The Board tentatively decided in June 2005 to explore a revenue recognition approach that measures performance obligations using an allocation of the customer consideration amount ('customer-based value') rather than fair value. At this meeting, the Board considered some of the issues relating to the identification and measurement of performance obligations using a customer-based value (CBV). Specifically, the Board was asked to consider a series of questions related to the staff's recommendations. These are set out below together with the Board's decisions:

1. Deliverables

The Board has previously tentatively decided that revenue should be defined in terms of changes in assets and liabilities. It has also tentatively decided that those assets and liabilities usually arise from legally enforceable rights and obligations that are conveyed in contracts with customers. Thus, a seller is providing a set of legally enforceable rights and incurring a set of obligations for which it expects to be fully compensated. Revenue should arise when each deliverable (or performance obligation) is delivered (or extinguished).

Board members were asked whether they agree, as a general concept, that revenues should arise when each contract deliverable (or performance obligation) is delivered (or extinguished).

The Board agreed.

2. Disaggregating the components of a revenue contract

Determining how to disaggregate a revenue contract (that is, identifying the separate units of account for the performance obligations) is an issue that is fundamental to revenue recognition and to the Board's proposed assets and liabilities approach. That issue deals with identifying the obligations that should be accounted for as recognised liabilities (separate units of account). Because revenue results from changes in assets and liabilities, it is critical that those changes be identified so that the timing and amount of revenue is faithfully represented. Contracts must be disaggregated so that a reporting entity is able to evaluate when those changes occur.

The CBV measurement attribute appears consistent with the customer's perspective of the arrangement. That is because the performance obligation is measured based on the price that the customer can or would pay for the good or service. Because the CBV measurement attribute is based on the customer's perspective, it is logical to also disaggregate revenue contracts and identify the separate units of account based on that perspective.

Board members were asked whether they agree that performance obligations in revenue contracts should be disaggregated from the customer's perspective.

The Board agreed.

3. Utility to the customer

In order to disaggregate the revenue contract using the customer's perspective, a reporting entity must analyze what the customer perceives it is receiving (buying) in the arrangement. That is, the customer's perspective should evaluate which components of a contract have value to an average customer (that is, a marketplace participant). In other words, the reporting entity must determine which components have utility to a customer. Utility to a customer means that a marketplace participant perceives that the product (that is, the good, service, or right to use) underlying the performance obligation is, in and of itself, fit for some purpose or is serviceable for some end.

Board members were asked whether they think that the notion of utility to a customer is useful for determining whether a component should be considered a separate unit of account.

The Board agreed having considered an alternative characterised as 'perceived delivery'. This alternative was suggested as some Board members believe that the concept of 'utility to the customer' may require onerous assessments by the reporting entity of the customer's decisions.

4. Guidance on componentising revenue

The staff provided three alternatives as to how the guidance for determining whether a component has utility to a customer would be structured and incorporated into the Standard.

The Board agreed with the following as a working principle (highlighting that the criteria is not exhaustive):

The standards-level guidance would explain that revenue contracts should be disaggregated (that is, separate units of account should be identified) from the customer's perspective and that guidance would describe the notion of utility to a customer. The Board would also provide broader criteria than for determining whether a component has utility to a customer and, therefore, should be treated as a separate unit of account. The following criteria would indicate that a component has utility to a customer:

• a. The component is sold separately by any vendor (or as an optional extra) or it could be resold separately by the customer in the customer's reference market.
• b. The component obligates the reporting entity to stand ready to perform over a specified term (that has been termed an unconditional stand-ready obligation in the Revenue Recognition project). The reporting entity may have the obligation to stand ready to provide goods, services, or other consideration in the event that specified events occur.

5. Defining 'customer based value' (CBV)

Earlier this year, the Board agreed to consider an approach to revenue recognition that would measure performance obligations based on customer based value (CBV).

CBV can be defined as the amount at which a product having utility to a customer is sold (or could be reasonably sold) on a standalone basis.

Board members were asked whether they agree with the definition of CBV.

While generally agreeing collectively, the following points were made by Board members:

• The phrase in parenthesis should be deleted.
• The definition should include the fact that utility to the customer should be assessed on the basis of 'rational economic behaviour' (or similar concept).
• The guidance should clarify that CBV is akin to fair value observable in a business to customer market (that is, the customer's reference market, not that of the reporting entity).

6. CBV reliability hierarchy

The staff developed the following hierarchy of relative reliability to be used in determining CBV:

• a. Level 1: CBV shall be estimated using an entity's sales information, specifically, current sales prices based on current sales transactions in an active market. An active market is one in which prices are readily available (transactions occur with sufficient frequency to provide pricing information on an ongoing basis) and representative of CBV (a customer would currently transact at those prices).
• b. Level 2: If Level 1 information is not available, CBV shall be estimated using other entities' (that is, competitors') sales information, specifically, current sales prices based on current sales transactions in an active market.
• c. Level 3: If Levels 1 and 2 information is not available, CBV shall be estimated using an entity's sales information, specifically, current sales prices based on current sales transactions in an inactive market.
• d. Level 4: If Levels 1, 2, and 3 information is not available, CBV shall be estimated using entity inputs that reflect an entity's own internal assumptions and data as a practical expedient. Such inputs include extrapolated or interpolated inputs that cannot be corroborated with observable market data. Said differently, Level 4 estimates represent an estimate of an entity's costs and a normal profit margin.

Board members were asked whether they agree with the notion that a relative reliability hierarchy is applicable to CBV measures.

The Board agreed with the staff proposal as a broad concept.

7. Measurement

One of the perceived strengths of CBV is that information necessary to estimate it should be readily available. However, such information would be lacking for many unconditional stand-ready obligations. An unconditional stand-ready obligation requires the reporting entity to stand ready to perform over a specified term. The reporting entity may have the unconditional obligation to stand ready to provide goods, services, or other consideration if specified events occur. Moreover, the primary characteristic of stand-ready obligations is that the timing and amount of economic benefits required to settle them is uncertain. Fair value provides a comprehensive mechanism for dealing with that type of uncertainty.

Board members were asked whether they think that unconditional stand-ready obligations should be measured at fair value.

The Board agreed on the basis that this would be consistent with its proposals in the amendments to IAS 37 Non-financial Liabilities.

8. Allocation

The Board considered briefly, the allocation of the customer consideration amount and the measurement issue pertaining to performance obligations at fair value if an active market exits. The Board did not conclude on these issues and requested that they be brought back to a subsequent meeting.