Concepts: Revenue Recognition

Date recorded:

All members of the Board were present for much of this discussion. Joining the discussion were two staff members from the US Financial Accounting Standards Board. The basis for the Board's paper was a FASB paper presented to the FASB Board earlier. It is the intention of both the FASB and IASB to look at case studies in their November meetings.

The purpose of this project is to develop criteria for revenue recognition that are based on changes in assets and liabilities that are consistent with the definitions of assets and liabilities in the current IASB Framework. A potential result of this project is that the definitions of assets and liabilities may be amended.

This meeting was a first step in the deliberations and focussed on developing a "working definition" of revenue. Broadly, revenues are defined as activities that either (1) increase assets and net equity, or (2) decrease liabilities and increase net equity. [As the Board papers were not available to the observer, this definition does not represent the actual drafting in the paper, but a paraphrase of that definition.]

Some members noted that, under the working definition of revenue that sales of receivables could be considered revenue at the gross amount, while sales of inventory at a negative margin would not be considered revenue as it would decrease net equity. The staff noted these observations and will adjust the working definition of revenue in a future Board paper.

One Board member noted that under the proposed model, the percentage of completion method would not be appropriate unless the buyer records an asset for the item being constructed or improved. The Board concurred with this observation and was satisfied with the result.

The Board discussed the notion of deferred revenue and concluded that the obligation to perform services that result in deferred revenue meets the definition of a liability. However, the Board noted that the amount at which the obligation should be recorded would not necessarily equal the amount of cash received. The Board did not discuss what the balancing account would be when, for example, cash of 100 was received, but the obligation to perform was 75 (or 125).

The Board noted that at a future meeting, gains must be distinguished from revenue. One Board member suggested that the UK ASB's project on revenue should be used as a basis for this research.

The Board concluded that each standard would identify the relevant attribute method for recognition and measurement of assets and liabilities (cost or value). The Board also concluded that, in order for revenue to be recorded, it must be measured with "sufficient reliability".

After analysis of case studies at the November 2002 meeting, the IASB and the FASB will work together on formulating a series of joint papers for the respective Boards.

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