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Revenue — Boards Kick Off Redeliberations, Decide to Remove Onerous Loss Test From Project

Published on: 23 Jul 2012

At their joint meeting last Thursday, the FASB and IASB began redeliberating their November 2011 exposure draft (ED) Revenue From Contracts With Customers. During the meeting, the boards discussed the following topics: (1) identification of onerous losses, (2) identification of separate performance obligations, (3) performance obligations satisfied over time, and (4) licenses and rights to use.

Editor’s Note: The FASB staff’s Summary of Board Decisions of the July 19 meeting is available on the FASB’s Web site. A more detailed meeting summary from Deloitte observers is available on Deloitte’s IAS Plus Web site but should not be regarded as official or final.

Identification of Onerous Losses

Many respondents to the ED were concerned that the ED’s onerous loss requirement could have resulted in accounting that was inconsistent with the economics of the contract (e.g., recognition of an onerous loss when the overall contract was profitable or when other factors indicated that the entity did not incur an economic loss). After extensive debate, the boards narrowly agreed to remove the guidance on onerous performance obligations in its entirety from the proposed revenue standard and to maintain the existing guidance on the accounting for onerous losses in U.S. GAAP (e.g.,
ASC 450, 1 ASC 605-35) and IFRSs (i.e., IAS 372). The FASB plans to consider this topic as a separate project in the future. Several FASB members supported maintaining the proposed guidance and requiring the identification of onerous losses at the contract level. However, a majority of FASB members voted in favor of removing the guidance from the revenue project, observing that the proposals introduced a significant amount of complexity into the accounting for revenue and that they would need additional time to consider unintended consequences that might result from it.

Identification of Separate Performance Obligations

The boards tentatively decided to clarify and improve the ED’s language regarding when a good or service in a contract is distinct (and thus is accounted for as a separate performance obligation). The tentative guidance would require an entity to account for a good or service as a separate performance obligation when it is (1) capable of being distinct (i.e., the customer can benefit from the good or service on its own or with other readily available resources) and (2) distinct in the context of the contract. The Summary of Board Decisions notes that the boards tentatively agreed that the final standard should include the following four indicators of whether a good or service is distinct in the context of the contract:

1.   The entity does not provide a significant service of integrating the good or service (or bundle of goods or services) into the bundle of goods or services that the customer has contracted. In other words, the entity is not using the good or service as an input to produce the output specified in the contract.

2.   The customer was able to purchase or not purchase the good or service without significantly affecting the other promised goods or services in the contract.

3.   The good or service does not significantly modify or customize another good or service promised in the contract.

4.   The good or service is not part of a series of consecutively delivered goods or services promised in a contract that meet the following two conditions:

a.   The promises to transfer those goods or services to the customer are performance obligations that are satisfied over time (in accordance with paragraphs 35 of the 2011 ED); and

b.   The entity uses the same method for measuring progress to depict the transfer of those goods or services to the customer.

The boards also decided to remove the ED’s practical expedient that would have allowed an entity to combine two or more distinct goods or services as a single performance obligation when those goods or services have the same pattern of transfer; however, they did note that concurrently transferred goods or services would not be precluded from such a combination. As the indicators above specify, a series of goods or services that is delivered consecutively (e.g., a five-year contract to deliver 500 units of a specific good each month, a three-year contract to supply energy continuously, a two-year contract to provide customer support services on demand) is an indicator that each good or service may not be distinct in the context of a contract (and thus could be accounted for as a single performance obligation).

Performance Obligations Satisfied Over Time

The boards tentatively decided to rearrange the ED’s criteria for when a performance obligation is satisfied over time. The Summary of Board Decisions notes that revisions to the criteria include:

  • Retaining the criterion in paragraph 35(a) of the ED that a performance obligation would be satisfied over time if the “entity’s performance creates or enhances an asset (for example, work in process) that the customer controls as the asset is created or enhanced.”
  • For “pure services contracts,” creating a single criterion for determining whether a performance obligation is satisfied over time that takes into account whether the customer receives and consumes the benefits of the entity’s performance as the entity performs and whether another entity would not need to substantially re-perform the work the entity has completed to date.
  • Creating a closer link between whether an asset has an “alternative use” and whether an entity has a “right to payment for performance completed to date.”

To help address various concerns raised by comment letter respondents, the boards also tentatively agreed to clarify and improve the guidance on when an asset has an “alternative use” and on when an entity has a “right to payment for performance completed to date.” Respondents’ concerns focused on (1) the impact of contractual restrictions and practical limitations on whether an asset has an alternative use, (2) the period to consider in assessing whether an asset has an alternative use, and (3) the conditions to be evaluated when determining whether an entity has a sufficient “right to payment for performance completed to date.”

Licenses and Rights to Use

The boards did not reach a tentative decision regarding changes to the ED’s implementation guidance on licenses and rights to use. Instead, the boards requested that the staffs perform additional analysis related to the impact of certain restrictions on the customer’s use of a license for determining when and how control transfers (i.e., at a point in time or over time) and thus when revenue can be recognized.



[1] For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s "Titles of Topics and Subtopics in the FASB Accounting Standards Codification."

[2] IAS 37, Provisions, Contingent Liabilities and Contingent Assets.

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