Revenue Recognition

Date recorded:


The Board focused on when an entity recognises revenue in the proposed revenue recognition model. In the Discussion Paper the Board proposed that an entity should recognize revenue when it transferred control of a good or a service to the customer.

The Board acknowledged that IASB's and FASB's literature contains definition of control on the level of an entity. Nonetheless, the Board agreed that control of a good or service would require a separate definition.

The staff proposed the definition that 'control of a good or service is an entity's present ability to direct the use and receive the benefit from that good or service'. Broadly the Board agreed with this definition. Nonetheless, several Board members raised important concerns regarding the application of the definition for the work in progress, distinction between a partially completed and a completed product, application of the proposed definition to a service contract and to situation when goods and services are provided continuously.

One Board member was concerned that the proposed definition is too vague and not clear. As a matter of fact, in the discussion it became clear, that several Board members had different understandings of the definition and would apply it differently in some situations. Some Board members were particularly concerned about application of the definition to construction contracts and its effects on the usage of the percentage of completion method.

The Board noted the need for consistency of the proposed model with the derecognition model proposed for the financial assets.

The Board concluded that on the high level the definition was suitable and could be adopted as a working definition. Nonetheless, it directed the staff to revisit the definition after the raised issues are addressed in other parts of the project.

The Board then addressed the issue from whose perspective the control should be assessed. Some of the Board members agreed that the notion of control was not symmetrical, that is, the fact that the vendor lost control over a product did not necessarily mean that the control had been transferred to the customer.

The staff proposal to assess the control from the customer perspective was not supported unanimously. Some Board members preferred that the staff explored the possibility of assessing control also from vendor perspective. In their opinion it could help to alleviate the some concerns about sales returns and application of the percentage of completion method. Other Board members proposed to assess the perspective based on facts and circumstances. The Board disagreed.

Some of the Board members were concerned how this decision would influence how much revenue should be measured. The staff explained that in this initial stage of deliberations this question was not addressed as it would be addressed as part of the measurement part of the next meeting. Nonetheless, the staff pointed out that assessing the transfer from the vendor perspective increased the risk that the revenues would be recognised based on activity.

The Board agreed with the staff view that control should be assess from the perspective of the customer. Nonetheless, it directed the staff to perform further analysis in connection with identification of performance obligation and consequences for complete and continuous delivery of products and services.

The staff than asked the Board to agree whether any indicators of control shall be specified and proposed eight such indicators. The Board agreed that indicators of control would indeed be helpful for constituents and clarity of guidance. Nonetheless, many Board members were concerned about the nature of these indicators, notably their relation to the contractual terms and conditions and their order of precedence. The staff agreed that it needed to further investigate and analyse the relationship with contractual terms and conditions. Moreover, further analysis is to be performed to determine how to define the need for comprehensive assessment of the indicators, their application to part-completed assets as well as identification of the situation when one/combination of indicators may be sufficient to determine control.

Several Board members seemed to support the idea that in case of uncertainty about the control, no revenues should be recognised.

Accounting for an Option for Additional Goods and Services in Contracts with Customers

The Board continued its deliberations in discussion how an entity would determine whether options to acquire additional goods and services are granted in a present contract with customer and how these shall be accounted for. The core of the discussion focused on distinguishing between an option granted implicitly as part of the contract and an offer. The Board agreed with the staff that the option should be accounted for as a performance obligation if that option provided a material right that the customer would not receive without entering into that contract. An entity should account for that performance obligation by allocating to it a portion of the transaction price relative to the standalone selling price of the option.

One Board member, although supporting the proposed principle, was particularly concerned about how operational this principle would be. Another Board member felt that the proposed guidance was not sufficient and was too open-ended. Nonetheless, as another Board member noted, the guidance related just to allocation of the already received consideration for further purchases. The staff agreed to provide more guidance in this respect.

Regarding measurement, the Board had a significant discussion over the staff proposal that the value of the option should be determined using an intrinsic value method if its value was not directly observable. Although, the Board supported simplification of the requirements, majority of the members felt that this principle would give a lot of discretion in the standards and as such would decrease the level of transparency for the users. Using only intrinsic value would be too restrictive as it may not capture many situations arising.

Therefore, the Board tentatively decided that the option shall be valued using observable data or calculated using an option pricing model. Only if determining of the value of the option by a model was impracticable would intrinsic value be used (that is, the time value component should be ignored).

Finally, the Board assessed valuation of renewal options. The staff proposed and alternative model of measurement for renewal options of contracts based on expected optional goods and services (probability-weighted basis) for the additional goods and services that were similar in nature to the other goods and services in the contract and were provided in accordance with terms and conditions of the contract (including pricing). The Board agreed.

One Board member raised the question if this 'expected basis' approach should not be conceptually consistent with the estimation of the standalone selling price of that option. The staff will analyse that issue further.

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