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Revenue from contracts with customers

Date recorded:

This session was devoted to discussing several issues relating to the transition requirements in Appendix C of IFRS 15 that emerged at the July 2015 meeting of the Revenue Transition Resource Group (TRG). The IASB Technical Manager introduced the session, noting that stakeholders had raised questions with respect to the definition of a completed contract and the accounting treatment for such contracts after the date of initial application of IFRS 15. He noted that the IASB staff believed the transition requirements were clear and therefore recommended that the IASB not propose any related amendments to IFRS 15.   He highlighted that the FASB had tentatively decided to clarify that a completed contract is one for which all (or substantially all) of the revenue was recognised under previous revenue Standards; and to amend the modified retrospective transition method to permit entities to apply the new requirements to all contracts, including completed contracts at the date of initial application of Topic 606.

There was discussion around the issue of divergence if the IASB did not propose similar amendments to those proposed by the FASB. The IASB Vice Chairman reminded the IASB members that the IASB had set a high hurdle for making changes, and noted that he agreed with the IASB staff that this did not meet that hurdle. It was acknowledged that although this was a converged Standard, the IASB and FASB came from different starting points and that inevitably, transition would be different. It was also highlighted that this difference would only result in divergence on transition that would wash out and not create a permanent difference.

One IASB member expressed a preference for the FASB’s approach, noting that he did not like the way ‘completed contract’ was construed, and that the FASB’s approach eliminated potential structuring opportunities. He further noted that he did not believe that the potential disadvantages that making amendments would have on companies early adopting IFRS 15 (and using the modified retrospective approach) outweighed the benefits of being aligned with the FASB on the issue.

Another IASB member stressed the importance of sending the message that the IASB’s hurdle for making changes was a very high one, and agreed that these issues did not meet that hurdle.

A further IASB member noted that it was important that people understood that there could be situations where an entity had a contract that had been ‘completed’ under current IFRS but there was some unrecognised revenue. And further, if the entity concluded that the contract was not a completed contract under IFRS 15, then the entity was required to apply IFRS 15 to the whole contract, not just the unrecognised portion.

She further highlighted that in situations where entities had a large population of contracts that were complete but the revenue not recognised, those entities should think carefully about whether taking the modified retrospective approach would be appropriate and provide useful information to investors. For example, in situations where the ‘run off’ from the completed contracts had the potential to distort revenue trends this should be a consideration in deciding between using the modified retrospective approach or the full retrospective approach.

Twelve of the thirteen IASB members present agreed with the staff recommendation not to undertake standard-setting regarding the issues discussed.

All thirteen IASB members present agreed with the staff analysis of the transition requirements in Appendix C of IFRS 15.

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