This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

Journal entry — FASB and IASB continue to make decisions on the revenue recognition project

Published on: Apr 18, 2011

At their joint meetings last week, the FASB and IASB (the “boards”) reached a number of tentative decisions related to the joint revenue recognition project. These decisions involved (1) determining the transaction price, (2) allocating the transaction price, (3) licenses and rights to use, (4) fulfillment costs, and (5) sale and repurchase agreements. The boards also reached tentative decisions regarding adjustments to revenue for the time value of money and collectibility (i.e., credit risk) at their March 21–23, 2011, meetings. This Accounting Journal Entry summarizes the decisions made at both the March and April meetings. (Note that all tentative decisions are subject to change before any standard becomes final.)

Note also that in May 2011, the boards plan to discuss disclosures, transition, and amortization and impairment of fulfillment costs. In light of the open issues and other tasks that need to be completed before issuance of a final standard, the boards have extended their timetable for completing the revenue project to the third quarter of 2011. The FASB has stated on its Web site that it will expose the proposed amendments to the FASB Accounting Standards Codification for public comment before issuing a final standard.

Editor’s Note: The FASB staff’s summaries of the March 21–23 and April 12–14 joint meetings on revenue recognition are available on the FASB’s Web site. Meeting summaries from Deloitte observers at the March and April meetings are available on Deloitte’s IAS Plus Web site and should not be regarded as official or final. The boards’ staffs emphasized that the tentative decisions will be subject to field testing and extensive outreach with constituents over the next several months.

Time Value of Money

The boards affirmed the proposal in the revenue recognition exposure draft (ED) that the transaction price should be adjusted to reflect the time value of money when the financing component is significant to the contract. Given the subjectivity associated with whether a financing component is “significant” to the contract, at the March meeting the boards provided factors an entity should consider in making this determination:

1.   Whether the amount of customer consideration would be substantially different if the customer paid in cash at the time of transfer of the goods or service

2.   Whether there is a significant timing difference between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services

3.   Whether the interest rate that is explicit or implicit within the contract is significant.

In addition, the boards tentatively decided that when the period between the transfer of goods or services and ultimate payment is one year or less, this assessment is not required (as a practical expedient).


The ED proposes that an entity should account for issues related to collectibility (i.e., credit risk) in two separate places in the financial statements: (1) initial adjustments, as part of the probability-weighted transaction price and (2) subsequent adjustments, as income or expense rather than revenue. The boards tentatively decided that initial and subsequent adjustments for collectibility will not be part of the transaction price determination. An entity will record expected credit losses, and subsequent adjustments to that estimate, as a separate line item within the income statement adjacent to the gross revenue line item (i.e., as contra revenue). The boards also tentatively decided that “the final revenue standard should not include a revenue recognition criterion that requires an assessment of the customer’s ability to pay the promised amount of consideration.” That is, there will not be a revenue recognition criterion that requires collectibility to be reasonably assured, which is a change to current practice.

Determining the Transaction Price

The ED proposes that if the transaction price is subject to variability, an entity is required to use an estimated transaction price (based on a probability weighting) if it can reasonably be estimated. At the April meeting, the boards modified how the entity would determine the transaction price, stating that the entity’s objective is to “estimate the total amount of consideration to which the entity will be entitled under the contract” (emphasis added). This estimation should be based on either (1) the probability-weighted amount or (2) the most likely amount (i.e., management’s best estimate), “depending on which is most predictive of the amount of consideration to which the entity will be entitled.”

In addition, the boards decided that the ED’s “reasonably estimated” revenue recognition constraint would be replaced with one that is “reasonably assured.” Accordingly, the boards noted that an “entity should recognize revenue at the amount allocated to a satisfied performance obligation unless the entity is not reasonably assured to be entitled to that amount,” which would “be the case in each the following circumstances:”

1.   “The customer could avoid paying an additional amount of consideration without breaching the contract (for example, a sales-based royalty).”

2.   “The entity has no experience with similar types of contracts (or no other persuasive evidence).”

3.   “The entity has experience, but that experience is not predictive of the outcome of the contract based on an evaluation of the factors proposed in the [ED] (for example, susceptibility to factors outside the influence of the entity, the amount of time until the uncertainty is resolved, the extent of the entity’s experience and the number and variability of possible consideration amounts).”

Editor’s Note: Although the wording changes described above are slight, they are noteworthy. The boards believe that their decisions to (1) change the objective for determining the transaction price from the amount the entity “expects” to receive to the amount the entity “will be entitled” to receive and (2) require separate adjustment for collectibility outside of gross revenue will help achieve their core objective of revenue recognition in the amount an entity expects to receive in exchange for goods or services transferred to a customer.

In addition, before the boards’ decision to change the revenue recognition constraint from “reasonably estimated” to “reasonably assured,” an entity could have argued that certain amounts could be reasonably estimated and thus revenue could be recognized upon transfer of control. In some situations, such as a sales- or usage-based royalty, an entity may have the experience to reasonably estimate the amount of consideration it expects to receive after it has transferred control to a reseller. However, in many of these cases, that entity is not entitled to consideration because such consideration depends on future events not within the entity’s control. The boards believe that changing the constraint to “reasonably assured” and clarifying the constraint will result in a final standard that is more in line with their core objective.

Allocating the Transaction Price

The ED requires an entity to  “allocate the transaction price to all separate performance obligations in proportion to the standalone selling prices of the goods or services underlying each of those performance obligations at contract inception (that is, on a relative standalone selling price basis).” At the April meeting, the boards decided “that if the standalone selling price of a good or service underlying a separate performance obligation is highly variable,” a residual technique may be the most appropriate method for entities to use in estimating standalone selling price for that good or service.

The boards also decided that an entity may allocate a subsequent change in the transaction price entirely to one or more performance obligations when both of the following are met:

1.   The contingent payment terms of the contract relate specifically to the entity’s efforts to satisfy that performance obligation or a specific outcome from satisfying that separate performance obligation.

2.   The amount allocated (including the change in the transaction price) to that particular performance obligation is reasonable relative to all of the performance obligations and payment terms (including other potential contingent payments) in the contract.

Licenses and Rights to Use

The boards tentatively decided to eliminate the ED’s accounting model for exclusive licenses and rights to use an entity’s intellectual property (which is a lease-type model). Accordingly, sales of licenses and rights to use intellectual property will be consistent with this project’s overall revenue recognition model.

Fulfillment Costs

The boards determined that with minor drafting improvements, the guidance on the accounting for fulfillment costs in the ED should be retained. They clarified that “costs of abnormal amounts of wasted materials, labor, or other resources that were not considered in the price of the contract should be recognized as an expense when incurred” (emphasis added). Further, the boards clarified that “the costs that relate directly to a contract include costs that are incurred before the contract is obtained if those costs relate specifically to an anticipated contract.”

Sales and Repurchase Agreements

Certain agreements provide for an entity to sell an asset to a customer and simultaneously provide the customer with the right to require the entity to repurchase the asset at a price below the sales price. In these situations, when a customer has a “significant economic incentive” to exercise that right, the customer is effectively paying the entity for the right to use the acquired asset for a period (thus, it should be accounted for as a lease). To determine whether a customer has a “significant economic incentive” to exercise this right, the entity should consider various factors, including (1) the relationship of the expected market value to the repurchase price (as of the repurchase date) and (2) the amount of time until the right expires.

Accounting Journal Entries Image

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.