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Journal entry — Revenue project — Boards reach tentative decisions on remaining issues

Published on: Nov 01, 2013

At their joint meeting this week, the FASB and IASB reached tentative decisions on three open issues related to their proposed standard on revenue recognition: (1) constraint on estimates of variable consideration, (2) implementation guidance associated with applying the proposed standard to licenses, and (3) collectibility.

Constraint on Estimates of Variable Consideration

The boards tentatively decided that an entity should include the amount of variable consideration in the transaction price only if it is probable1 (per the FASB, or highly probable2 per the IASB) that a subsequent change in the estimate of the amount of variable consideration would not result in a significant revenue reversal. An entity would assess each source of variability separately and would be required to update the transaction price as of each reporting date to incorporate changes to its estimate of this “minimum amount” during the period.

As noted in a staff paper for the meeting, the boards also tentatively decided that the proposed standard would “[i]nclude an exception that would preclude an entity from including in the transaction price an estimate of sales or usage-based royalties from licenses of intellectual property until the customer’s subsequent sales or usage occur.”

Implementation Guidance Associated With Applying the Proposed Standard to Licenses

The boards reiterated their previous decision that some licenses provide access to the entity’s intellectual property (IP) as it exists at the time the customer accesses the IP, while other licenses promise to provide a right to use the entity’s IP at the time control transfers to the customer. The boards tentatively decided to provide criteria for determining when a distinct license (i.e., a performance obligation) of IP is “dynamic” (i.e., the license gives the customer a right to access the IP because the nature of the rights obligates the customer to use the most recent form of the entity’s IP). As tentatively decided by the boards and outlined in a staff paper, a license would be considered dynamic if the following criteria are met:

a.   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 (that is, the intellectual property . . . is dynamic). . . .

b.   Those activities do not transfer a good or a service to the customer as those activities occur (that is, the activities are not accounted for as performance obligations).

c.   The rights granted by the license directly expose the customer to any positive or negative effects of the entity’s activities that affect the intellectual property as and when the entity undertakes those activities and the entity expects that the customer entered to the contract with the intention of being exposed to those effects.

If these criteria are met, control of the license is transferred over time (i.e., revenue would be recognized over time). If the criteria are not met, the license gives the customer a right to use the entity’s IP and therefore control transfers at a point in time (i.e., revenue is recognized at a point in time).


The boards tentatively decided to remove the requirement that an entity must “intend to enforce” its rights under a contract to apply the proposed model. Instead, the boards introduced a collectibility threshold into the proposed model that precludes an entity from recognizing revenue unless it is probable3 that the entity will collect the consideration it ultimately will be entitled to receive under the contract.

If a contract did not meet the aforementioned collectibility criteria at contract inception, an entity would, as outlined in a staff paper, “reassess the contract at each reporting date to determine whether the criteria . . . are subsequently met.” After meeting the criteria, an entity would not reassess “unless there is an indication of a significant change in facts and circumstances.”

The boards also clarified that when facts and circumstances indicate that an entity intends to issue a price concession at contract inception, subsequent changes in that estimate are most likely changes in the transaction price (not impairment losses).

Next Steps

The boards directed the staffs to incorporate the decisions from the meeting into the proposed standard and the basis for conclusions. In response to a board member who asked whether the boards should reconsider the proposed standard’s effective date, the staffs indicated that they will consider the date after determining how long it will take to draft the revisions.

1    FASB Accounting Standards Codification Subtopic 450-20, Loss Contingencies: Overall, states that the term “probable” refers to a “future event or events [that] are likely to occur.”

2    Paragraph BC81 of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, states that “‘highly probable’ . . . impl[ies] the same probability as the FASB’s phrase ‘likely to occur.’”

3    As stated in a staff paper, “although [the term probable is] not defined in IAS 18 and IAS 11 it is defined elsewhere in IFRS to mean ‘more likely than not.’”

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