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Revenue from contracts with customers

Date recorded:

At their joint meeting, the IASB and FASB (“the Boards”) discussed several issues that were highlighted during joint IASB-FASB Revenue Transition Resource Group (TRG) discussions.  The issues discussed related to practical expedients upon transition, sales tax presentation: gross versus net, non-cash consideration, collectability, and principal versus agent considerations.  These issues were referred to the Boards to enable them to decide what, if any, action they would like to take at this stage to address the issues. 

Practical expedients upon transition – Contract modifications and completed contracts

This session was devoted to discussing whether the Boards wanted to add new practical expedients to the transition requirements in the new revenue standard.

At their January 2015 meeting, the TRG discussed potential challenges that stakeholders may encounter when applying the transition guidance in the new revenue standard for contracts that had been modified prior to the date of initial application.  TRG members generally agreed that an additional practical expedient (or expedients) to the transition guidance in the new revenue standard may help to reduce some of the challenges. 

The IASB and FASB staff developed three Alternatives:

  • Alternative A (the “frozen balances” expedient) would provide a practical expedient that would permit an entity to account for the unsatisfied performance obligations in a modified contract at the Contract Modification Adjustment Date (“CMAD”) as if there was a termination of the original contract and the creation of a new contract as of that date.
  • Alternative B (the “use of hindsight” expedient) would provide a practical expedient that would permit an entity to account for a modified contract by determining the transaction price at the CMAD and performing a single stand-alone selling price allocation (with the benefit of hindsight) that would include all satisfied and unsatisfied performance obligations in the contract from inception.
  • Alternative C (the “completed contracts” expedient) would provide a practical expedient to the guidance in paragraph C5 of IFRS 15 [606-10-65-1(f)] to permit an entity electing the full retrospective approach to apply the new revenue standard retrospectively only to contracts that are not completed contracts as of the beginning of the earliest period presented.

Alternative C is not mutually exclusive of Alternatives A and B.

The IASB and FASB staff recommended that the Boards permitted entities to apply Alternatives B and C to all contracts with similar characteristics.

The IASB staff recommended that for entities electing the modified retrospective approach, the CMAD should be determined based on the date of the last modification preceding the beginning of the annual period prior to the date of initial application (for example, January 1, 2016) so that entities did not need to wait until the date of initial application (for example, January 1, 2017) before finalising the accounting for previous modifications.

The FASB staff recommended that the date of initial application (for example, January 1, 2017) be used as the CMAD, as this date more closely aligned with the date at which the new revenue standard is intended to be applied under the modified retrospective approach.

The IASB and FASB staff recommended that for entities electing the full retrospective approach, the beginning of the earliest period presented should be used as the CMAD in order to preserve the comparability of financial information across all periods presented.

The IASB staff also recommended that the IASB permitted a first-time adopter of IFRSs to apply Alternative B.

The IASB and FASB staff recommended that, if the boards pursued Alternatives A, B or C (or a combination thereof), they should require transition disclosures required by paragraph C6 of IFRS 15 [606-10-65-1(g)] for use of that expedient.

FASB

A FASB member introduced the joint agenda paper and noted that the TRG had discussed challenges that stakeholders had experienced when applying the transition guidance in the new revenue standard to contracts that were modified prior to the date of initial application.  He noted that the staff had performed outreach in this area and based on the result of the outreach, the staff had identified three potential practical expedients that it believed could reduce the challenges in accounting for contracts modified prior to the date of initial application.  He noted that the staff recommended the FASB permit entities to apply Alternatives B and C as the staff believed those alternatives provided limited, targeted relief that has the potential to reduce the cost and complexity associated with applying the transition guidance in the new revenue standard without significantly affecting the comparability of financial information that otherwise would have been provided absent the use of the expedient.

In response to a question from a FASB member, the FASB staff member confirmed that Alternative A (the ‘frozen balances’ expedient) would provide entities with more relief than Alternative B, as the relief under Alternative B would only relieve an entity from having to go back and perform a stand-alone selling price allocation at the point of each contract modification, whereas Alternative A eliminated the need to go back and look at contract modifications that occurred prior to the CMAD at all.  He noted that the reason the staff recommended Alternative B rather than Alterative A was because in some situations where an entity disregarded contract modifications that had occurred in the past and only focused on what was left in the contract, this could result in a significantly different answer in terms of revenue to be recognised on a prospective basis.  He further noted that in a situation where there was a contract modification that changed the pattern of revenue recognition, an entity could potentially end up with a significantly different answer.  The FASB member expressed his preference for Alternative A as even though he acknowledged that there may be situations where entities arrived at different answers, he believed the costs of this were outweighed by the benefits provided to entities from an operational perspective.

Another FASB member also expressed his preference for Alternative A, acknowledging that entities were struggling to come up with the historic data, and noting that Alternative A provided the most practical approach.

Another FASB member noted that he initially supported Alternative A as it would provide entities with the most relief; however, he noted that the fact that such an expedient could result in significant differences caused him concern.  He asked the FASB staff to expand on a comment made in paragraph 26 of the FASB memo that Alternative A could be subject to more manipulation than Alternative B.

The FASB staff member responded and noted that under Alternative A, depending on what date the practical expedient would be applied, an entity could modify a contract immediately prior to that date so that the accounting under the new revenue standard would only focus on what was left in the contract, whereas Alternative B required an entity to acknowledge that a modification had occurred; adding that there could be the potential for structuring opportunities under Alternative A.

The FASB member noted that if the FASB was really concerned about this, they could specify that the practical expedient only applied to contract modifications prior to today’s date.  He also observed that significant contract modifications required the agreement of both the entity and the customer and accordingly, were not necessarily that easy to achieve.

A further FASB member raised a question with respect to Alternative C (the “completed contracts” expedient).  He questioned whether entities would still be able to say they were doing full retrospective application if they were ignoring every contract completed prior to the initial period, and added that entities already had the ability to do this under the modified retrospective approach.

A FASB staff member responded noting that entities would still disclose that they were applying full retrospective application but that they were applying the completed contracts expedient.  He agreed that entities already had the ability to do this under the modified retrospective approach, but he noted that one of the benefits of this expedient would be that entities were not discouraged from doing full retrospective application based on this point.

A FASB staff member clarified that if an entity elected the full retrospective approach they would have a choice whether or not they applied the practical expedient.  The FASB members observed that applying the practical expedient to the full retrospective approach would not be the same as applying the modified retrospective approach because this would only result in the same treatment for completed contracts, not contracts in progress.  A FASB member observed that the end result of including the completed contracts expedient (Alternative C) in the transition guidance of the new revenue standard would be that there would be three approaches – full retrospective approach, modified retrospective approach, and an approach in between the two.

Another FASB member noted that users of financial statements would want to see application of the full retrospective approach to enable them to see trends.  He noted that if the numbers were perturbed by entities taking the completed contracts election, allowing this practical expedient would not be helping users.  He noted that if entities were worried about costs, they had the option to apply the modified retrospective approach, adding that he did not believe that introducing another method that potentially upset the trend was necessary.

IASB

An IASB member noted that he shared some of the concerns discussed by the FASB with respect to introducing Alternative C and hence, another ‘category’ of full retrospective application.  He noted that he believed that an entity should either elect the full retrospective approach and provided trend information as it economically occurred or chose the path of applying the modified retrospective approach, adding that, in assessing the trade-off between simplicity and relevance of information, he did not support introducing Alternative C.

An IASB member noted that his understanding was that preparers had provided feedback that they needed relief and that if the IASB wanted to provide such relief, only Alternative A provided relief from going back to old contract modifications.  He questioned whether Alternative B would really provide entities with sufficient relief, and whether it was really worth introducing this expedient.  He asked the IASB staff what the feedback was from the outreach they had performed.

The IASB staff member responded, noting that the software industry had a preference for Alternative A, while the telecommunications industry preferred Alternative B, which reflected the different characteristics of their businesses.  He noted that entities in the telecommunications industry had millions of contracts with frequent modifications which was why they preferred to perform the calculations once, but that they preferred to apply the new standard across the fully modified contract to give them a more accurate picture of the restated numbers and prospective numbers, as opposed to the frozen balances expedient (Alternative A) which would result in a distortion in the trend.  He further noted that the main factor in the staff’s thinking was that the frozen balances expedient had the potential to distort both the restated and prospective numbers to a greater extent.

With respect to the concerns raised earlier in the discussion regarding Alternative A distorting trend information, another IASB member pointed out that this issue also existed with trend information for entities electing the modified retrospective approach.

Another IASB member asked the staff whether, based on outreach performed, they had an idea of the size of the population Alternative C (completed contracts expedient) would apply to.  The IASB Technical Manager responded noting that the IASB staff were aware that the software industry had raised the issue, but that no other industry had specifically raised it. 

He asked the staff to explain how Alternative B would be applied in practice.  The IASB Technical Director responded noting that entities applying this expedient would still be required to assemble the information with respect to what had happened with the contract before the CMAD, and determine what the performance obligations were under the new revenue standard, but they would not have to recalculate each modification as it happened sequentially.  Rather, an entity would determine the transaction price for the contract at the CMAD, taking into account the contract modifications that had occurred since inception, and perform a single allocation of the transaction price.  He added that if an entity did not elect to apply this expedient, it would need to start at the beginning of the contract and reperform this calculation every time the contract was modified.  He emphasised the fact that Alternative B did not relieve entities from the need to understand what had happened in the contract, or from accounting for the whole contract under the revenue standard overall, rather, it just reduced the number of iterations they were required to do.

Another IASB member confirmed with the IASB staff that the CMAD would be an absolute date, noting that the wording in paragraph 42 of the agenda paper [“the IASB staff recommends that the CMAD be determined based on the date of the last modification preceding the beginning of the annual period prior to the date of initial application…”] made it sound like a moving target based on the date when the last contract modification occurred.

Following up on a comment made by the IASB Technical Director earlier in the discussion, the IASB Vice Chairman questioned why entities in the telecommunications industry preferred Alternative B.  The IASB Technical Director responded that the telecommunications entities’ preference for Alternative B over Alternative A was that they were concerned about the impact an Alternative A approach would have on information after the crossover date. 

Another IASB member questioned why entities in the telecommunications industry preferred Alternative B, when they would still incur the costs of obtaining the information on past contract modifications.  The IASB Technical Director responded, noting that while these entities would still be required to collect all the information on past modifications, their main concern was the number of calculations they would need to do in a short period, which Alternative B relieved them from doing.

Tentative decisions

Practical expedients

The FASB agreed with the staff recommendation to permit entities to apply Alternative B (the “use of hindsight” expedient) to all contracts with similar characteristics.  Five FASB members agreed.

The FASB did not agree with the staff recommendation to permit entities to apply Alternative C (completed contracts expedient). 

Date practical expedients should be applied

The FASB agreed that under the modified retrospective approach, the date of initial application would be used as the CMAD.

The FASB agreed that under the full retrospective approach, the beginning of the earliest period presented would be used as the CMAD.

All FASB members agreed.

Disclosures

The FASB agreed that entities applying Alternative B should be required to provide the transition disclosures required by paragraph 606-10-65-1(g) (disclosure of both the expedients that have been used and, to the extent reasonably possible, a qualitative assessment of the estimated effect of applying each of those expedients).  All FASB members agreed.

Technical Correction – FASB only

The FASB agreed to make a technical correction to paragraph 606-10-65-1(e) so that an entity would not be required to disclose what its financial information would have been under former GAAP in the period of adoption of the new revenue standard.  All FASB members agreed.

IASB

Practical expedients

The IASB agreed with the staff recommendation to permit entities to apply Alternative B (the “use of hindsight” expedient) and Alternative C (“completed contracts” expedient) to all contracts with similar characteristics.  Eleven IASB members agreed with permitting Alternative B.  Nine IASB members agreed with permitting Alternative C.

Date practical expedients should be applied

The IASB agreed that under both the modified retrospective and full retrospective approaches, the beginning of the earliest period presented would be used as the CMAD.  Thirteen IASB members agreed.

Disclosures

The IASB agreed that entities applying either of Alternative B or Alternative C should be required to provide the transition disclosures required by paragraph C6 of IFRS 15 (disclosure of both the expedients that have been used and, to the extent reasonably possible, a qualitative assessment of the estimated effect of applying each of those expedients).  Thirteen IASB members agreed.

Sales tax presentation: Gross versus Net

In this session the Boards discussed an implementation issue relating to determining the transaction price, specifically with respect to the treatment of amounts collected from customers and remitted to governmental authorities, such as sales taxes. In particular, U.S. stakeholders had asked the Boards to consider adding a practical expedient to the new revenue standard to lessen the complexity and practical difficulties in assessing whether a sales tax was collected on behalf of a third party.

The IASB and FASB staff identified three alternatives for sales tax presentation, and noted that they believed that if the Boards selected one of the three alternatives, the scope of the alternative should be the same as the scope of the sales tax policy election in current US GAAP.

  • Alternative A1 —  Gross reporting for all in-scope sales taxes and disclosure of the policy.
  • Alternative A2 —  Net reporting for all in-scope sales taxes and disclosure of the policy.
  • Alternative A3 — Policy election as either gross or net presentation for in-scope sales taxes and disclosure of (i) the policy election and (ii) significant amounts reported on a gross basis (current US GAAP).

The FASB staff had a split recommendation between Alternative 2 and Alternative 3.

The IASB staff recommended that the IASB does not amend the new revenue standard to add a practical expedient with respect to the presentation of sales taxes.

FASB

A FASB staff member introduced the session and noted that the determination of whether sales taxes should be included in, or excluded from, the transaction price was discussed at the July 2014 TRG meeting, particularly as it related to applying the principal versus agent implementation guidance to some common amounts billed to customers.  She noted that there was general agreement amongst the TRG members that entities should perform a principal versus agent analysis to determine whether amounts should be included in, or excluded from, revenue.  Subsequent to the TRG discussion, some TRG members and other U.S. stakeholders had asked the FASB to consider adding a practical expedient to lessen the complexity and practical difficulties of determining whether the sales taxes should or should not be included in revenue, because this determination would be particularly difficult for entities that operated in a large number of tax jurisdictions with various tax laws.  The FASB members were asked which alternative they preferred and what scope of sales taxes they would like the practical expedient to apply to.

One FASB member observed that the memo listed some factors that might be considered when performing a principal versus agent analysis, which, if present, might indicate that the entity was the principal, and therefore providing justification for amounts to be included as part of revenue.  He noted that one of these factors was the entity having credit risk, and highlighted the fact that in some jurisdictions where an entity was only a collection agent, if there was determined to be a deficiency in the amount remitted, it would be assessed against the entity, not the customer.  Discussion amongst the FASB members indicated that this varies across states, and the FASB member who raised the issue pointed out that accordingly, he did not believe this indicator would result in the same answer.

The FASB Chairman questioned the IASB staff whether this analysis was required under existing IFRS.  The IASB Technical Director noted that under IAS 18, the principle is that amounts collected on behalf of third parties are excluded from revenue, and so this is in an assessment that companies have to make on a tax and jurisdictional basis.  He added that he was not aware of entities having any issues with their ability to make this assessment under the existing requirements.

The FASB Chairman observed that research performed by the FASB showed that U.S. companies operating in the U.S. believed they would struggle with the costs of implementing this because of all the differences across states.

Several FASB members expressed their preference for pursuing Alternative A2 as in most cases net reporting was appropriate.

A FASB member expressed concern with introducing an accounting policy election (Alternative A3), as an entity collecting on behalf of a third party could gross up revenue through a policy election where there were no restrictions on choice.  Another FASB member shared this concern, and added that his preference was also for Alternative 2, as presentation would always be net, unless an entity went through the process to justify gross presentation.  A further FASB member also cautioned that users may only look at the numbers on the face of the statement, not in the notes, and therefore, he believed allowing the accounting policy choice with additional disclosure in the notes did not necessarily level the playing field. 

The FASB members observed that current predominant practice in this area was mixed.

Another FASB member noted that he did not believe this was an area where practice was broken today, so noted his support for Alternative 3, which would be consistent with current US GAAP.

IASB

One IASB member noted that if the IASB supported the IASB staff recommendation to do nothing, and the FASB did decide to propose an amendment, that the IASB should note this in the June Exposure Draft package to highlight the differences to stakeholders.

Tentative decisions

The FASB tentatively agreed to pursue Alternative A2 for a practical expedient to the new revenue standard, which would allow net reporting for all in-scope sales taxes (and disclosure of the policy).

Five of the seven FASB members voted in favour.  It was also tentatively agreed that the scope of the types of sales taxes to be included in the practical expedient should be the same as the scope of the sales tax policy election in current US GAAP.

 The IASB did not vote on this issue.

Non-cash consideration – Issues emerging from TRG discussions

This session was devoted to discussion of two specific issues highlighted during TRG discussions relating to the accounting for non-cash consideration when applying the new revenue standard:

  1. The date at which the fair value of non-cash consideration should be measured for inclusion in revenue.  The following three views were considered by the TRG:
    • View A — non-cash consideration is measured at contract inception.
    • View B — non-cash consideration is measured when the non-cash consideration is received or receivable. Consideration is receivable when an entity’s right to consideration is unconditional (such that only the passage of time is required before payment of that consideration is due)
    • View C— non-cash consideration is measured at the earlier of:
      1. the date that the non-cash consideration is received or receivable; and
      2. the date that the related performance obligation is satisfied (or as the performance obligation is satisfied, if satisfied over time).
  2. How the constraint for variable consideration is applied in respect of non-cash consideration that varies in value due to boththe form of the non-cash consideration and for reasons other than the form of the consideration. The following two views were considered by the TRG:
    • View A — the constraint applies to variability resulting from both the form of the consideration and for reasons other than the form of consideration; and
    • View B — the constraint applies only to variability resulting from other than the form of consideration

The FASB staff recommended that the FASB pursue the following views:

  • Non-cash consideration is measured at fair value at the date of contract inception (View A)
  • The constraint on variable consideration applies only to variability resulting from other than the form of consideration (View B)

The IASB staff recommended that amendments to IFRS 15 are not required to address these issues at this time.

FASB

A FASB staff member introduced the FASB memo, highlighted the key points, and asked the FASB members whether they agreed with the staff recommendations in the memo.

The FASB Chairman asked the staff whether they believed the three views articulated in the memo were all acceptable alternatives under the Standard, and, therefore, if the FASB did not do anything, would all three views potentially be acceptable.  The FASB staff member responded and noted that she believed that the Standard (particularly Illustrative Example 31 [606-10-55-123]) could be interpreted to support any of the three views.  The IASB Technical Director also noted that he believed the Standard was unclear with respect to measurement date, and that Illustrative Example 31 could potentially be read in many different ways.

The FASB Chairman therefore noted that the question the FASB was addressing was whether it wanted to narrow down the potential diversity around when non-cash consideration was measured.

A FASB member highlighted the fact that this was an issue that had arisen previously in US GAAP, which the FASB had addressed due to the volume of demand for an answer; and therefore, noted his preference to address the issue under the new revenue standard also.

IASB

The IASB Practice Fellow introduced the IASB agenda paper.  She noted that the IASB staff recommended that the IASB does not amend the body of the Standard for these issues at this point in time.  She noted that if the IASB agreed with this recommendation, the staff had other alternatives for the IASB to consider – namely, monitoring the FASB’s work on the issues, performing some outreach in the near term to help the IASB better understand the likely effect of diversity for IFRS stakeholders, or simply deferring consideration of the issues until a later date (for example, as part of the post-implementation review).  She further noted that the IASB could also partially address the first issue at this stage by clarifying the wording in Illustrative Example 31 (“IE31”) to eliminate View A, because as currently drafted, IE31 could be read as implying that any of View A, View B or View C could apply.

The IASB Vice-Chairman noted that he was in favour of not amending IFRS 15 at this stage.  He noted that the IASB should monitor the FASB’s work in this area, but that the IASB need not carry out any research.

An IASB member agreed with the IASB not doing anything at this stage.  He noted that the IASB should monitor the activities of the FASB and defer consideration of the issues to the post-implementation review as these issues may only apply to a small population and this could be monitored subsequent to implementation.  He further highlighted the need to look at the symmetry between revenue and expenses, noting that the majority of these transactions were share-based payment related transactions, for which guidance existed on how to expense such transactions, and that therefore, this provided an answer on how to recognise the revenue.  He further noted that he believed IE31 was consistent with the share-based payment idea.

Three further IASB members expressed their preference for the IASB to do nothing at this stage.  One IASB member noted that if the IASB was to do anything at this stage, it should be limited to making it clear in IE31 that View A (non-cash consideration measured at contract inception) was not the IASB’s intention; and this would be dependent upon what the FASB decided to do.  She expressed concern that if the FASB voted in favour of pursuing View A, and the IASB did not do anything, people might look to the FASB’s interpretation.  Another IASB member noted that he struggled to see how View A was consistent with the Standard, and accordingly, he believed that an amendment to IE31 to rule out View A was not necessary.  A further IASB member cautioned about making tweaks to an example to clarify text in the Standard, as the example could become interpretative rather than just illustrating application of the Standard, which was the purpose of illustrative examples.

FASB

All seven FASB members voted to add the issue, and to amend the new revenue standard in line with the views recommended by the FASB staff.  The FASB also noted that the example would need to be updated to clarify that the non-cash consideration is measured at contract inception.

IASB

The IASB Chairman asked the IASB members whether, based on the FASB’s proposed actions, they still agreed that no amendments were needed to IFRS 15.

Thirteen of the fourteen IASB members indicated support for the IASB doing nothing.

The IASB clarified with the FASB that what the FASB was proposing would be an amendment to the actual guidance so it would be clear that View A (measurement at contract inception) would be GAAP in the US.

Another IASB member noted that he did not believe the IASB should do nothing as if the IASB did nothing, people would just read View A into IFRS 15.  He also noted that he could see a basis for View A, adding that based on a reading of paragraphs 76 and 87, it was a logical interpretation to assume that at inception date an entity measured the transaction price that included both cash and non-cash consideration.  He agreed that IE31 was ambiguous, but that what was written in paragraphs 76 and 87 was not ambiguous – it was View A.  He noted that he was hesitant for the IASB not to do anything at this stage as people would just default to US GAAP, which, he acknowledged, may be the right interpretation.

Another IASB member noted that she believed that if the FASB went ahead with their proposed amendment, the consequence would be that under IFRS, View A would be one of the approaches people would take.  She noted that she did not believe the FASB’s actions would require entities reporting under IFRS to adopt View A, and that if the IASB decided not to do anything, it would be making that decision with the knowledge that entities applying IFRS could potentially adopt View A, B or C.  She emphasised that she did not believe that by doing nothing the IASB would be implicitly forcing entities to adopt View A by virtue of the FASB’s amendment.  Another IASB member noted that she agreed with the previous IASB member, but noted that this could be problematic if the IASB believed that View A should be eliminated, as the consequence of doing nothing would be that View A would be left open.

Tentative decisions

The FASB members tentatively agreed to amend the revenue standard to clarify that non-cash consideration is measured at fair value at the date of contract inception; and that in transactions in which the fair value of non-cash consideration might vary due to both the form of the consideration and for reasons other than the form of the consideration, the constraint on variable consideration applies only to variability resulting from reasons other than the form of consideration.

Ten of the fourteen IASB members voted in favour of the IASB doing nothing now and leaving consideration of these issues until the post-implementation review.

Collectability considerations – issues emerging from TRG discussions

In this session, the Boards discussed several issues related to collectability that were highlighted during the TRG discussions in January 2015.  The issues related to the following:

  1. the application of the collectability criterion in Step 1 of the new revenue standard; and
  2. the requirements for when a contract does not meet that collectability criterion.

The FASB memo discussed some possible clarifications in respect of these issues.

  • Alternative A — amend the standard so that an entity is required to recognise revenue for the lesser of a) the non-refundable consideration received from the customer and b) the amount that would have been allocated to a satisfied performance obligation.  This requirement would apply when a contract fails the collectability criterion in paragraph 9(e) of IFRS 15 [606-10-25-7(a)] but meets all of the other criteria for a contract in paragraph 9(a)-(d).
  • Alternative B — make the guidance clear that paragraph 15(a) [606-10-25-7(b)] should be evaluated with respect to the legal contract, and to clarify that a contract termination in paragraph 15(b) [606-10-25-7(b)] means that the entity has the ability to stop transferring additional goods and services to the customer and they actually have stopped transferring goods and services
  • Alternative C — improve the guidance on assessing collectability in Step 1 (paragraph 9(e) [606-10-25-1(e)]) by clarifying that an entity should not simply assess the probability of collecting all the consideration promised in the contract.  Rather, an entity should consider the probability of collecting the consideration to which it will be entitled in exchange for goods or services that will be transferred to the customer.

The FASB staff recommended that the FASB pursue Alternatives B and C.

The IASB staff did not ask the IASB to make any decisions with respect to these issues.  The IASB will be asked to make decisions at a future meeting after considering the decisions made by the FASB and, if applicable, any discussion with IFRS stakeholders on the effect of those decisions in the context of IFRS 15.

FASB

The FASB staff member introduced the FASB memo noting that several issues raised by stakeholders with respect to the application of the collectability threshold in Step 1 had been discussed by the TRG at their January 2015 meeting.  He reminded the FASB members that in assessing collectability, an entity needed to look at paragraph 9(e) [606-10-25-1(e)], and if this criterion was not satisfied, the entity would go to paragraph 15 [606-10-25-7] to determine when any consideration received should be recognised as revenue.  He noted that there was diversity around the interpretation of the second element in paragraph 15, specifically, the question of when a contract has been terminated.  He noted that overall, stakeholders were interpreting the guidance to mean an entity would recognise a liability for any non-refundable consideration received for a significant period of time during the contract term, even though the entity may have performed and the consideration they had received was non-refundable.  He noted that the staff had identified three alternatives to deal with the issues raised, noting that the amendment proposed in Alternative A would result in the greatest change, and if chosen by the FASB, the FASB staff would recommend that additional outreach was performed to ensure there were no unintended consequences of making this amendment.  He noted that Alternatives B and C would make drafting improvements to clarify and improve consistency of application of the new revenue standard, and therefore, the FASB staff did not view these as resulting in a fundamental change to the standard, but helping to improve the interpretation of the standard.  He further noted that Alternatives B and C addressed different areas of the guidance that could be improved, and therefore, were not mutually exclusive.  He finally noted that the FASB staff recommended that the FASB pursue Alternatives B and C.

A FASB member agreed that the FASB needed to clarify this issue; however, he expressed concern with the way the FASB staff had framed Alternative C, and how it interrelated with the rest of the standard.  He noted that he could potentially see a conflict being created by talking about “consideration to which an entity will be entitled upon transfer”, noting that the transaction price was the consideration to which an entity expected to be entitled, and this was not established once the entity believed it had a viable contract, but for all the performance obligations in a contract.

Another FASB member agreed that the FASB needed to take some action to address these issues.  He observed that the FASB staff had noted that Alternative A would be the most responsive to stakeholders’ concerns, and that it might be what many would like as it was very close to existing US GAAP.  However, he noted that when the Boards were deliberating in this area they did not vote for an Alternative A type view, and he believed that now all the FASB should be trying to do is to provide clarification on their previous decision, not change that decision.  Accordingly, he noted that he did not support Alternative A.  He noted his support for Alternatives B and C, as they were good articulations that clarified the intent of what the FASB had previously decided, and would help people to apply the new revenue standard in a consistent manner. 

A further FASB member noted that he believed Alternatives B and C were useful articulations, but, similar to the first FASB member who spoke, questioned how the FASB was going to reconcile the language to the rest of the model.

A FASB staff member responded and acknowledged the concern raised, but noted that from the FASB staff’s perspective, the staff were only clarifying guidance on how an entity should think about whether they have a valid contract or not.  He noted that this will need to be made very clear, with a good discussion in the Basis for Conclusions.

A FASB member suggested that the FASB should not use the language “to which you will be entitled”, and instead draft something along the lines of “in evaluating whether you can collect something, and in the conditions where you can stop performing, all you have to do is evaluate whether you can collect before you stop performing”.

Another FASB member noted that he did not believe the FASB needed to do anything in this area.  He noted that he believed the majority of people who had raised the issues did not like the answer in the Standard, and that the FASB should be dealing with things that were inoperable or not implementable, or could lead to major diversity.  He noted that he did not believe that was the case for these issues.  He noted that the collectability threshold in Step 1 was really just for an entity to determine whether a contract was genuine, not to determine whether they were going to collect every dollar.  He cautioned about the risk that redrafting to clarify these issues could lead to issues arising in other areas.  He noted that his first choice would be not to add the issue, but that he would support Alternative B and C, subject to drafting, if the other FASB members voted to add the issue.

IASB

The IASB Technical Director introduced the IASB agenda paper.  He noted that it was not the IASB staff’s intention to ask the IASB to make any decisions, and that the purpose of the agenda paper was to highlight to the IASB the concerns expressed at the TRG meeting with respect to the issues.  He noted that the IASB staff’s preliminary assessment of the issues was that, with respect to the collectability criterion, at most, some clarification of paragraph 9(e) might be necessary, and that the IASB staff’s thinking about what needed to be clarified was consistent with Alternative C as developed by the FASB.  He noted that the clarification could potentially be done through an Illustrative Example that would link the criterion in the Standard with the wording in the Basis for Conclusions.  With respect to the question of the accounting requirements in paragraph 15 (to be applied when the criteria in paragraph 9 are not met), he noted that the IASB staff believed it might be helpful to do some more work in this area before concluding, but that addressing the issue could result in a big change to the standard, and he hoped that with greater clarity about how the collectability criterion was to be applied there would be less concern about the requirements in paragraph 15 because fewer contracts would end up having to be accounted for under said requirements. 

An IASB member noted that he struggled to understand why this was an issue.  He noted that the intention had been that paragraph 15 would not be triggered very often.  He noted that any well managed company would have customer acceptance criteria in place and would make business judgements about what customers to accept.  For customers with lower credit quality there would be measures in place to protect the seller such as guarantees or lower credit limits.  Accordingly, he did not believe that this should be such a big issue.  He noted that some clarification might be needed, but definitely not an Alternative A approach.

Another IASB member reiterated the point that the collectability criterion was included in the standard to assist entities in determining whether a genuine contract existed, and had nothing to do with the actual credit risk of the counterparties.

Another IASB member noted that ideally her preference would be to do nothing in the Standard, but noted that she believed the FASB and IASB were aiming for the same clarification, and that if the FASB were going ahead with the clarification, she would have a preference for including something in the IASB’s package in June with respect to this issue.

Tentative decisions

The FASB tentatively agreed with the FASB staff’s recommendation to amend the new revenue standard to clarify that:

a)      A contract would be considered terminated if the entity has the ability to stop transferring additional goods or services to the customer (Alternative B); and

b)      An entity should not simply assess the probability of collecting all the consideration promised in the contract.  Rather, an entity would consider the probability of collecting the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer (Alternative C).

The IASB did not vote on the issue.

Principal versus agent considerations – issues emerging from TRG discussions

The purpose of the IASB agenda paper was to obtain input and direction from the IASB on the issue of assessing whether an entity is a principal or an agent in the context of the recognition of revenue.  Two issues were addressed in the agenda paper.

  • Issue 1 — Implementation questions about the principal versus agent guidance in IFRS 15
    The IASB staff recommended doing more work to determine whether there are minor amendments that could be made to IFRS 15 at this time that might be helpful to clarify the existing thought process, and/or whether adding one or two illustrative examples might be helpful in addressing some of the issues raised.
  • Issue 2 — Estimating gross revenue if the entity is the principal but is unaware of amounts being charged directly by an intermediary to the transaction
    The IASB staff recommended that no further work is performed on this issue at this time.

The purpose of the accompanying FASB memo was for the FASB staff to seek input and direction from the FASB on whether and how to address the principal versus agent issues identified.  The FASB memo was a research paper, and the FASB was not asked to make any decisions to amend (or not amend) the new revenue standard.

FASB

The FASB staff member introduced the FASB memo.  He highlighted a number of practice issues in both current US GAAP and potential issues with the new revenue standard and provided an overview of the activities the FASB staff had been performing on these issues, and where they were at on the issues.  He noted that the FASB staff would not be asking the FASB to make any technical decisions with respect to these issues in the meeting.

A FASB member questioned the FASB staff whether, at this point, they were leaning towards saying it was not really possible to clarify Topic 606 to articulate better what was intended or whether they believed that the FASB basically needed to modify Topic 606 to provide some clarity. He further questioned whether, when looking at Topic 605 in conjunction with Topic 606, a modification of what the FASB had previously decided would be necessary to accomplish both objectives in the same manner.

The FASB staff member responded noting that what might be a clarification in Topic 606 could not be separated from the broader issue that related to both Topics 605 and 606.  He noted that the staff were not yet sure whether they would be able to substantively resolve the level of judgement and complexity that exists under current US GAAP, noting that was why the staff had left open the possibility that there might not be a better approach than the indicator type approach.  However, he noted that the specific issue with respect to Topic 606 could be a clarification, along the line of clarifying how the indicators related to control. 

Another FASB member noted that, with respect to the first issue, he was sceptical about whether the FASB could make significant improvements in this area on the practice issues that already existed today.  He questioned whether this could be a good issue for the Emerging Issues Task Force (EITF) to look at given the issue was about making fundamental improvements to both Topic 605 and 606, noting that he viewed the issues not so much to be about Topic 606 as existing practice.  With respect to the second issue on estimating gross revenue in the absence of being able to understand the full amount of consideration, he noted that he believed that the answer was that an entity should not recognise revenue it did not know about, adding that an entity should not start guessing, and he further questioned how this would be auditable.

A further FASB member noted that he did not believe the first issue was an issue that had arisen with the new standard, noting that it was an issue that had arisen in the US with existing guidance. He expressed concern that he believed the FASB staff were trying to get to a solution that worked for both Topic 606 in the future and Topic 605 now, and that that answer steered the FASB more to a risks and rewards sort of view – noting that the variability of profit or loss was more a risks and rewards view not a control view. He expressed concern that trying to get to an answer that worked for both existing and future guidance might result in going down a path that created greater inconsistencies in Topic 606.  He noted his belief that taking a control view would be a far better and more consistent way of dealing with things, and that he would like the FASB staff to ensure they explored this concept very seriously.  He noted that his preference was for the FASB staff to focus on developing guidance that fixed Topic 606, and then once they were done with that, consider what should be done with respect to Topic 605, suggesting that one thing that could be done instead of updating Topic 605 was to replace Topic 605 guidance with the updated Topic 606 guidance.  With respect to the second issue, he agreed with the previous FASB member that if an entity did not know the amount paid by the customer, it was not revenue. 

IASB

The IASB Technical Manager introduced the IASB agenda paper.  With respect to the first issue, he noted that the implementation questions highlighted in the TRG discussions existed prior to the issuance of IFRS 15, and were not caused by IFRS 15.  He noted that the principal versus agent guidance included in IFRS 15 built on the previous requirements in IAS 18 and improved on those requirements by having a clear principle over the indicators.  He noted that, for this reason, the IASB could decide that no standard setting was needed at this time.  However, he acknowledged that the discussion at the TRG meetings had highlighted the difficulties stakeholders were having in linking the various aspects of the guidance.  He noted that the IASB staff believed that an important consideration for stakeholders to look at when applying the principal versus agent guidance was the identification of the entity’s promise, that is, what was the good or service the entity was controlling before transfer to the customer.  He commented that the IASB staff believed Illustrative Example 57 helped to an extent, and that the notion of control and the indicators were intertwined with the nature of the promise.  He noted that with respect to this issue, the IASB staff recommended that more work should be performed to understand what minor amendments could be made to the Standard to clarify the existing thought process which was already embedded in the standard, and to consider adding one or two Illustrative Examples that might be helpful in addressing the issues. 

With respect to the second issue, he noted that the IASB staff believed that a situation where the principal was unaware of the gross consideration collected by the agent from the end customer was only applicable to a narrow population of contracts, and therefore, the IASB staff recommended that no further work should be performed at this time on this issue.

An IASB member noted that although he agreed that the issue was not caused by IFRS 15, he still believed the interaction between paragraph B35 and the indicators in paragraph B37 of IFRS 15 was not very clear.  He noted that a number of indicators were inherited from IAS 18, and that the IASB needed to decide whether or not they intended to change current practice substantially.  He noted that he believed further work on the first issue was necessary, and that he did not believe the IASB should make such a drastic change as the possible approach set out in paragraph 37(b) of the IASB agenda paper (to restructure the principal versus agent guidance around a premise different from control (e.g. which party is most significantly exposed to profits or losses from fulfilling the promise to the customer) – as this would be a departure from the control notion.

Another IASB member noted that he agreed that the IASB should not do anything with respect to the second issue.  Regarding the first issue, he questioned what the timeframe was for performing further work and whether it would be possible to include anything on this issue in the Exposure Draft the IASB was intending to issue in June 2015.  The IASB Technical Director responded that it was the IASB staff’s intention to do so, and that in order to achieve this, the IASB staff planned to bring this issue back to the IASB in May 2015.

Tentative decisions

No decisions were made by the FASB.

The IASB agreed that the IASB staff would perform further work on the first issue – implementation questions about the principal versus agent guidance in IFRS 15.

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