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Revenue recognition

Date recorded:

Effective date of IFRS 15

This session was devoted to discussing whether the effective date of IFRS 15 should be deferred.  The IASB staff recommended to the IASB that, given that a) the IASB was proposing some limited amendments to IFRS 15; b) the FASB had tentatively decided to defer the effective date by one year, and c) the publication of IFRS 15 was later than anticipated; the effective date of IFRS 15 should be deferred by one year to 1 January 2018, with early adoption permitted.  The IASB staff further recommended that, if the IASB agreed to defer the effective date of IFRS 15, a separate narrow-scope Exposure Draft should be published, with a comment period of no less than 30 days that would allow for the finalisation of the IASB’s discussions in this respect at the July 2015 IASB meeting. 

The IASB Technical Manager introduced the agenda paper, and asked the IASB members whether they agreed with the staff recommendations, and whether they had any comments or questions with respect to the agenda paper.

Deferral of effective date

The Chairman and Vice-Chairman both indicated their support for a one year deferral.  The Vice-Chairman noted that his support was based on a combination of factors, namely the slightly late publication of the Standard, the decisions that the IASB had made subsequent to publication of the Standard, and the fact that deferral would retain a converged effective date with the FASB.  With respect to convergence, he observed that the FASB had voted 4-3 in favour of a one year deferral, with the other 3 FASB members voting in favour of a two year deferral.  He noted that his understanding was that the FASB planned to ask the question about a two year deferral in its exposure draft – and that accordingly, the Boards could still end up in different positions on this issue.

The IASB Technical Manager clarified that the FASB intended to include a question in its exposure draft asking whether the FASB should consider a two year deferral only for those entities that chose to apply the Standard on a fully retrospective basis.

An IASB member noted that he was also in favour of deferral for reasons including the FASB’s tentative decision on this issue, the amendments to the Standard proposed by the IASB, and the fact that he was hearing from a number of preparers that they had underestimated the work required to implement the Standard, and would welcome additional time to do this well.

Another IASB member noted that he also supported deferral for the sake of convergence.  However, he expressed concerns with respect to entities preparing for early adoption, and suggested that if the IASB deferred the effective date, it was made clear that the effective date for the amendments would be later than the effective date of IFRS 15, and that also, no retrospective amendment should be required with respect to these amendments, so as not to penalise entities who had early adopted IFRS 15 on the basis that the Standard had been finalised.

Another IASB member noted that he generally agreed with the staff recommendation.  He questioned whether some stakeholders could question whether the transition relief provided in paragraph C5 of the Standard was still necessary given preparers had an additional year to implement the Standard.

A further IASB member stressed the importance of the IASB sending a clear message with respect to the specific reasons it had considered in deciding to propose a one year deferral.  She noted that while convergence was one of the reasons, this should not be overplayed, as it could imply that if the FASB changed its mind (and deferred for two years), the IASB might also.  She agreed that the late publication of the Standard was a valid reason for deferral, but noted that the publication was 3 or 4 months later than expected, and that accordingly; a one year deferral of the effective date was generous.  She noted that she supported the proposal to defer the effective date by one year, but did not want the IASB to send the signal that they could be contemplating a two year deferral.

Another IASB member also supported the staff recommendation; he noted that convergence was important, and that it was important that IFRS preparers were not disadvantaged.  He did not believe the IASB should ask a similar question to the FASB with respect to a two year deferral, noting that a one year deferral provided more than sufficient time for preparers to implement the Standard.

Three IASB members noted that they did not support deferral of the effective date.

One IASB member noted that he did not support the staff recommendation for several reasons.  Firstly, the fact that there was already discussion around a one vs two year deferral weakened the convergence argument.  Secondly, he noted that the IASB had spent a long time deliberating what they thought was an appropriate period for entities to adopt the Standard and that the relief provided with respect to the comparative period was generous given the period given, and that the fact that the IASB was a few months late publishing the Standard was not sufficient reason to justify a one year deferral.  Thirdly, he noted that he did not believe the proposed changes to the Standard were significant enough to justify a deferral, as they were merely minor clarifications that would not change the way entities would be thinking about actually adopting the Standard.  Lastly, he expressed concern with respect to the IASB setting a bad precedent in deferring the effective date, and stressed the importance of the IASB communicating very clearly the specific reasons for deferring the effective date if they went ahead with this.

Another IASB member also stressed the importance of the IASB sending a clear message regarding any decision to defer the effective date and the reasons for doing so.  She reminded everyone that the IASB had spent a long time considering what the right effective date should be, and that when they had originally set this date, they were “nervous” that it was a long lead time compared to what had been given in the past.  She noted that the IASB really needed to encourage people to think about what lead time they needed when sending in comments on exposure drafts.  She expressed concern with creating a perception that it was fine for people to come back once they had actually started thinking about the time they would need.  She noted that, while she did have some sympathy for the concerns expressed by proponents of deferral, she believed the risks of deferring were too high, and accordingly, that she did not support deferral of the effective date.

A further IASB member agreed with the comments made by the two previous IASB members, and also noted that he did not support deferral of the effective date.

The Vice-Chairman acknowledged the concerns expressed by the previous IASB members, but noted he still supported the IASB proposing a deferral of the effective date.  He noted that once the IASB had dealt with the amendments in the exposure draft expected in June, it would then need to look at whether any further changes were needed, and what the role of the TRG would be going forward.  He added that the Chief Accountant at the SEC had expressed a desire for the TRG to continue.

The IASB Technical Manager further clarified that the fact that implementation was taking preparers longer than they expected was not one of the arguments that influenced the staff recommendation, it was merely something that the staff had been told.

Another IASB member commented that it was harder for entities to make an assessment based on an exposure draft, and that it was really only when they had the final Standard that they could move forward, which was why many were only now discovering how complex the Standard actually was.  He added that he had recently been advised that a group of 20 large companies in France who had not initially asked for a deferral had now said that a deferral would really help them.  He further noted that a deferral date of one year would provide the IASB with the opportunity to align the effective date of IFRS 15 with the proposed amendments, expressing his preference for one clear effective date.

Eleven of the fourteen IASB members voted in favour of proposing a deferral of the effective date of IFRS 15 by one year.

Comment period of Exposure Draft

The Chairman noted that the IASB had acquired prior permission from the Trustees for a special short period of at least 30 days for the comment period on the exposure draft on this issue.  The IASB Technical Manager added that the comment period would be no less than 30 days, but that the staff would try to make this as long as they could, while still enabling the IASB to finalise their discussions on this issue in the July 2015 IASB meeting.

One IASB member noted that he believed a 30 day period was too short, highlighting the fact that, unlike the FASB, the IASB was dealing with constituents in many jurisdictions with many languages, and that different jurisdictions were at different stages with respect to adoption of IFRS.  He noted that consequences could arise the IASB was not expecting, and cautioned that although the issue looked simple, it might not be.

The IASB Technical Manager clarified that the intention of the IASB staff was to turn this around as quickly as possible in order to be able to provide people with a 45 day comment period.  She noted that the staff recommendation for the IASB to agree to a comment period of no less than 30 days was to avoid a situation whereby the IASB agreed to a 45 day comment period, and a delay resulted in the need for a shorter period and the staff needing to come back to the IASB.  She reiterated that the staff’s intention was that it would be a 45 day comment period.

All IASB members agreed with the staff recommendation that the proposal to defer the effective date of IFRS 15 should be issued in a separate narrow-scope Exposure Draft with a comment period of no less than 30 days.

Collectability considerations

This discussion focused on the possible actions that the IASB could take with respect to the issues regarding collectability that were highlighted during the Joint IASB-FASB Revenue Transition Resource Group (TRG) discussions in January 2015.  This topic was discussed at the March 2015 board meeting, but no decisions were made by the IASB at that meeting.

The IASB staff recommended that the IASB did not make any clarifications or amendments to IFRS 15 with respect to the issues highlighted by the TRG regarding collectability, based on the fact that the IASB staff did not anticipate that any practical change in outcomes would arise if any of the clarifications discussed in the agenda paper were made, and the fact that the post-implementation review would provide an opportunity to assess the effect of IFRS 15, including any diversity in practice and the consequences of any clarifications made by the FASB to Topic 606.

The IASB Technical Manager introduced the agenda paper and asked the IASB members whether they agreed with the staff recommendations, and whether they had any comments or questions with respect to the agenda paper.

In response to a question from an IASB member, it was confirmed that when the IASB issued its exposure draft with the package of proposed amendments to IFRS 15, the discussion in the Basis for Conclusions would not only cover reasons for the proposed changes, but also discussion on areas, such as this, where the FASB was proposing a change and the IASB was not, and why the IASB did not think it was necessary to make such a change.

Another IASB member noted that he did not support the staff recommendation.  He noted that he believed people were struggling to ‘connect the dots’ in this area, and that bringing paragraph 46 of the Basis of Conclusions into the Standard would help with this.  He pointed out that not everyone was as close to the issue, and that for the average person, it was not as easy to work out what the IASB’s intent was based on the current wording in the Standard.

Another IASB member agreed that no further clarification was necessary at this stage.  He noted that any example added might help in the case of a few very specific scenarios, but risked confusing the majority.  He noted that he believed people understood the IASB’s intent, and recommended waiting and observing how practice developed in this area.  He also brought up the issue of people looking to US guidance if the IASB did not make the amendments/clarifications that the FASB was proposing.  He noted that this was current practice with IAS 18 today, but noted that this should not be the case when IFRS 15 was adopted as IFRS 15 provided IFRS constituents with a clear standard, and that if a clarification was made to meet the needs of the FASB’s constituents, this did not necessarily mean that it should be applicable to IFRS constituents.  He noted that IFRS 15 should be read as it was written, and that this point should be made clear.

The Vice-Chairman noted that he also supported the staff recommendation, and highlighted the fact that the issue would be addressed in the exposure draft so people would have an opportunity to comment on the IASB’s decision not to do anything on this issue at this stage.  Following on from earlier comments about whether the IASB’s decision to do nothing would result in people looking to US guidance, he pointed out that his understanding was that the clarifications made by the US would not make any difference to the outcome, and that accordingly this was not a point of concern.  He disagreed with comments made by another IASB member that the ‘dots were not well connected’, noting that he believed the guidance was clear.  The other IASB member responded noting that the dots were connected for those who were experts, but pointed out that the fact that the IASB was having this discussion provided evidence that enough people believed the guidance was not clear.

A further IASB member noted that he was in favour of adding guidance to the Standard on this issue.  He reminded the IASB members that this was one of three issues (collectability, constraint, licences) that the IASB had spent almost 24 months analysing in advance of the Standard being issued, and that there were around 100 comments from IASB and FASB members on the fatal flaw draft with respect to this issue to ensure they understood the application.  He agreed with the staff that when the words in paragraph 9(e), discussion in the Basis for Conclusions, and TRG discussions were put together, it was abundantly clear what the IASB’s intent was; but he pointed out, as another IASB member had, that not everyone was as engrossed in the details and that preparers did not have to observe what was in the Basis for Conclusions.  He believed doing something now could avoid additional interpretative questions in the future.  He further expressed concern that there would be the potential for structuring if a preparer chose to ignore some of the guidance in the Basis for Conclusions (paragraph 46) which, he noted, was quite possible.  He noted that his preference would be for the IASB to make the same amendments as the FASB; however, noted that he would also settle for the IASB coming up with its own additional words, as long as it was made abundantly clear what the IASB’s intent was.  He also noted that this was one of two or three issues where he believed it was worth being on the same page as the FASB on.  He further confirmed, in response to a question from another IASB member, that he was in favour of making both changes proposed by the FASB (in paragraph 15 of the agenda paper) – to clarify the objective of the collectability threshold in paragraph 9(e) and what was meant by when a contract is terminated.   The other IASB member expressed concern that if the IASB started to talk about what they meant by when a contract was terminated, this could potentially have repercussions in other areas of the IASB’s literature.

Twelve of the fourteen IASB members voted in favour of the staff recommendation not to make any clarifications or amendments to IFRS 15 with respect to the issues highlighted by the TRG regarding collectability.

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