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Revenue Recognition

Date recorded:

The staff presented various recognition and measurement principles based on the Board's tentative decisions to date. These principles are:

Fundamental Revenue Recognition Principle

A reporting entity should recognise revenues in the accounting period in which they arise and measure them at their fair value on the date that they arise if it can determine both their occurrence and measurement with sufficient reliability.

The following recognition principles amplify and extend the fundamental revenue recognition principle:

Recognition Principle #1

Contractual revenues cannot arise before a contract with a customer exists.

Recognition Principle #2

A reporting entity should recognise contractual revenues when an increase in its claims against its customers can be determined to have occurred and the fair value of that increase can be measured with sufficient reliability.

Recognition Principle #3

A reporting entity should recognise contractual revenues when a decrease in claims against it by its customers can be determined to have occurred and the fair value of that decrease can be measured with sufficient reliability.

Recognition Principle #4

Increases in assets or decreases in liabilities that give rise to contractual revenues stem from contractual promises that may be either express or implied.

Recognition Principle #5

Contractual revenues should be recognised at contract inception if the fair values of the contractual assets obtained on that date exceed the fair values of the contractual liabilities simultaneously incurred, and if those revenues can be measured with sufficient reliability.

Recognition Principle #6

Subsequent to contract inception, contractual revenues should be recognised upon the reporting entity's performance of its obligations under the contract, as evidenced by a decrease in its contractual liabilities or an increase in its contractual assets, the fair value of which can be determined with sufficient reliability.

Recognition Principle #7

Contractual revenues should be recognised upon contract completion to reflect any final increases in the fair values of contractual assets or final decreases in the fair values of contractual liabilities.

Fundamental Measurement Principle

A reporting entity should measure revenues arising from an increase in its assets or a decrease in its liabilities (or a combination thereof) at the fair value of that increase or decrease.

The following measurement principles amplify and extend the fundamental measurement principle:

Measurement Principle #1

The estimates of the fair value that the reporting entity uses to measure revenues arising from increases in its assets or decreases in its liabilities should be those that have the highest relative reliability.

Measurement Principle #2

The estimates of the fair value of revenues that are consistent with Level 3 of the fair value hierarchy should be developed by means of multiple valuation techniques that maximise market inputs, such as a market approach or an income approach, whenever information necessary to apply those techniques is available.

Measurement Principle #3

The fair value of revenues arising from increases in the reporting entity's contractual assets reflects the effects of credit risk, the time value of money, and dilution risk.

Measurement Principle #4

The measures that reflect the effects of credit risk on the fair value of a reporting entity's revenues also should reflect expectations of recoveries, if any, in case of breach of the contract by the customer.

Measurement Principle #5

Any express or implied rights of return and refund, allowances, rebates, discounts, credits, and other similar rights granted to customers that reduce revenues by reducing the reporting entity's contractual assets or increasing its contractual liabilities should be measured at fair value.

Measurement Principle #6

Revenues arising from increases in contractual assets that stem from the reporting entity's rights to the customer's stand-ready performance in case of occurrence or non-occurrence of a specified event should be measured at fair value that reflects the assessment of the probability that the specified event will occur.

It was noted that the use of fair value was adopted as a working principle, and no formal decision on this has been taken. In addition it was noted that strictly speaking fair value would apply to assets and liabilities and not revenue.

The Board noted that there were certain of these principles, and the effects of these principles, that they still needed to discuss and the principles could be expanded.

The Board agreed that the effects of the time value of money and credit risk would only ever be disregarded as a result of materiality.

The staff noted that, for the revenue recognition project, conditional is defined as 'subject to the occurrence of an event that is not certain to occur (such as performance by the counterparty)' and unconditional as 'only the passage of time is required to make performance due.'

The Board agreed.

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