Noncash consideration

The FASB staff joined by video conference.

The staff began the discussion by reminding the Board of the previous tentative decisions made at the March and April Board meetings, including that:

• The entity should measure noncash consideration at fair value.
• If an entity cannot reliably estimate the fair value of noncash consideration, it should measure the consideration indirectly by reference to the selling price of the promised goods and services.
• Some exchange transactions should not be transactions that generate revenue but did not decide on which exchange transactions should be excluded from revenue. The Board had asked the staff to seek user input on this matter.

The staff talked to users, particularly in the oil and gas industry. The staff advised that the (almost unanimous) user input was that they preferred that transactions not be recognised as revenue. The users believed that exchanging assets in the normal course of business was more like the acquisition of inventory rather than a sale.

The staff then moved on to their first recommendations:

• that an exchange transaction should not be regarded as a transaction that generates revenue if the purpose of the transaction is to facilitate sales of an asset to another customer in the ordinary course of business.
• that the revenue standard not provide guidance on how to account for contracts whose purpose is to facilitate sales to customers.

One Board member noted that the proposals work well for similar assets, but not for dissimilar assets. Problems are likely to arise if different assets and different timing occurs. For example, what if tow oil companies sold oil to each other and exchanged cash? As long as there is economic substance the Board member though that there may be revenue recognised.

Another Board member noted that the current IAS 18 seemed to work in practice.

The Board agreed with the staff recommendations.

The staff then moved on to their recommendation that either the selling price of the asset surrendered or fair value of the asset received in an exchange transaction needs to be reliably estimable for the transaction to be considered a transaction that generates revenue. One Board member queried whether this is meant to be different to the current paragraph 12 of IAS 18 which refers to goods being dissimilar and measured revenue based on fair value received if able to be measured reliability, or those given up otherwise.

The staff responded by saying they thought it was consistent, but also if you can't measure either then it is revenue.

Another Board member responded to this by stating that they were concerned that the drafting is too broad. They would prefer not to have the reliable criteria, and would prefer to keep the requirements as currently included in IAS 18. Following discussion the Board supported the current requirements of IAS 18 and not the staff recommendation.

Presenting revenues for performance by third parties

The staff introduced the paper that considers whether in some cases an entity should recognise revenue as the gross amount billed to the customer, or the net amount retained by the entity after paying those other parties. The staff presented their first three recommendations:

1. The identification of performance obligations should determine the amounts at which an entity recognises as revenue.
2. The revenue recognition standard should provide indicators to assist entities in identifying performance obligations when it is not clear what goods or services an entity is obliged to transfer.
3. Indicators that an entity may have a performance obligation to provide a good or service to a customer include:
   • Primary responsibility for fulfilment
   • Inventory risk
   • Discretion in establishing prices
   • Customer credit risk.

The Board agreed with each of those recommendations.

The staff then proceeded to their fourth recommendation:

• If an entity transfers a performance obligation to another party, it should not recognise revenue with respect to that obligation.

The staff clarified that by transfer they intended legal transfer. The Board discussed whether any amount that may arise on the transaction (fir example, if an entity was paid by another entity for the transfer of the obligation) would be classified as a gain or revenue. The Board did not conclude on this point. There was general agreement by the Board with the staff recommendation.

The final two recommendations related to disclosure. The staff recommended that an entity:

• Disclose separately revenues in the same line of business from (a) providing goods and services on its own account and (b) arranging for the provision of goods and services.
• Disclose the basis for its assessment and any significant judgement when determining whether it is obliged to provide goods and services to a customer or to arrange the provision of goods and services on behalf of another entity.

The Board agreed with the first disclosure recommendation. A number of Board members thought that the second recommendation was already addressed by IAS 1 requirements. The staff was asked to reconsider this disclosure recommendation to avoid any redundancy in requirements.

Combination, segmentation and modification of contracts

The Board first considered the issue of combination of contracts. The staff recommended that when two or more contracts with the same customer should be combined into a single contract position if the price of those contracts are interdependent. The Board agreed with the staff recommendation. The Board discussed some issues relating to how the indicators for such principle may be expressed, but the Chair reminded the Board that the wording is not yet finalised, and that the staff were heading in the right direction so asked the Board to move on to the next issue.

The Board then moved on to discuss in what circumstances a contract should be segmented. The staff recommended that a single contract with a customer should be segmented into more than one net contract position only if each segment is priced independently. One Board member said that they did not fully understand the principle and would like to see the full picture before concluding. The staff noted that implicitly if the Board agreed with the first recommendation they should also agree with the second recommendation as it is the inverse. Another Board member noted that it is about getting the right allocation, and when contracts should be segmented. Following a brief discussion the staff were asked to reconsider and clarify the issue and bring it back to a future Board meeting.