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Journal entry — Revenue — Redeliberations continue

Published on: Oct 01, 2012

At their joint meetings last week, the FASB and IASB (the “boards”) resumed redeliberating their November 2011 exposure draft (ED) Revenue From Contracts With Customers. During their meetings, the boards discussed the following topics: (1) constraining revenue, (2) collectibility, (3) the time value of money, and (4) contract issues related to distribution networks.

Constraining Revenue

The boards tentatively decided to (1) remove the term “reasonably assured” from the revenue recognition constraint and (2) clarify the definition of variable consideration to include instances in which the contractual price of a good or service is fixed but the amount is not fixed as a result of an uncertain event (e.g., an outcome-based fee). The boards also asked the staffs to obtain additional feedback on these proposed changes. Certain constituents (primarily those with long-term service or construction contracts) believed that the proposed changes could significantly defer the recognition of certain types of revenue that is subject to uncertainty (e.g., a performance bonus).


The boards did not make any decisions regarding the accounting for or presentation of adjustments related to a customer’s credit risk (i.e., collectibility). However, after extensive discussions, the boards requested that the staffs research the potential implications of including a collectibility threshold for recognizing revenue. (The ED does not include an explicit threshold that must be overcome in connection with a customer’s credit risk for an entity to recognize revenue, such as collectibility being reasonably assured.) In addition, the boards requested that the staffs further evaluate the following two alternatives for presentation of initial and subsequent collectibility impairments in the income statement:

  • Remove the ED’s requirement to present these impairments as a separate line item next to gross revenue. Under this alternative, current practice would not change and impairments on receivables from contracts with customers would generally be presented within operating expenses.
  • Present impairments resulting from all types of receivables for contracts with customers (i.e., all sales transactions, regardless of whether a significant financing component exists) as a separate line item next to gross revenue. These impairments would be presented differently than impairments of loan receivables that are not part of a sales transaction with a customer.

The boards also tentatively agreed to clarify the criteria in the ED’s contract guidance by providing indicators of when a customer is committed to perform its obligations in the contract (and, therefore, when the guidance can be applied to the contract).

Time Value of Money

The boards affirmed the ED’s proposal that an entity should adjust the amount of a contract’s consideration to reflect the time value of money when the contract includes a significant financing component. However, they agreed to clarify their intent that a significant financing component might not exist for:

  • Goods or services paid for in advance when the “transfer of those goods or services to the customer is at the discretion of the customer” (e.g., loyalty points, prepaid phone cards).
  • Certain types of payments that are made in advance or arrears that arise for reasons other than financing (e.g., retainages on a long-term construction contract).

In addition, the boards decided to retain and clarify the practical expedient to not account for the time value of money when the timing between performance and the payment for that performance is less than one year. Finally, the boards agreed with the staff’s recommendation to clarify that this guidance is not intended to preclude interest income from being presented as revenue if it was part of an entity’s ordinary business activities.

Contract Issues Related to Distribution Networks

The boards tentatively decided to affirm the ED’s guidance on contract combination and consideration payable to a customer in connection with the accounting for sales incentives offered in a distribution network (e.g., an automobile manufacturer that offers free maintenance to a dealer’s end customer). However, the boards agreed to make the following clarifications to the guidance on accounting for such sales incentives:

  • Goods or services granted in a sale to a reseller, when they represent sales incentives that will be transferred to the reseller’s customer, should be evaluated as goods or services in the entity’s sale to the reseller.
  • A promised good or service provided to a reseller’s customer after the customer’s performance obligations in a contract are satisfied would not be a performance obligation unless it was an implied performance obligation in the original contract.

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