Measurement approach under a customer-consideration model and its interaction with IAS 37

The purpose of this session was to get initial input from the Board about how the approach for accounting for performance obligations in the revenue recognition project interacts with the approach for accounting for non-financial liabilities in the project to reconsider IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Issue

In its discussions on the IAS 37 project, the Board has considered the accounting for warranty obligations to be a liability recognition and measurement issue. The Exposure Draft had emphasised that issuing a warranty gives rise to a stand-ready obligation and that both initial and subsequent measurement of that obligation will be a current measurement issue. In the project on revenue recognition, the Board has also agreed that the issuance of a warranty gives rise to an obligation as under IAS 37. However, the initial measurement of the obligation is performed by reference to the customer consideration which is received and, in the examples considered to date, the subsequent measurement is by reference to the revenue recognition.

The objective of the Board's discussion was to explore how these approaches interact and, particularly, what a customer-consideration model might mean for subsequent measurement of a performance obligation.

The Board explored two approaches.

• Approach A: Under Approach A all estimates about the performance obligation are locked in at inception. Those estimates are not revised until the measurement of the liability is deemed inadequate compared to a direct measure of the liability under IAS 37. In such cases, the liability is remeasured.
• Approach B: Under Approach B, customer consideration is viewed largely as a current measurement approach, with only specified aspects of the measurement locked in at inception.

The Board discussed the two approaches. A Board member also introduced a third approach in which the customer consideration would be recognised over the service period on a straight-line basis.

No conclusions were reached. The Board asked staff to investigate further the alternative approach that was introduced.

The Board will continue its discussions at a later meeting.