASB agreed to amend the Standard in a manner consistent with the staff’s recommendation.

IASB

The Technical Manager introduced the agenda paper and asked the IASB members whether they agreed with the staff recommendation in the agenda paper, noting that it was the same as the FASB staff’s recommendation on this issue.

An IASB member noted that she would be fine with making the proposed amendment, particularly if the FASB made the same amendment, for the sake of convergence.  She also questioned whether the determination of the predominant item would change over time, or if it would be a one-off assessment, and noted that it was something for the staff to think about.

Another IASB member asked about the process going forward given the IASB and FASB had come to different conclusions on the previous issue, particularly with respect to the exposure documents.

The FASB Chairman noted that, depending on the outcomes of the day’s discussions, the FASB might be in a position to issue exposure documents on the two topics discussed, but acknowledged that the IASB might want to only deal with all changes at once, noting that if that was the case, the FASB might be in a position to put out its preferred approach, and include a dialogue in the Basis for Conclusions about other approaches including those favoured by the IASB.  He further noted that the FASB could share any input they received with the IASB before the IASB put out any potential exposure documents, noting that if the IASB was thinking of an end of June date for getting out an exposure draft – this could be after the end of the comment period for the FASB’s exposure draft on the two topics.

The IASB member asked when the FASB was planning to finalise the amendments, to which the FASB Chairman responded that if all went well, the FASB would look to seek feedback by the end of June, which would mean finalising in Q3 2015.  He noted that this timeframe was based on feedback from stakeholders who had said that they needed certain information locked down before they implemented their processes and systems changes, to either avoid incurring substantial rework or being concerned about the current effective date.  Another FASB member noted that he did not believe the FASB could agree on an effective date until it was known what follow on guidance would be provided.

The IASB member noted that if the Standards were diverging, resulting in two revenue standards, the IASB should think about what action was best for its constituents on each of these issues, and that it could well be an additional example, as the staff mentioned in the agenda paper.

The Vice-Chairman noted that he believed that the process of each Board including the other Board’s view in their Exposure Draft and getting input on it was a good idea, regardless of the timing.

Another IASB member noted that if the majority view was to provide guidance and the staff thought it was in the best interests of stakeholders, he would be willing to go down this route, and stressed that he would like to see the IASB and FASB use the exact same words.  With respect to timing, he noted that looking at all the potential changes a company would need to deal with and when they would need to deal with them it was important the Boards got exposure drafts out and decisions made as soon as possible.  He noted that inevitably there was going to be a delay in the effective date, noting that if a company was going to apply the Standard and restate three years, they would have to know the answers to these questions on January 1, 2015, which they were obviously not going to.  He further noted that it was pretty obvious that there was going to have to be a deferral in light of the potential changes that were being discussed.  He noted that in order to be efficient, serve stakeholders effectively and reduce unnecessary costs, it was important that the Boards stayed synchronised, adding that he believed it would be prudent for each Board to include the other Board’s views in its exposure draft.

Thirteen of the fourteen IASB members supported the staff recommendation.

Other less significant issues

Two other less significant issues were also highlighted at TRG meetings:

a) Should an entity assess the nature of a licence if the licence of intellectual property is not distinct from other goods or services promised in the contract?

b) If there are restrictions on the customer’s rights to use or access the entity’s intellectual property (of the nature described in paragraph B62 [606-10-55-64]), do these restrictions affect the number of promises in the contract?

The FASB staff recommended making minor clarifications about a) when an entity should apply the guidance on determining the nature of the entity’s promise in granting a licence, and b) how contractual restrictions affect the identification of the promised goods or services in a contract.

The IASB staff recommended that the IASB do not undertake standard-setting regarding the two less significant issues discussed.

FASB

The Project Lead introduced the memo and asked the FASB members whether they agreed with the staff recommendation in the memo to make the minor clarifications proposed by the staff with respect to these two issues.

A FASB member questioned what the form and location of the clarifications would be.

The FASB staff responded and noted that to clarify the second issue, additional words would be added to paragraph 606-10-55-64 [IFRS 15 B62], and the first issue would be clarified through an amendment to paragraphs 606-10-55-55 through 57 [IFRS 15 B53-B56] as the current wording could lead to an illogical outcome, because the guidance could clearly be read to say that if the licence was not distinct, you did not have to think about it.  He noted that it was the FASB staff’s understanding that paragraph 407 of the Basis for Conclusions was added to deal with that consequence, but was not as clear as the FASB staff would have liked, and also included only in the Basis for Conclusions.  He noted that, accordingly, the FASB staff thought it would be appropriate to move it into the guidance to clarify the notion that one could arrive at some odd answers if they assumed they could just ignore the fact that the licence would have been a 10 year licence if it were a standalone performance obligation.

Another FASB member noted that he did not believe the FASB needed to do much with respect to contractual restrictions if the clarification was merely saying “we meant what we wrote”.  He further noted that he believed this issue could be dealt with through TRG discussions rather than an amendment to the Standard.

The Project Lead responded and noted that the view of the FASB staff was that they would not have brought the FASB an agenda request to clarify the impact of contractual restrictions on its own, but given there were other proposed amendments, and the fact that the lack of clarification could result in a materially different answer for some companies, the FASB staff had proposed an amendment on this issue.

The FASB agreed with the staff recommendation to make minor clarifications to the Standard with respect to these two issues.

IASB

The Technical Manager introduced the agenda paper and asked the IASB members whether they agreed with the staff recommendation in the agenda paper not to undertake any standard-setting activity on these issues.

In response to a comment made in the FASB discussion, an IASB member noted that she disagreed with making amendments just because there were other amendments being made for two reasons. Firstly, she noted that the IASB should be trying to minimise the number of changes so only those amendments that were necessary were made.  Secondly, with respect to the comments in the FASB discussion regarding contractual restrictions, where it was noted that the problem only arose if one was reading the guidance very narrowly and rigidly, she noted that she did not agree with sending the message that guidance could be read in different ways unless the Boards actually took action to say they really meant what was published, noting that it would set a bad precedent to do something just to make sure it was absolutely clear.  She further noted that she believed there had been sufficient discussion on both issues at the TRG and that the discussion indicated that people understood the intention.

The FASB Project Lead responded and noted that his summary of discussions at the December TRG meeting indicated that people did not know what to do, and that this formed part of the FASB staff’s analysis in coming to their recommendation.

All IASB members voted in favour of the staff recommendation not to undertake any standard-setting activity on these issues.

Identifying performance obligations in contracts with customers

This session was devoted to discussing the specific issues relating to identifying performance obligations in contracts with customers that were highlighted during the TRG discussions.

Issue 1: Promised goods or services

The new revenue Standard requires an entity to assess the promised goods or services in identifying the performance obligations in a revenue contract with a customer.  Questions have arisen, mainly in the US, as to whether entities would be required to identify a significant number of additional goods or services that are promised in a contract with a customer that are not identified as ‘deliverables’ or ‘components’ under existing revenue standards. 

In the US, the assessment of materiality is subject to a rigorous process, and accordingly, some believe an explicit exemption from having to identify inconsequential or perfunctory goods or services could ease implementation, as well as reducing ongoing compliance costs and efforts.  Accordingly, the FASB staff developed two alternatives for the FASB’s consideration:

a) Incorporate the existing SEC guidance on inconsequential or perfunctory performance obligations into the new revenue Standard

b) Specify that an entity would not evaluate materiality in the aggregate when determining whether an item or activity promised in a contract should be identified as a promised good or service

The FASB staff recommended that the FASB add this issue to its project scope and pursue Alternative B.

The IASB staff recommended that the IASB does not undertake any standard-setting in response to the concerns raised.  The IASB staff noted that the TRG discussion highlighted that IFRS stakeholders can understand and apply the new revenue Standard.

FASB

The FASB Project Lead introduced the memo [FASB Memo No. 1 – Identifying Promised Goods or Services, Distinct, and Shipping Services] and noted that the FASB would be asked to vote on whether it would like to add a project to its agenda to improve the guidance on identifying performance obligations, and whether it would like to add this issue to the project scope, and, if so, which alternative it would like to pursue.

One FASB member noted that he didn’t believe this issue should be included in the project scope as it was debateable as to whether this was an accounting issue that required accounting standard-setting, and, if it was, whether it was specific to revenue recognition or a broader issue.  He noted that he believed the issue was broader than just relating to revenue and that if the FASB tried to deal with the issue in the revenue standard it would set a bad precedent.  He pointed out that there was a provision in the codification [in Topic 105] that broadly related to dealing with immaterial items and if the FASB believed that provision was not working, then they should look at fixing that guidance, rather than introducing piecemeal guidance from one project to the next.  In response to a question from another FASB member, he further noted that he believed that the FASB could think about how to amend Topic 105 to fix the concerns in more than enough time for people to implement the Standard.

Another FASB member noted that he agreed with the comments made by the first FASB member, but that he arrived at a different outcome.  He pointed out that the language in Topic 105-6 had been around for a long time, and that there was a longstanding lack of clarity as to how people should think about it.  He noted that the staff recommendation would be a very clear solution, that for any immaterial items at the contract level, these did not need to be treated as performance obligations with revenue allocated to them; and that such treatment would not be an error, and therefore, there would be no need to accumulate and assess in the aggregate.

Another FASB member noted that he agreed with the perspective and conclusion of the first FASB member who commented.  He expressed concern about setting a precedent of overriding materiality at the aggregate level when doing reporting, and questioned whether the FASB even had the ability to override the materiality standard or whether such an override would even comply with federal securities law.  He noted that he believed there was an issue in the system that the FASB needed to address but cautioned against addressing it through overriding aggregate materiality as it would be the second time this had been done, and could result in the FASB being pressured to do it again in the future when other issues emerged.

A FASB staff member acknowledged the different perspectives over whether or not this was an accounting standard setting issue, but pointed out that from the outreach the staff had performed, it was clear that the FASB’s stakeholders believed it was a problem that was caused by what was written in the Basis for Conclusions, and accordingly, a problem that the FASB needed to fix.

A FASB member responded and noted that the vast majority of people who expressed views at the TRG meeting stated that the Basis for Conclusions was problematic, but they did not necessarily conclude that therefore the FASB needed to do standard setting in the codification to fix it.  He noted that many suggested that the Basis for Conclusions could be clarified through additional means, such as clarifying the judgement required in the process in the minutes to the TRG meeting.  Another FASB member noted that this could also be achieved through fixing the Basis for Conclusions and clarifying the language in paragraph 90.

There was discussion around the language in paragraph 90.  It was noted that the wording states that an entity is not exempt from accounting for performance obligations that the entity might regard as being perfunctory or inconsequential; however, a FASB member pointed out that the two sentences in paragraph 90 should be read together and not in isolation.  Read together, the paragraph said that an entity is not exempt from accounting for performance obligations that it might regard as being perfunctory or inconsequential, but that the entity needed to think about this in terms of materiality. 

Another FASB member noted that he agreed with the earlier comments about taking a broader approach to the issue and looking at Topic 105.  However, he expressed concern that this could be completed on a timely basis.  He noted that the staff recommendation provided clarity and took care of the issue in an expeditious manner, and accordingly, he supported the recommendation. 

A further FASB member also agreed that this was a broader issue, and expressed concern that the broader issue would not be able to be resolved on a timely basis.  He highlighted that fact that some of the conflicting remarks made at the TRG meeting provided evidence that there was a problem, and that his preference was that the problem was resolved before the standard became effective. Accordingly, he supported the staff recommendation to address it.  He acknowledged that it set a precedent in terms of future standard setting, but noted that until the FASB came up with a more holistic way of dealing with it, there was an outstanding issue, and one that added a lot of unnecessary cost and time on a lot of people.

Another FASB member suggested that the FASB could also amplify in the TRG minutes what was discussed with respect to what was meant by the standard, which was that people generally did not think the FASB expected that people would identify a lot more deliverables, with the exception of marketing incentives.

Another FASB member noted that even if the FASB could go back and erase the wording in the Basis for Conclusions that was causing the issue, this would not solve the problem, because people would still have to go through the exercise of aggregating and determining whether in aggregate the individually immaterial performance obligations were material to the entity or the financial statements as a whole.  In contrast, what the staff was now recommending was that this evaluation was performed on a contract by contract basis, which was a very different exercise.  He noted that his preference was for the issue to be resolved within revenue to eliminate the need for people to have to perform the assessment beyond the contract level.

Another FASB member pointed out that there were different levels of materiality from an audit and preparer perspective.  He noted that theoretically there was a financial statement level of materiality, and, in theory, if this guidance was applied appropriately on a rational basis, an entity should not expect to identify individually immaterial performance obligations that would then be material at the financial statement level.  However, he pointed out that the level at which an entity has to accumulate and report adjustments to the Audit Committee was often at a much smaller fraction of that bigger number [i.e. materiality vs. clearly trivial threshold], so even if an entity believed that ignoring the immaterial performance obligations would not be material to the financial statements as a whole, there was still a good chance that it would be over the clearly trivial threshold. What the FASB was trying to do through this amendment was to eliminate the need for entities to have to identify and aggregate these items for the purposes of reporting to the Audit Committee.

Another FASB member commented on the drafted language in paragraph BCX1 of the FASB memo and expressed concern that making a statement that materiality should only be evaluated at the contract level was not consistent with federal securities law, and that he was particularly concerned with the use of the word ‘material’.

Following discussion on the issue, the FASB tentatively decided to add guidance clarifying that an “entity is not required to identify goods or services promised to the customer that are immaterial in the context of the contract”.  The FASB also tentatively decided that an entity would consider materiality of items or activities only at the contract level (as opposed to aggregating such items and performing an assessment at the financial statement level).

IASB

The Technical Director introduced the agenda paper.  He highlighted the fact that feedback received from IASB’s stakeholders had indicated that no standard setting action was needed, and that some of the difficulties explained by the FASB did not seem to prevent IASB stakeholders from making the reasonable judgements the IASB expected people to make in applying IFRS 15.  He noted that if the FASB were to decide to amend the Standard to specify that materiality would be applied at the contract level, the IASB could consider the proposal, but on balance, noted that the staff were not recommending any standard setting action on the issue, as they believed it was best to avoid the unintended consequences of making a change in this case.  He further noted that he agreed with a lot of the comments made in the FASB discussion that this was a broader issue that did not only apply to revenue recognition.

An IASB member noted that, even if the FASB made a change to allow entities to consider the materiality of items or activities at the contract level, he would be vehemently opposed to the IASB making such a change.  He noted that such a change would be penalising investors in order to give preparers and auditors an easier time.  He also noted that it confused the definition of materiality as the definition was at the entity level, although he would still not agree with such a change even if the word ‘material’ was replaced with ‘significant’.  He observed that this was a similar situation to that of determining significant financing components, where the Boards’ have allowed entities to perform this assessment at the contract level.  He noted that he was not in favour of this also, as he believed this assessment should also be performed on the basis of materiality, but noted that he had voted for it in the interests of convergence.  He stressed that this was a dangerous path for the IASB to go down.

Another IASB member highlighted the fact that the Boards were not disagreeing about what should happen when the Standard was applied, but about what guidance was necessary to give people the right level of certainty about the intended reading of the Standard.  She noted that her preference would be for the IASB to so something along the lines of the FASB staff recommendation (i.e. to clarify assessment at the contract level), but to also explain the linkage with the material rights analysis and show how the two were not in conflict with each other. 

A further IASB member noted that he disagreed with the comments of the previous IASB member.  He stressed the importance of the two sentences in paragraph 90 of the Basis for Conclusions being read together and not in isolation, as highlighted by a FASB member.  He expressed concern that in situations where there were individually immaterial items that accumulated because of the nature of the contracts or passage of time and were material in the aggregate; that such items would not need to be accounted for if guidance was changed to only require assessment at the contract level.  He agreed with the IASB not making any amendment on this issue, noting that he believed the guidance in the Standard was clear that, if an item was material, it should be accounted for, and that what was being proposed by the FASB staff was going to trump that.

A further IASB member reminded the IASB that in previous discussions, the IASB had talked about what the high hurdle should be before making changes to a completed IFRS that people were implementing.  She pointed out that the agenda paper noted that there was no issue to solve, and that (as highlighted earlier in the conversation), there would be unintended consequences and knock-on effects if the IASB did start making changes.  Accordingly, she noted that she supported the staff recommendation that the IASB should not be making any changes to the Standard.

Another IASB member noted that he supported the IASB making a change.  He referred to the FASB’s proposed amendment to the Standard to specify that materiality would be applied at the contract level, and noted that if the IASB did not make such a change, it would result in additional time and costs to IFRS preparers in having to aggregate and determine whether the items were material to the entity as a whole.

On voting, twelve of the fourteen IASB members supported the staff recommendation not to undertake any standard-setting with respect to this issue.

Issue 2: ‘Distinct within the context of a contract’

The new revenue Standard requires an entity to identify performance obligations on the basis of whether the promised goods or services are distinct.  The TRG considered issues relating to the principle in paragraph 27(b) regarding when a promised good or service is ‘distinct within the context of a contract’ and the supporting factors in paragraph 29. 

The main issue that arose related to potential diversity in stakeholders’ present understanding of the factor in paragraph 29(c) – what does it mean for a good or service to be ‘highly dependent on, or highly interrelated with, other goods or services promised in the contract’?  The concern is that 29(c) is being read more broadly than was intended and could result in items being inappropriately combined together as a single performance obligation. 

Another specific issue related to the term ‘combined output’ in paragraph 29(a), where concerns had been expressed by some stakeholders with long-term construction contracts that this term might preclude identifying a single performance obligation when that output comprised more than one unit of output or phase of a contract.

The specific questions also pointed to some broader questions about stakeholders’ present understanding of the principle in paragraph 27(b).

The IASB staff recommended that the IASB explore adding some illustrative examples to a) illustrate the application of the principle in paragraph 27(b) (including the highly dependent/highly interrelated factor) and b) to clarify that a combined output can include multiple units or phases.

The FASB staff recommended the following:

a) The FASB further articulate what it means for a promise to be “separately identifiable” in the revenue standard, and provide additional explanation as to its thinking in the Basis for Conclusions.

b) The FASB should reframe the factors in paragraph 606-10-25-21 [equivalent of paragraph 29 of IFRS 15] to more clearly align to the intent of the guidance. This would primarily involve evaluating the ‘separately identifiable’ principle in the context of the bundle of promised goods or services in the contract, rather than evaluating the promised goods or services, in effect, individually.

c) Additional examples should be added to the implementation guidance in order to provide additional clarity as to how the FASB intends the separation guidance to be applied.

FASB

The Project lead introduced the session and noted that the FASB would be asked to vote on whether it would like to add this issue to the project scope, and, if so, whether the FASB agreed that the intent was to clarify the issued guidance, and not to revisit the FASB’s previous decisions underlying the issued guidance; and to vote on which alternative set out in the memo it would like to pursue.

A FASB member noted that he supported the staff recommendation; however, noted that he thought that the suggested revision to factor (c) of paragraph 606-10-25-21 [set out in paragraph 78 of the FASB memo] was less helpful than the existing guidance. 

Another FASB member supported the staff recommendation, and noted that he thought the suggested revision in paragraph 78 of the memo was critical to helping the issue, because the change helped in the ‘big deliverable and subsequent deliverable’ situation.  He noted that today, people interpreted the guidance as “if either is highly interrelated” (and installation would always be highly interrelated to some previously provided obligation), then you do not have distinct performance obligations.  He noted that the revision was clarifying that both had to be highly interrelated.

The first FASB member who had commented noted that he did not find it helpful in terms of evaluating the bundle of goods.  He noted that there was a reason why the FASB had been very clear that examples would be pivotal to understanding this issue and that the way the previous FASB member had described it was exactly how the FASB had intended it.  He noted that the problem the FASB was trying to solve was people concluding that providing maintenance on a piece of hardware or installation of a piece of equipment was highly dependent on the fact that they had delivered the associated equipment.  He noted that he agreed that the revision clarified this issue, but noted he thought the existing guidance was more useful in other scenarios.

A FASB staff member noted that the example revision was really to help people in the deliverable and subsequent installation scenario get to two performance obligations. 

Another FASB member noted that he believed this issue met the high hurdle for making changes to the Standard, as based on the TRG discussions and separate outreach performed on the issue, it was very clear that people were having a lot of trouble figuring out how to apply the guidance, which could lead to very different answers and major differences in accounting for very similar fact patterns.  Accordingly, he agreed with the staff recommendation to clarify the existing guidance.

A further FASB member agreed that the issue met the hurdle of needing to clarify the guidance to make it understandable and operable.  He noted that he agreed with the first FASB member who spoke that the revised wording in paragraph 78 did not really get to the notion of combined items where they are reliant on each other.  He noted that this was better explained in paragraph 79 of the paper, and instructed the staff to work some more at effectively communicating what they were trying to say about combined items and relying on each other.  He further noted that he agreed and understood why different examples might be useful, but cautioned that the FASB needed to ensure that the examples connected directly to the guidance in a complete way – adding nothing new and not ignoring anything.  He pointed out that the FASB had run into problems previously with some of the licence issues by not referring to the guidance in its totality, and people misinterpreted that some parts of the guidance were more important than others.  He also cautioned about adding too many examples, noting that the examples the FASB did add needed to be done very well. 

The FASB decided to add guidance that was consistent with the FASB staff’s recommendations.

IASB

The Technical Director highlighted the fact that the identification of performance obligations was an important step in the model, and also a part of the Standard where the Boards expected judgement would be required in application.  He noted that the staff believed the questions raised pointed more to the need for explanation of what was already in the Standard rather than amendments to the existing words.  He reminded the IASB of the long experience in trying to articulate the words in this part of the Standard, and noted his concerns that trying to amend the words would just result in new questions.  He noted that the staff had developed paragraphs 32 through 43 of the agenda paper with the hope that the discussion in said paragraphs could help educate and inform people about how the Boards intended this part of the Standard to be understood.  Finally, he noted that he believed that some additional examples could be helpful to illustrate the application of the principle in paragraph 27(b) (including the highly dependent/highly interrelated factor) and to clarify that a combined output can include multiple units or phases.

The Vice-Chairman agreed with the staff recommendation to develop some additional examples.  He noted that the IASB needed to have a high hurdle for making changes to the wording in the Standard because of the risk of unintended consequences of changing the Standard, and that he did not believe this issue met that high hurdle.

An IASB member also agreed with developing additional examples.  He noted that he hoped that the IASB could have identical examples to the FASB. He also noted that if it would be helpful to use the words in paragraph 78 of the FASB memo, which contained an example revision of paragraph 29(c) in terms of explaining the concept ‘distinct in the context of a contract’, that these words should be included in the example, and then at least hopefully this would result in the same outcomes even though the actual wording in the Standards differed.

Another IASB member also agreed with the staff recommendation.  She cautioned that the IASB should only be looking to add one or two examples rather than a number to try and address a range of issues.  She specifically noted that she would like to see an example developed that dealt with the issues explored in Example 4 in the FASB paper; however, she noted that the example developed should include more discussion that linked back to the Standard about how the Standard should be applied rather than being something that was useful just for the answer in the scenario.

All IASB members voted in favour of the staff recommendation to develop some examples to illustrate the application of the principle in paragraph 27(b) (including the highly dependent/highly interrelated factor) and to clarify that a combined output can include multiple units or phases. 

The Technical Director also noted that the analysis in the agenda paper would serve as educative material by giving additional colour to people about how the IASB thought about this part of the Standard.  He noted that the IASB would work with the aim to have identical examples to the FASB, so that, even if the FASB amended the wording in paragraph 29, the same result would be applied in practice.

Issue 3: Shipping and handling services

With respect to identifying the promised goods or services in a contract with a customer, a number of questions have been raised in the US as to whether an entity should account for shipping and handling services as a promised service or, instead, treat them as a cost of fulfilling the promise to deliver goods to the customer.  In particular, concerns have been raised in situations where shipping occurs after the transfer of control of the related goods.  Under existing revenue guidance, shipping and handling services provided in conjunction with the sale of goods are not generally accounted for as an additional deliverable, but are treated as fulfilment costs.  If such services were to be accounted for as a promised service, this might result in a significant change to existing practice.

To address this issue, the FASB staff recommended the following:

a) The Board clarify that shipping and/or handling that occurs before the customer obtains control of the goods are fulfilment activities; and

b) Introduce a practical expedient that would allow an entity to elect to account for shipping and handling that occurs after the customer has obtained control of a good as a fulfilment cost rather than as a promised good or service in the contract.

The issue has not been raised by IFRS stakeholders, and accordingly the IASB staff does not recommend that the IASB does anything with respect to this issue at this time.  The IASB staff will consult with IFRS stakeholders to determine whether this is also an issue under IFRS.

FASB

The Project lead introduced the session and noted that the FASB would be asked to vote on whether it would like to add this issue to the project scope, and, if so, which alternative set out in the memo it would like to pursue.

A FASB member questioned whether, if the FASB agreed with the staff recommendation and went down the practical expedient (or option) route, the staff had thought about any presentation or disclosure alternatives to give users the information to try and reconcile between companies that put shipping up into revenue and those that decided to accrue.

A FASB staff member noted that the people were not treating shipping as a separate service today, so if the FASB were to require people to do some sort of disclosure of what that shipping amount would be, it would pretty much negate the benefit of the election.  He added that the staff believed that people should disclose the policy choice they had made, but that the idea of the election was not for entities to have to obtain that same information anyway.

The FASB member expressed his concerns that if the FASB went down the policy election route, it could potentially introduce diversity into revenue.

Another FASB member noted that he believed that if the model was applied at FOB shipping point, then shipping would be a separate performance obligation.  He noted that he would not be concerned with that separate performance obligation not being recognised if it was not material, and further noted that he believed this issue had been resolved through discussions on Issue 1.  He expressed concerns with having an accounting policy election that would override the model when shipping costs were material, and noted his preference for relying on what the FASB decided on Issue 1 to deal with it.  He also noted that he agreed with the staff’s proposed treatment for FOB destination scenarios, but that he thought this point could be clarified through means other than amending the Standard.

Another FASB member agreed that in a FOB shipping scenario, shipping could be looked at as a separate performance obligation; however, questioned what was really different in Topic 606 vs. existing multiple element guidance that resulted in people coming to this different conclusion.  He noted that he believed the staff recommendation to allow shipping costs to be treated as fulfilment costs was a practical solution, which eliminated potential questions around principal/agent etc., and that he did not believe this treatment was viewed as a problem in practice today.  Accordingly, he supported the staff recommendation, and further noted that he would be happy saying that all shipping costs were fulfilment costs.

Another FASB member also noted that his preference would be to say that all shipping costs were fulfilment costs – rather than allowing an option (which would be an override of the model), which would result in non-comparability.

The FASB staff responded, noting that the complication with requiring all shipping costs to be fulfilment costs was that there were entities that were in the business of providing shipping, and it was difficult to draw a line between when an entity would have revenue vs. fulfilment costs, which was why the staff were recommending an option to address the issue.  With respect to diversity, the FASB staff noted that they believed people would coalesce around an approach, and that it was unlikely that, in an industry where entities do not treat shipping as a separate performance obligation today, half the industry would elect to start doing multiple element accounting.

A FASB member suggested that one way of making the distinction could be to treat as a fulfilment cost if it was included with other activities in the contract, and treat it as revenue if it was the predominant thing.  Another FASB member noted that the option proposed by the staff allows the predominant shippers to have revenue, and predominant retailers that ship to fulfil the contract to have fulfilment costs.

A further FASB member noted that he was generally not a proponent of options as they resulted in diverse application.  However, he noted that he believed what the staff was recommending was likely to result in the consistent treatment seen in practice today; and that this proposal was an expeditious way to get to consistency with current practice.  He also reiterated the concerns expressed earlier by the FASB staff with respect to the challenges in trying to draw a line between when entities should recognise revenue vs. fulfilment costs if an option was not allowed.

Five of the seven FASB members agreed with the staff’s recommendations to add the issue to the project scope and to pursue Alternative A, i.e. to introduce a practical expedient.

IASB

The Technical Director introduced the agenda paper.  He noted that the staff did not have any questions for the IASB on this issue, and were not asking the IASB to make any decisions.  He noted that to date, the issue had not been raised by IASB stakeholders.  He pointed out that this question was only relevant when shipping occurred after transfer of control of the related goods, which also highlighted the fact that the assessment of control needed to be thought about carefully.  He also pointed out that the issue had a relationship with the first issue discussed, which related to applying judgement in identifying performance obligations.  He asked the IASB members whether they had any comments with respect to the issue.

One IASB member highlighted the fact that there were situations where shipping arrangements were very complex, and that it was difficult to take a standard approach to determining whether or not shipping was a separate performance obligation.  He noted that the business activities of the entity needed to be considered.

Several IASB members commented that the issue stressed the importance of performing a careful assessment of when control transfers.  One IASB member noted that the issue highlighted some questions about practice, and whether the substance backed up the assertion that for retail customers it was easy to get FOB shipping when there was a third party shipper.

The IASB did not vote on this issue.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.