Revenue Recognition — Collectibility

Date recorded:

The Board discussed how collectibility of the customer consideration amount affects the carrying amount of an entity's net contract position and, hence, its effect on revenue recognition. Specifically, the Board considered the effects of the customer's credit risk.

The Board debated whether the measurement of an entity's net contract position should reflect the customer's credit risk. Hence, uncertainty of collectibility because of the customer's credit risk would affect the amount of revenue recognised when a performance obligation is satisfied. In addition, after a performance obligation is satisfied, whether any change to the amount allocated to that performance obligation relating to customer credit risk should be recognised as income or expense rather than revenue. Finally, once the entity has an unconditional right to cash, that right should be accounted for in accordance with existing receivables standards.

In doing so, the Board discussed how revenue should be recognised and whether it should be 'gross' or 'net' - that is, whether the seller's assessment of financing and default should be separated from the consideration itself.

Board members noted that any time that the seller did not receive the consideration on the date of sale, the seller was financing that sale. This would help to derive the true selling price. The longer the time between sale and collection, the larger the financing and credit risk elements.

Some Board members were caught up in separating revenue from bad debt expense and financing. Others did not support this view; rather, they saw gross presentation as an invitation to inflate revenue artificially. Still others saw it as a presentation matter. Many points of view around these positions were aired during the debate.

A majority (8 members) favoured a 'gross presentation' of revenue. However, whether this presentation should be required on the face of the statement of comprehensive income was not resolved and the staff will return at a subsequent meeting to discuss this with the Board.

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