The Board continued yesterday's discussion on measurement of performance obligations.

Subsequent measurement: Allocation approach

According to the preliminary view expressed by the Board, the transaction price used to measure the bundle of performance obligations at contract inception is allocated to individual performance obligations based on the entity's separate selling prices of the promised economic resources (that is, goods and services). The amount allocated to each performance obligation at inception is then recognized as revenue when that particular performance obligation is satisfied. This approach negates the need to remeasure the remaining performance obligations in subsequent periods to determine how much revenue to recognize in those periods.

By majority vote the Board modified this view by including a limited exception to the allocation approach. This exception applies when goods or services identical to those promised in the contract have a quoted price in an active market (corresponds to 'Level 1 Inputs' of the fair value hierarchy in SFAS 157) or the fair value can be determined using 'Level 2 Inputs'. In these situations the promise to transfer the good or service should be measured at the so determined fair value with any remaining balance of the contract transaction price is allocated to all other performance obligations on a relative selling price basis.

Remeasurement of performance obligations

At the May meeting the Board noted that performance obligations might be remeasured for circumstances other than the onerousness of the performance obligation. The staff identified the following additional circumstances that may trigger remeasurement:

• Availability of observable current exit prices
• Uncertain, long-term performance obligations

Regarding the first issue by majority vote the Board tentatively decided that observable current exit prices should not result in remeasuring the performance obligation. In this context several Board members noted that quoted current exit prices may exist in general but that very often it is difficult to determine the exit price goods or services identical to those promised in the contract with the customers.

Regarding the second issue the Board did not come to a conclusion. The Board noted that a thorough understanding of the onerous contract test would be required to answer this question, that is, to assess whether such an onerous contract test would be sufficient to cover the risk of 'surprise losses' related to these performance obligations.

Finally the Board deferred its decision on remeasurement of performance obligations. The staff was asked to develop a detailed description of the onerous contract test including the measurement of onerousness (in particular how to consider risk and profit margins in such a calculation).