Revenue Recognition

Date recorded:

Project Timetable

The staff began the meeting by discussing the timetable of this project. The Boards plan to issue an exposure draft in the second quarter of 2010, and a final standard in June 2011.

Segmentation of a Contract

The staff then explained that the purpose of the discussion was to decide on further guidance to clarify the recognition and measurement provisions outlined in the discussion paper. The primary concern relates to the extent to which an entity would be required to identify separate performance obligations and allocate consideration to each performance obligation (that is, segmentation of a contract). The model in the discussion paper directs entities to separate (or segment) contracts on the basis of when the promised goods and services are transferred to the customer.

The staff noted that comment letters indicated that the model as articulated in the Discussion Paper is not operational for contracts with many performance obligations (for example, does a performance obligation exist for each brick, nail, and labor hour?). The staff indicated that the discussion paper did not adequately convey the Boards intent and that clarifying language regarding segmentation will be necessary in the exposure draft.

The staff explained that segmentation is about measurement rather than recognition. An entity would identify the performance obligations and then aggregate based on established criteria. The staff proposed that the transaction price should be allocated to the segments of a contract rather than to individual performance obligations in the contract. Entities should separate contracts into segments when there is evidence that a market exists for those segments on a standalone basis. Standalone value as described in US GAAP is not a consideration in determining when segments exist. Rather, the entity should consider materiality, when goods and services are transferred, and the margins of the promised goods and services in determining the segments that exist within an arrangement.

While the Boards generally agreed with the staff's approach, they expressed concern that the segmentation model would add complexity to the model. Some board members requested more clarity on how an entity would determine the market to use in determining segments when multiple markets exist. For instance, two markets exist for a particular segment. One market consists of two performance obligations, and the other consists of six performance obligations. The staff noted that in this circumstance, the entity should use the market with the highest level of performance obligations (that is, the market consisting of two performance obligations).

One FASB member noted that the model should take a 'bottom up' approach. Under that approach, entities would first identify performance obligations and then determine whether or not these performance obligations should be aggregated into segments. The staff agreed that 'segmentation of contracts' could be better described as 'aggregation of performance obligations'. The Boards directed the staff members to further refine and articulate the model with respect to segmentation.

The staff proposed that allocation of the transaction price to the different segments within a contract should be based on the stand-alone selling price of the segment. If the standalone selling price is not directly observable, the entity should estimate the selling price of the segment. The staff further noted that when estimating selling price, entities should maximise the use of observable inputs, but the model should not prescribe any specific method of estimating selling price.

The staff also proposed that the residual method is not an acceptable allocation method. Instead, any discount should be allocated on the basis of the relative stand-alone selling price to the segments in the arrangement. Residual value may be used only as an input and not as a method of allocating a discount to segments within an arrangement.

The Boards agreed with the staff's recommendations. Several members of the Boards noted that the selling price hierarchy in Issue 08-1 [ASU 2009-13] should be included in this model to provide a framework for estimating selling price. Additionally, the Boards noted that robust disclosures would be needed. While the Boards agreed to that the residual method should not be used as an allocation method, several members expressed concern that if the residual method is allowed as an input, entities may not consider other inputs in allocating transaction price.

Recognising Revenue in a Segment of a Contract

The staff members proposed that an entity should exercise judgment and select from various methods of measuring goods and services transferred to a customer in a segment of a contract. The Boards agreed with the staff and instructed them to clarify that, while the general concept of recognizing revenue is based on the transfer of control, as a practical consideration, methods such as units of output, units of input, etc, may be used as a proxy in determining whether control has transferred to the customer. Once a method for recognising revenue for a particular segment is determined, that method should be used consistently for that segment within the contract and within other contracts.

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