The IASB and the FASB discussed determining the transaction price, allocating the transaction price, licences and rights to use, fulfilment costs, and sale and repurchase agreements.
Determining the transaction price
The boards discussed how an entity would determine the transaction price and recognise revenue when the customer promises an amount of consideration that is uncertain. The boards tentatively decided that:
- An entity's objective when determining the transaction price is to estimate the total amount of consideration to which the entity will be entitled under the contract.
- To meet that objective, an entity should estimate either of the following amounts depending on which is most predictive of the amount of consideration to which the entity will be entitled:
a. the probability-weighted amount, or
b. the most likely amount.
- An entity should recognise revenue at the amount allocated to a satisfied performance obligation unless the entity is not reasonably assured to be entitled to that amount. That would be the case in each of the following circumstances:
a. the customer could avoid paying an additional amount of consideration without breaching the contract (eg a sales-based royalty).
b. the entity has no experience with similar types of contracts (or no other persuasive evidence).
c. the entity has experience, but that experience is not predictive of the outcome of the contract based on an evaluation of the factors proposed in the exposure draft (for example, susceptibility to factors outside the influence of the entity, the amount of time until the uncertainty is resolved, the extent of the entity's experience, and the number and variability of possible consideration amounts).
The first two decisions were supported by all members of both boards. The third decision was supported by 14 members of the IASB and all members of the FASB.
Allocating the transaction price
The boards discussed how an entity should allocate the transaction price on a relative selling price basis.
The boards tentatively decided that if the standalone selling price of a good or service underlying a separate performance obligation is highly variable, the most appropriate technique to estimate a standalone selling price may be a residual technique. Using a residual technique, an entity would determine a standalone selling price by reference to the total transaction price less the standalone selling prices of other goods or services in the contract. That decision was supported by all members of both boards.
The boards also tentatively decided that an entity should allocate a portion of (or a change in) the transaction price entirely to one (or more) performance obligation if both of the following conditions are met:
- the contingent payment terms of the contract relate specifically to the entity's efforts to satisfy that performance obligation or a specific outcome from satisfying that separate performance obligation; and
- the amount allocated (including the change in the transaction price) to that particular performance obligation is reasonably relative to all of the performance obligations and payment terms (including other potential contingent payments) in the contract.
That decision was also supported by all board members.
Licences and rights to use
The boards discussed how an entity should account for contracts in which the entity grants a license or other rights to a customer. The boards tentatively decided that the promised rights give rise to a performance obligation that the entity satisfies at the point in time when the customer obtains control (ie the use and benefit) of the rights. If there are other performance obligations in the contract, an entity should consider whether the rights give rise to a separate performance obligation or whether the rights should be combined with those other performance obligations. All members of both boards supported that decision.
The boards discussed the accounting for costs of fulfilling a contract with a customer and affirmed the guidance proposed in the exposure draft subject to minor drafting improvements. Specifically, the boards decided:
- not to amend the scope of the proposed guidance on fulfilment costs in the final standard. 13 members of the IASB and 5 members of the FASB supported that decision.
- that the costs that relate directly to a contract include costs that are incurred before the contract is obtained if those costs relate specifically to an anticipated contract. All IASB members and 6 members of the FASB supported that decision.
- that the costs of abnormal amounts of wasted materials, labour or other resources that were not considered in the price of the contract should be recognised as an expense when incurred. All members of both boards supported that decision.
Sale and repurchase agreements
The boards discussed how an entity should account for an agreement in which the entity sells an asset to a customer and grants the customer the right to require the entity to repurchase the asset at a price below the original sales price. The boards tentatively decided that if the customer has a significant economic incentive to exercise that right, the customer effectively pays the entity for the right to use the asset for a period of time. Consequently, the entity should account for the agreement as a lease. To determine whether a customer has a significant economic incentive to exercise their right, an entity should consider various factors including the relationship of the repurchase price to the expected market value of the asset at the date of repurchase and the amount of time until the right expires. That decision was supported by all members of both boards
In May 2011, the boards will discuss the following topics:
- Stransition, and
- fulfilment costs: amortisation and impairment