The IASB and FASB began their redeliberations on the exposure draft Revenue from Contracts with Customers by discussing the following topics:
- segmenting a contract;
- identifying separate performance obligations; and
- determining the transfer of goods and services
Segmenting a contract
The boards decided to eliminate the proposed requirement in the exposure draft to account for one contract as two or more contracts, in the situation where the price of some goods or services in the contract is independent of the price of other goods or services in the contract. Consequently, an entity would separate a contract only if the entity identifies separate performance obligations in the contract. At a future meeting, the boards will discuss further the implications of this decision on allocating the transaction price.
Identifying separate performance obligations
The boards decided that the revenue standard should clarify that the objective of identifying separate performance obligations is to depict the transfer of goods or services and also the profit margin that is attributable to those goods or services.
The boards decided to retain the principle of 'distinct goods or services' as the basis for identifying separate performance obligations. The boards asked the staff to analyse further the following attributes of a distinct good or service and to consider how an entity would apply them in various scenarios:
- distinct function;
- separable risks; and
- different pattern of transfer to the customer.
The boards also decided that it would not be necessary for the revenue standard to include additional requirements on accounting for perfunctory, incidental or other similar obligations.
Determining the transfer of goods and services
The boards affirmed the core principle in the exposure draft that an entity should recognise revenue to depict the transfer of goods and services to a customer.
For determining the transfer of a good, the boards decided that an entity should recognise revenue when the customer obtains control of the good. The boards also decided that the revenue standard should:
- carry forward most of the proposed guidance on control from the exposure draft;
- describe rather than define control;
- add 'risks and rewards of ownership' as an indicator of control; and
- eliminate 'the design or function of the good or service is customer-specific' as an indicator of control.
For determining the transfer of a service, the boards decided that an entity should recognise revenue for the entity's performance of contractually-agreed tasks if:
- the customer controls the work-in-process; or
- another entity would not need to reperform the task if that other entity were required to fulfill the remaining obligation to the customer; or
- the entity has a right to payment for the performed task and the entity's performance to date could not be put to an alternative use by the entity (ie the performance to date has not created an asset that could be transferred to another customer).
The boards decided that an entity would recognise revenue for a service only if the entity could reasonably measure its progress toward successful completion of the service. The boards asked the staff to analyse further which method an entity should use to measure its progress toward completion of a service (eg an output method, an input method, or a method based on the passage of time).
Goods and services
The boards decided that if an entity promises to transfer both goods and services, the entity should first determine whether the goods and services are distinct (in accordance with the guidance on identifying separate performance obligations).
- If the goods and services are distinct, the entity would account for them as separate performance obligations.
- If the goods and services are not distinct, the entity would account for the bundle of non distinct goods and services as a service.
Formal votes were not taken for the matters described above. However, there was support from the board to develop the project along the lines described with no board members objecting to the recommendations.
At their joint meetings in February, the boards will discuss the following topics:
- costs of obtaining a contract;
- combining contracts;
- contract modifications; and
- product warranties.