Exposure Draft on revenue

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24 Jun 2010

The IASB and FASB have jointly published for public comment an exposure draft (ED) on Revenue from Contracts with Customers.

If adopted, the proposals would supersede IAS 11 Construction Contracts and IAS 18 Revenue and related interpretations. The core principle proposed in the ED would require an entity to recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to receive in exchange for those goods or services. To apply that principle, an entity would:
  • Identify the contract(s) with a customer. Normally each revenue transaction is a single contract, but sometimes the elements of a multiple-element contract must be accounted for separately or, less commonly, two contracts are combined.
  • Identify the separate performance obligations in the contract. If an entity promises to provide more than one good or service, it would account for each promised good or service as a separate performance obligation only if the good or service is distinct – that is, it is or could be sold separately.
  • Determine the transaction price. Transaction price is the probability-weighted amount of consideration that an entity expects to receive. This would take into account collectibility, the time value of money, the fair value of noncash consideration, and consideration payable to a customer.
  • Allocate the transaction price to the separate performance obligations in proportion to the standalone selling prices of the goods or services underlying each performance obligation.
  • Recognise revenue when the entity satisfies each performance obligation by transferring the promised good or service to the customer. A contract for the development of an asset (for example, construction, manufacturing, and customized software) would result in continuous revenue recognition only if the customer controls the asset as it is developed.
The ED also specifies the accounting for contract costs. Costs of obtaining a contract are charged to expense when incurred. If the costs incurred in fulfilling a contract are not eligible for capitalisation in accordance with other standards (for example, IAS 2 Inventories), an entity would recognise an asset only if those costs:
  • relate directly to a contract (or a specific contract under negotiation);
  • generate or enhance resources of the entity that will be used in satisfying performance obligations in the future; and
  • are expected to be recovered.
For many companies the new approach will not change the amount or timing of revenue recognition. However, in some cases there could be a significant impact. For example, the standard would require separate up-front recognition of revenue from providing a mobile phone that is bundled, without a separate charge, as part of a contract for mobile phone services. Comment deadline on the ED Revenue from Contracts with Customers is 22 October 2010. Click for IASB Press Release (PDF 116k). Link to IAS Plus Project Page.


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