Revenue Recognition

Date recorded:

At recent Board meetings, several Board members expressed the view that a reporting entity's performance obligations to its customers should be initially measured based on the amount that the customer paid or agreed to pay to the reporting entity (the 'customer consideration amount') rather than the amount that the reporting entity would have to pay to legally lay off its obligation to its customers (the 'legal layoff amount'). Some of those Board members also expressed the view that measurement of those obligations should be based on the perspective of the customer rather than that of the reporting entity.

A customer perspective focuses on the fact that the customer and the reporting entity are counterparties to the same contract. Under this view, the reporting entity's obligations to its customer are thought to correspond precisely to the customer's rights (and vice versa). Accordingly, the reporting entity's accounting for its rights and obligations should mirror the customer's accounting for its rights and obligations under the contract (assuming that the customer prepares financial statements).

Under a reporting entity perspective, the reporting entity's accounting for its rights and obligations is not based on how the customer accounts for its rights and obligations under the contract. Instead, the reporting entity's accounting is based on the reporting entity view of its rights and obligations, which does not necessarily mirror the customer's view of those rights and obligations.

The Board agreed with the reporting entity perspective. Some Board members continued to express concern that revenue would be recognised despite an obligation to refund in the case of non-performance.

The Board discussed a case study covering a long term contract illustrating the application of the proposed conceptual model for accounting for contractual rights and obligations.

In this example a number of Board members agreed that allocating revenue to contract origination, assuming its fair value can be determined, would be better than current percentage-of-completion accounting. Other Board members expressed concern either because they disagreed with the model or because they were concerned as to its application due to the assumptions being unrealistic.

Tatsumi Yamada conveyed a message from the Accounting Standards Board of Japan (ASBJ). The ASBJ expressed concern as to the direction of the project and requested that it be stopped. The message was noted.

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