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Revenue Recognition

Date recorded:

The Board continued its deliberations on the customer consideration approach. Specifically, the staff said that the objective of this meeting was to discuss possible options of an onerous test (that is, a test whether a contract has become onerous) and possible exceptions to the Board's tentative general decision not to remeasure. The two issues represent items which the Board were not able to conclude on at the July Board meeting.

The staff presented two possible approaches that would trigger a remeasurement of the performance obligation, one of which is cost-based and the other being margin-based. Under the cost approach an entity would remeasure its performance obligation, if its cost of performance exceeded the carrying amount of the performance obligation. Under the margin approach, remeasurement would take place if measurement of the performance obligation in accordance with IAS 37 (or another similar current price) exceeded the carrying amount of the performance obligation.

The staff discussed the advantages and disadvantages of each model. The cost model has the advantage of being fairly easy to apply and of limiting the occasions of remeasurement to unforeseen events. However, by doing so it would, in essence, defer recognition of adverse changes to future periods. The margin-based approach takes into account changes in the entity's margin and would, hence, be a more reliable reflection of the value of the performance obligation. The disadvantage of this lies is a higher complexity.

Some Board members asked for clarification as to the scope of the project and the items/instances that would not fall under either of the approaches proposed. The staff acknowledged that the most likely candidates would be financial instruments and insurance contracts, for which a different model was envisaged (see below). One Board member said that there might even be a third category of arrangements, namely service concessions. Focussing on the onerous test, he remarked that the cost model would be entity-specific, whilst the margin-based approach would take into account all changes in price. Either approach would not take pre-existing inventory into account, which would lead to a mismatch anyway.

Another Board member said that he got the impression that staff was proposing a complete shift in measurement attribute. Under the cost approach an entity would initially measure its performance obligation at fair value and subsequently at an entity-specific amount. He questioned the idea of there being a concept of 'cost' of discharging of a liability. Cost was defined for assets, not for liabilities.

The chairman asked the staff whether the onerous test would be one-sided only, that is, remeasurements would be recorded only if they resulted in an increase of the performance obligation. The staff confirmed that this was how they envisaged the test to work. One Board member replied that such a procedure would be in total contradiction to other parts of the literature. He cited the Board's proposed approach to remeasuring non-financial liabilities under IAS 37, where the remeasurement would take place both directions.

The Board discussed the issues intensively, and there was no predominant view. After a lengthy debate, the chairman took a straw vote as to which approach Board members preferred. Seven members were in favour of the cost model, the other six favoured a margin-based approach.

The Board finally turned to the question whether or not the forthcoming Discussion Paper should acknowledge that a second model might have to be developed for those items/instances where remeasurements seemed appropriate (in contrast to the Board's general view on remeasurements). Nine Board members advocated such an approach. Rather than having a majority and an alternative view being presented in the Discussion Paper, the Board recommended to list the circumstances that might warrant a deviation from the basic principle and to specifically ask the constituents whether they agree.

The chairman asked the staff whether they had all information they needed in order to draft the section. The staff acknowledged that this was the case and that they did not plan to come back to the Board. The chairman thanked the team and closed the meeting.

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