The boards discussed when and how an entity should adjust the promised amount of consideration in a contract to reflect the effects of the time value of money, collectability and uncertain consideration.
Promised amount of consideration
The boards tentatively decided that an entity should adjust the promised amount of consideration to reflect the time value of money if the contract includes a financing component that is significant to that contract. In assessing whether a contract has a significant financing component, an entity should consider various factors including:
- whether the amount of customer consideration would be substantially different if the customer paid in cash at the time of transfer of the goods or service;
- whether there is a significant timing difference between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services; and
- whether the interest rate that is explicit or implicit within the contract is significant.
The decision was supported by all members of both boards.
The boards also tentatively decided that, as a practical expedient, an entity should not be required to assess whether a contract has a significant financing component if the period between payment by the customer and the transfer of the promised goods or services to the customer is one year or less.
That decision was supported by 11 members of the IASB and 4 members of the FASB.
The boards discussed how an entity should account for the effects of a customer's credit risk, and changes in that risk, in a contract with a customer.
The boards tentatively decided that:
- An entity should not reflect the effects of a customer's credit risk in the measurement of the transaction price and, hence, revenue upon transfer of a good or service to the customer. Consequently, an entity would recognise revenue at the promised amount of consideration (ie at the stated contract price). That decision is a change from the boards' proposals in the exposure draft, Revenue from Contracts with Customers.
- The final revenue standard should not include a revenue recognition criterion that requires an assessment of the customer's ability to pay the promised amount of consideration.
- An entity should recognise an allowance for any expected impairment loss from contracts with customers. The corresponding amounts in profit or loss should be presented as a separate line item adjacent to the revenue line item (as contra revenue).
The first two decisions were supported unanimously by the members of both boards. Nine members of the IASB and six members of the FASB supported the third decision (with two members of the IASB and one member of the FASB voting against it).
The boards will discuss the interaction between the revenue model and the impairment model at a future meeting.
The boards discussed how an entity would determine the transaction price and recognise revenue when the promised amount of consideration is uncertain. No decisions were reached.
In April, the boards will discuss the following topics:
- Uncertain consideration
- Allocation of the transaction price
- Licences and rights to use