Revenue Recognition

Date recorded:

The staff presented a draft version of three chapters of the forthcoming discussion paper on revenue recognition discussing definitional and recognition issues relating to the proposed contract-based model. The three chapters are:

  • Chapter 2: Accounting for contracts with customers (Agenda Paper 11B)
  • Chapter 3: Performance obligations (Agenda Paper 11C)
  • Chapter 4: Satisfaction of performance obligations (Agenda Paper 11D)

The staff noted that these issues are independent of measurement and suggested to stop referring to two models. Instead it should be outlined that the Board has developed a single revenue recognition model that has two measurement approaches being 'customer consideration' and 'current exit price'.

Chapter 2: Accounting for contracts with customers

The staff explained that this chapter was redrafted based on the comments made by the Board at the November 2007 meeting with the main changes being:

  • Amending the discussion about the focus on assets and liabilities to clarify that the pursued assets and liabilities approach is not the only possible approach for a revenue recognition model.
  • A clearer explanation of what the Boards mean by a contract.
  • A discussion of when a particular contract should first be recognised.

Some Board members asked for clarification on the recognition of a net position (net asset or liability) at inception of the contract, in particular, whether this would lead to the recognition of an executory contract. The staff responded that under the customer consideration measurement approach this position would be zero while under the current exit price approach a day 1 asset or liability could arise.

Some Board members questioned the term 'enforceable or otherwise recognisable at law' in the contract recognition principle. There seemed to be a consensus to align this term to the language used in IFRSs.

Chapter 3: Performance obligations/ Chapter 4: Satisfaction of performance obligations

The two chapters were discussed together. The staff explained that these chapters were redrafted based on the comments made by the Board at the January 2008 meeting with the main changes being:

  • An amendment to the description of when a service obligation is satisfied to remove the notion of the customer 'receiving an immediate benefit'. Some Board members noted the awkwardness of saying that a customer has received a benefit if, for example, a painter has only painted half the customer's house, because at that point the customer would probably consider himself to be in a worse position than he was before painting began (even though he has received economic resources).
  • Modifications regarding the two views about return rights.

Some Board members asked how the revenue recognition model would interact with IAS 11 Construction Contracts. The staff responded that the model may cause changes to the accounting for construction contracts since IAS 11 refers to contract activity whereas the model exclusively focussed on whether an economic resource has been transferred. The staff also noted that the model may result in a continuous sale if the customer obtains enforceable rights to the economic resources on an ongoing basis.

Way forward

Overall the Board's comments were more of editorial nature rather than challenging the principles in the draft chapters.

The staff intends to present to Board a complete first draft of the discussion paper in May and to discuss the measurement approaches (Chapter 5) at the May Board meeting. The staff noted that the topics 'revenue recognition outside a contract' and 'variable consideration' are still outstanding.

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