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Revenue Recognition

Date recorded:

The Board discussed the project timetable and continued its deliberations on the measurement approaches of the forthcoming discussion paper (DP) on revenue recognition.

Way forward and project timetable

There was a broad consensus that a DP should be drafted and issued as soon as possible. One Board member expressed frustration about the progress made in the project and noted that the unresolved issues are more significant than the resolved issues. Among other things, this Board member noted that the scope is not clear (that is, the impact on accounting for leases, insurance contracts, and financial instruments), that there is no proper definition of onerous contracts, and that the treatment of rights to return and the measurement of contract rights are not addressed. This Board member raised the concern that because of these deficiencies constituents will find it difficult to respond to the DP as currently drafted.

Other Board members acknowledged that several issues are unresolved but noted that the DP is a 'high level document' that seeks input on the general revenue recognition approach.

Finally the Board agreed to the staff proposal to finalise drafting the DP and to publish it in October or November 2008.

The staff explained that it intends starting work on the exposure draft (ED) immediately. The staff was of the view that constituents will not fundamentally disagree to a contract-based recognition principle and the proposed measurement approach.

Consequently, developing the high-level model in the DP into standards-level guidance should begin in parallel to completing and redeliberating the DP. The ED would then be updated to reflect comments on the DP.

The Board agreed to the staff proposal. The Board tentatively decided to have a six-month comment period for the ED.

Eventually, the Board adopted the following timetable:

  • October/November 2008: DP issued; six-month comment period.
  • Up to September 2009: Development of the ED parallel to completing and redeliberating the DP.
  • October 2009: ED issued; six-month comment period.
  • March 2010: Roundtable discussions (if necessary).
  • May 2011: Publication of final standard.

Measurement of performance obligations

At the May 2008 meeting the Board decided that the discussion paper should express a preliminary view in favour of the customer consideration approach. At this meeting the Board discussed the description of the measurement approach in the pre-ballot draft and when performance obligations should be remeasured under the customer consideration approach.

Measurement at contract inception

By majority vote the Board reaffirmed its decision that at contract inception performance obligations should be measured equal to the transaction price of the contract (customer consideration measurement approach).

The Board agreed to outline the two different views expressed by Board members why at inception a contract should be recognised in that way:

  • View A: No revenue should be recognised before a performance obligation is satisfied. Because the transaction price represents the amount the customer is willing to pay for the goods and services to be provided in the contract, that price serves as a meaningful measure of the performance obligations in the contract.

    This view suggests that no matter how observable or costless to obtain a fulfilment price measurement might be the recognition of a contract asset and revenue at contract inception would not be favoured.
  • View B: A fulfilment price is conceptually preferable but the costliness and complexity of estimating such a price is unjustified given that the transaction price in the contract is a relatively straightforward, observable, and reasonable proxy for a fulfilment price.

    This view suggests that the Board might decide at some future point that in situations in which a fulfilment price is observable and relatively inexpensive to obtain, that price would be used to measure the bundle of performance obligations, in particular, if the fulfilment price for those obligations materially departs from the transaction price.

Discussion will be continued on Wednesday 23 July at 13.15 UK time

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