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Revenue recognition

Date recorded:

As part of its continual deliberations surrounding the Exposure Draft Revenue from Contracts with Customers (Revenue ED), the Boards deliberated on the following topics:

Summary

The Boards made a number of tentative decisions in the conduct of these deliberations, as summarised below:

Effect of the proposed model on telecoms (and other) companies

  • The proposed model should not be revised to address some of the concerns raised by constituents in the telecommunications industry (and other industries with similar concerns).

 

Transition requirements

  • An entity should apply the revenue standard on a retrospective basis either through:
  1. adopting a full retrospective application, or
  2. adopting a retrospective application subject to the following reliefs to reduce the burden to preparers of transitioning to the new requirements:
    1. not require restatement of contracts that begin and end within the same prior accounting period to be restated
    2. allow the use of hindsight in estimating variable consideration
    3. not require recognition as assets of fulfilment and acquisition costs recognised as an expense in prior periods
    4. not require the onerous test to be performed in comparative periods but only at the effective date unless an onerous contract liability was recognised previously
    5. in the first year of application not require disclosure for prior periods of the maturity analyses of remaining performance obligations.
  • If an entity adopts a retrospective application subject to any of the above reliefs, it would be required to:
  1. to state which reliefs have been employed by the entity
  2. a qualitative assessment of the likely effect of applying those reliefs.

 

Effect of the proposed model on telecoms (and other) companies

The staff noted that constituents in the telecommunications industry (and other industries with similar concerns) have provided feedback on the effects of the proposed model. At the May 11, 2011 education session, the Boards received input directly from select representatives of the telecommunications industry. The Boards heard that the feedback from the telecommunications industry has been mixed but that the vast majority of constituents have significant concerns about the effect of the proposed revenue recognition model. The main concerns include:

  • allocating consideration to a handset on a standalone selling price basis does not provide useful information because it results in an entity recognising revenue for the network service at an amount that is less than the amount of cash received for ongoing network services
  • key metrics currently monitored by users (e.g. average revenue per user) would be less predictive of future earnings. Hence, if the proposed model is implemented, users would request that companies provide the same financial information as under current practice
  • applying the proposed model would be complex and costly because of the high volume of contracts and the various potential configurations of handsets and service plans. An entity would need to significantly modify its systems and processes.

Most constituents in the telecommunications industries suggested that the Boards introduce the contingent revenue cap of existing US GAAP. The staff were not unanimous about whether to revise the proposed model but recommended that if the Boards decided to revise the proposed model, the staff would prefer allowing a broader use of the residual technique rather than introducing the contingent revenue cap of US GAAP. The staff thought that the contingent revenue cap would have a much greater risk of unintended adverse consequences. In addition, the staff noted that the Boards had already tentatively decided to permit the use of a residual technique in some circumstances. Applying the technique to the telecommunications industry (and to similar contracts in other industries) would specify additional circumstances in which an entity would use that technique.

Although the decision was not unanimous, the Boards tentatively agreed that the proposed model should not be revised to address some of the concerns raised by constituents in the telecommunications industry (and other industries with similar concerns). Several Board members noted that the objective of the revenue project was to create a single model that would be applied consistently across various transactions and industries and that it would not be possible to achieve that objective without affecting the accounting for some transactions and industries. In addition, other Board members noted that if they were to revise the proposed model in response to concerns from a particular industry, other industries might expect the Boards to revise the proposed model in response to their concerns.

Transition requirements

The Boards unanimously rejected the proposal that the ED should be applied prospectively. The Boards tentatively decided that an entity should apply the revenue standard on a retrospective basis either through:

  1. adopting a full retrospective application, or
  2. adopting a retrospective application subject to the following reliefs to reduce the burden to preparers of transitioning to the new requirements:
    1. not require restatement of contracts that begin and end within the same prior accounting period to be restated
    2. allow the use of hindsight in estimating variable consideration
    3. not require recognition as assets of fulfilment and acquisition costs recognised as an expense in prior periods
    4. not require the onerous test to be performed in comparative periods but only at the effective date unless an onerous contract liability was recognised previously
    5. in the first year of application not require disclosure for prior periods of the maturity analyses of remaining performance obligations.

The Boards tentatively decided that if an entity adopts a retrospective application subject to any of the above reliefs, it would be required to:

  1. to state which reliefs have been employed by the entity
  2. a qualitative assessment of the likely effect of applying those reliefs.

 

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