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Revenue recognition — Principal versus agent considerations

Date recorded:

This session was primarily devoted to discussing actions the IASB could take to resolve issues discussed by the TRG on the application guidance ‘Principal versus agent considerations’ in IFRS 15.

The Technical Principal explained that the staff were asking the IASB to make tentative decisions on whether or not to propose clarifications to the principal versus agent guidance in IFRS 15 to address some of the issues highlighted by TRG discussions. It was noted that this topic was discussed jointly with the FASB in March 2015, and that the FASB was currently performing further research and outreach on the topic. The reason for this discussion was to identify any clarifications the IASB wanted to include in the single exposure draft of proposed clarifications to IFRS 15 to be issued in June/July. The topic would be discussed with the FASB in June.

The Technical Manager explained that a very important consideration in applying the principal versus agent guidance in IFRS 15 was the identification of the nature of the specified good or service, and most of the questions in the TRG discussions related to the identification of the nature of the specified good or service. The application of the control principle became easier if the entity identified the specified good or service appropriately, and accordingly, the staff recommended as a minimum, that IASB should add an additional guidance along the lines set out in paragraph 58 of the agenda paper which helps provide a better framework for applying the guidance. On the application of the control principle to services, the IASB could clarify this by providing an explanation of the scenarios in which a principal can control a service; this could be achieved by either including an explanative paragraph in the application guidance or by adding illustrative examples. The staff recommended the explanation be included in the application guidance because it directly links and completes the guidance in paragraph B35. In relation to the indicators in paragraph B37, he noted that the staff recommended that the IASB not remove the indicators but consider removing one or both of the commission indicator and the exposure to credit risk indicator because there were questions about the usefulness of those in the assessment of control.  

An IASB member questioned why the staff had not recommended changes in other areas, for example, collectability. The Technical Manager noted that on the collectability issue, the FASB was trying to bring something from the Basis for Conclusions into the main part of the Standard, and the IASB believed there was guidance in the application guidance or Basis for Conclusions that was clear. He noted that, in contrast, with the principal versus agent issues it was hard to connect the dots based on what was in the application guidance.

An IASB member agreed that the staff recommendations would provide some clarity on the issue.

Another IASB member noted that the real problem here was in determining whether or not an entity was a principal or agent in providing a service, and that the proposed drafting in paragraph 63 of the agenda paper was helpful in answering that question. He saw the proposed drafting in paragraph 63 as the key improvement, with the proposed drafting in paragraph 58 just introducing the idea that an entity needed to perform the assessment in paragraph 63.

Another IASB member thought that, on the issue of control of a right, the concepts that the staff had developed around the definition of a lease and control were quite useful because the person who controls the service is effectively determining the how or when the right is going to be transferred; and he could see the IASB borrowing some of those same words or concepts in explaining this.

A further IASB member cautioned about changing examples or adding too many examples, highlighting the shortcomings of EITF 99-19 - that it contained too many examples and too many indicators without a clear principle. He also noted that too many examples can actually confuse preparers. He agreed with making amendments to existing examples to make necessary changes, but disagreed with increasing the number of examples.

The Vice-Chairman referred back to the discussion at the February 2015 IASB meeting on the implications of amending IFRS 15 before the mandatory effective date, and reiterated his preference for changing the Standard as little as possible, noting that he was not always convinced there were no knock on effects, and that some of the recommendations were fairly substantial changes. If the IASB was going to do anything, his preference would be to make the examples a little clearer, but he did not support the amendments proposed in Questions 1, 2, or 3 in the agenda paper.

An IASB member supported some of the Vice-Chairman’s comments and was concerned about the message the IASB was sending in making changes when they thought the Standard got one to the answer. He noted that the building blocks to get to the answer were in the Standard, and what people were finding difficult, as with adoption of any new Standard, was connecting the dots; and questioned why additional guidance should be provided in this area and not others. He agreed with making the examples clearer if the IASB was going to do anything, and, to the extent the IASB felt that Examples 45-48 were actually leading people down the wrong path, it was important these were amended.

Another IASB member agreed with the comments of the previous IASB member. He felt the Standard was clear, and the IASB was in danger of turning the Standards into a text book. He was concerned about continually adding to Standards, and the potential questions that would arise. He questioned whether the FASB, if it makes a change, would make the same changes as the IASB.

The Technical Principal noted that the FASB was looking at the issue more broadly. The FASB was looking at clarifications based on control and were thinking about things similarly to the IASB. However, the FASB is also doing some further research and exploring the possibility of using a different principle based on exposure to profits or losses.

There was discussion around the dangers of the IASB proposing changes before knowing what the FASB was going to do. The IASB member noted his support of amendments was dependent on what the FASB does, if the FASB changes the model, he would not support making any changes, and if the FASB was keeping the model and making the same changes, he would support making the changes to maintain convergence.

In conclusion only six of the thirteen IASB members present supported the staff recommendation to propose amendments to the application guidance in IFRS, along the lines set out in paragraph 58 of the agenda paper, to clarify the application of the principal versus agent, so it was not agreed.

The IASB tentatively agreed to propose amendments to the application guidance in IFRS 15, along the lines of those set out in paragraph 63 of the agenda paper, to explain the application of the control principle in the context of services. Seven of the thirteen IASB members present supported proposing such amendments.

With respect to deleting the commission and exposure to credit risk indicators in paragraph B37, an IASB member he strongly disagreed with deleting the exposure to credit risk indicator. The argument for deleting is because in many transactions, the customer pays in advance or when it obtains the goods or services so there is no exposure to credit risk, but he noted that for some transactions this was an important factor in assessing whether the entity was acting as a principal or as an agent.

The Vice-Chairman pointed out that the real problem was the role of the indicators, and now this has been clarified, there was no need to make amendments to the list of indicators. The Technical Principal agreed that with clarification that the indicators were not a checklist (i.e. not all indicators need to be present), there was no harm in retaining all indicators.

The IASB members did not vote in favour of the staff recommendation to delete the commission and/or exposure to credit risk indicators in paragraph B37 of IFR S15.

Twelve of the thirteen IASB members present agreed with amending Examples 45-48 and including some additional examples to clarify the application of the principal versus agent guidance.

Series of distinct goods or services

The Technical Director drew the IASB members’ attention to a matter that had arisen in the March 2015 Joint IASB-FASB TRG discussion on the requirement to account for a series of otherwise distinct goods or services as a single performance obligation if specified criteria were met. The TRG considered several implementation questions on this topic, and their discussions highlighted that the requirements in IFRS were clear; however, he noted that this requirement, which had been included 5 to simplify the model, actually created additional complexities for entities when moving away from the simple cleaning example.

The reason the IASB staff wanted to bring this matter to the IASB’s attention was because the FASB had asked in its recently issued exposure draft (on amendments to licences and performance obligations) for feedback on whether this should be an optional practical expedient rather than a requirement, and what the potential consequences would be. He asked the IASB members whether they wanted to ask for similar feedback in the upcoming IASB exposure draft.

In response to an IASB member’s question, the Technical Director noted that the outcome could be same under both methods, but not necessarily, because if the series was treated as a single performance obligation, an entity would go through the process of picking a measure of progress for the single performance obligation, whereas, if accounted for as separate performance obligations, the entity would go through the process of allocating the transaction price.

An IASB member questioned why they would differ if the entity selected the most appropriate basis to do the allocation (in the case of separate performance obligations), and the most appropriate measure of progress towards completion of the single performance obligation, which would be delivery of the goods or services, noting that in principle, both methods should give the same answer. He and another member were not in favour of the IASB opening this issue up, especially if the IASB did not have any intention of making such a change.

Another IASB member commented that this was more an operational issue and not a clarification issue. A further IASB member pointed out that changing from a requirement to an optional practical expedient would be changing the Standard, not just clarification.

Another IASB member noted that his understanding was that the TRG was set up to focus on making clarifications, and no fatal flaws in the Standard requiring changes had been identified. He was amenable to making changes to the Standard to stay on the same page as the FASB, but noted that this would be changing the Standard, and added that he would like to explore the potential permutations that might come out of the application of using this as an option.

The Chairman noted that he did not believe the IASB could ask a question without having an opinion on the issue itself.

There was no support from any of the IASB members for including a question asking whether the requirement in paragraph 22 to identify a series of distinct goods or services as one performance obligation should be changed to an optional practical expedient.

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