Contracts in which an entity grants a licence to a customer

The Boards discussed identification and satisfaction of performance obligation and the pattern of revenue recognition in contracts in which an entity grants a licence to a customer.

The Boards discussed the staff proposal to base the recognition pattern on the distinction between an exclusive and non-exclusive licence and tested the proposal by applying it to various industries. After a significant debate, the Boards concluded that while an exclusive versus non-exclusive distinction might work for some contracts, it would not work for others. Finally, a consensus emerged on a principle that would ensure that:

• Full revenue is recognised if the customer controls the licence (the contract would be more akin to a sale rather than a licence) or the reporting entity fully satisfies the performance obligation.
• If the performance is to be provided continuously (more akin to a lease), revenue would be recognised ratably.
• Moreover, if the entity is unable to separate the licence from other performance obligations, revenues should be recognised ratably over time.

The Boards asked the project team to better articulate guidance underpinning these principles.

Subsequent measurement of performance obligation

The Boards reaffirmed their preliminary view that all performance obligations in the scope of the revenue recognition standard should be re-measured after contract inception only when they are onerous.

Some FASB Board members were concerned that the Boards might be going too far in scope of the project as this issue relates also to cost, but a majority of both Boards noted that it is part of the project because the project relates to customer contracts.

Onerous performance obligations

The Boards continued their discussions on measurement of onerous contracts. The Boards discussed the unit of account for the 'onerous test' and agreed that a contract segment level was appropriate. Accordingly, the Boards agreed that a contract segment is onerous if the expected costs to satisfy the remaining performance obligations in that segment exceed the amount of the transaction price allocated to those performance obligations. Moreover, the Boards agreed that subsequently, measurement of the obligation for onerous contracts (that is, the liability) should be updated at each reporting date.

Some IASB members were unhappy with this outcome as they believed that its might not be indicative of the economic reality, such as in case of discounts on multiple performance obligations. The staff will analyse the effects the approved principle on various scenarios.

Finally, the Boards discussed at length the proposed measurement of the onerous test. The IASB was split between the margin approach and a cost-based measurement, and the FASB supported the cost-based measurement. In the end, the Boards preferred the cost-based approach, with the cost defined as direct and incremental cost.

Cost guidance associated with contracts with customers

The Boards agreed that revenue recognition project should not address existing guidance outside IAS 11, IAS 18, and ASC Topic 605.

One IASB member noted that if the cost guidance that is in IAS 11 or IAS 18 is useful, it could be retained in another 'carrier' Standard. Nonetheless, the Boards agreed that costs should be recognised as expenses when incurred unless eligible for capitalisation in accordance with other Standards.

The FASB directed the staff to analyse the need for guidance in ASC Topic 605.