In October 2004 the staff of the IASB and FASB conducted small non-public meetings to gauge the response of IASB and FASB members to the following three broad issues

• a. Whether an increase in net assets that occurs at contract generation gives rise to revenue that should be recognised if it can be measured reliably.
• b. Whether the standard or revenue recognition should include a 'special' reliability threshold for measuring the increase in net assets at contract generation.
• c. If the standard includes a 'special' reliability threshold and that threshold is not met, how the increase in net assets at contract generation should be recognised and measured and when that increase should be recognised as revenue in the income statement.

In considering these questions Board members had been asked to consider a very specific fact pattern in which cash is given for entering into a non-refundable contract. The objective of the simplified fact pattern was to focus debate only on one side of the journal entry (because the fair value of cash consideration is readily measurable). In real situations the fair value of the consideration received, related service obligations etc may in fact be quite complex.

Prior to commencing their discussion of this matter Board members emphasised the specific fact pattern they had considered, that they were not discussing recognition of profit on taking an ordinary sales order, and that they did not expect the proposals to result in a revenue recognition model that they would expect to be implemented in the short term.

Once a determination had been made on that fact pattern the intention was to develop a conceptual method of dealing with revenue recognition (based on the broad concepts previously agreed: that revenue and expenses should be determined by reference to assets and liabilities) which would then be road tested on a number of fact patterns.

On point a, whether an increase in net assets at contract generation gives rise to revenue, a majority of both Boards had indicated in the small group meetings that they did not understand what other possible alternative there was, and therefore agreed that this would be the case. It was noted that not all members might agree with the method suggested in determining the increase in net assets (such as measuring the performance obligation at its legal lay-off amount). However, the Board agreed that where an increase in net assets had occurred, this would result in the recognition of revenues.

On the second point, a majority of Board members agreed that a 'special' threshold should not be introduced for the measurement of revenue. They noted that where a 'special' threshold came into play this would necessarily result in the recognition of a 'special' liability (to recognise the dangling credit) which would not meet the recognition criteria for liabilities. The Board did note that its discussion paper should clearly set out the reasons why a 'special' threshold is not considered possible, in order to address the concerns of those who believe a 'special' threshold is appropriate. This discussion would include the pros and cons of such a threshold and illustrate why it is not possible or desirable. Therefore the third question relating to accounting if there is a 'special' threshold did not require resolution by the Board.