Revenue Recognition

Date recorded:

The Boards had previously agreed that performance obligations in revenue contracts should be disaggregated from the customer's perspective based on whether the deliverable has utility to the customer. In this meeting the Boards considered the following revised criteria for determining whether the deliverable has utility to the customer:

A good, service, or other right has utility to the customer if either:
  • a. It is sold separately or as an optional extra by any vendor in the customer's reference market or it could be resold separately by the customer in that reference market, or
  • b. It gives the customer an unconditional right that obligates the reporting entity to stand ready to provide goods, services, rights, or other consideration if specified events occur.

The Boards agreed that this definition was an improvement from that which had previously been considered. However, the Boards did not believe the requirement in (a) that the customer could resell it in that same reference market was necessary. The Boards agreed that the customer reference market is ordinarily the market that the customer buys in, that is, the market in which the entity and the customer transacted with each other. That being the case, measurement is normally appropriate at the price negotiated between the entity and the customer. It was agreed that practical guidance regarding the identification of customer reference markets will need to be provided.

Staff noted that the existing definition of 'performance obligation', which refers to an obligation to deliver goods or services, is inadequate, because it does not make reference to other rights which can be sold (for example a refund right.) Staff proposed the following revised definition:

A performance obligation is a legally enforceable obligation of a reporting entity to its customer, under which the entity is obligated to provide good, services or other rights.

The Boards agreed that this definition appeared appropriate. However the need for the word 'legally' to be included was debated, as 'legally' means different things in different jurisdictions, and if an obligation is enforceable, it is ordinarily legally enforceable, so that word might be superfluous and potentially confusing. The Boards agreed to delete 'legally' from the working definition at this time, but noted this decision might need to be revisited once the accounting for executory contracts had been considered.

Several Board members had expressed concern about the use of the term 'customer based value' in the revenue recognition project. The Boards agreed to rather use the term 'allocated consideration amount' which better describes what the Board was trying to identify by the term.

At previous meetings the Boards had agreed that the estimated sales price of a performance obligation should be measured using the most reliable available evidence, and agreed a hierarchy of reliability. In that hierarchy 'Level-4' was estimated current sales prices based on entity inputs that reflect the reporting entity's own internal assumptions and data. Staff proposed that this could be clarified by requiring entities to use average costs in their data, and requiring that items be assessed on a portfolio basis rather than on an individual contract basis (where such homogenous portfolios exist.) The Boards disagreed, believing that they should not be prescriptive in determining how to arrive at a Level-4 estimate.

Both Boards had considered the measurement of unconditional stand-ready obligations. The IASB had determined that these should be measured at fair value, for the purposes of consistency with the proposed amendments to IAS 37. The FASB had concluded that these should be measured at the allocated consideration amount for consistency with the remainder of the revenue recognition project. The Boards agreed that the allocated consideration amount approach should be considered first before the fair value alternative was developed. It was acknowledged that in developing fully the customer allocation approach, the IASB might be persuaded that the fair value approach did not need to be pursued. If both approaches are pursued the Boards will decide at a later date whether a preference should be expressed in the public consultation documents.

The Boards considered the effects of extinguishment of unconditional stand ready obligations, and confirmed their earlier decision that this would be presented as a credit to the income statement rather than as a reduction of any expense category. The Boards noted that all warranties (whether statutory, express, or implied) arise from revenue contracts (directly or indirectly), and their extinguishment is a revenue earning activity.

The Boards considered a range of examples the staff had prepared illustrating the implications of their decisions to date, and the differences between the allocated consideration amount and fair value approaches, and provided staff with feedback to assist them in further developing the model.

The Board considered the issues surrounding distinguishing transactions that give rise to revenues from those that give rise to gains. The Boards considered whether there might be a better criterion than 'ordinary activities' (IFRS) or 'major or central operations' (US GAAP). The Boards noted that in this context they did not see the notion of comparability as key. The staff proposed some new definitions that would focus this distinction on the provision by the entity of goods, services, or other rights to the customer. The Boards agreed to proceed with this work.

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