The Board considered the second of the two revenue recognition models that had been developed over the past year by the staff and a group of board members (drawn from both the IASB and FASB). This second model is called the customer consideration model.
Customer consideration model
In the customer consideration model, an entity accounts for the contract asset or liability that arises from the rights and obligations (performance obligations) in an enforceable contract with a customer. At contract inception, the rights in the contract are measured at the amount of customer consideration in the contract. That amount is then allocated to the individual performance obligations identified within the contract in proportion to the stand-alone selling price of each good or service underlying the performance obligation. Therefore, at contract inception, the sum of the amounts allocated to the individual performance obligations equals the customer consideration so that neither a contract asset nor a contract liability is recognised. Subsequently, the performance obligations are measured at the amount of the customer consideration allocated to them at contract inception. They are not remeasured except when the contract is judged to be onerous. As each performance obligation identified in the contract is satisfied, the resulting decrease in the contract liability or increase in the contract asset results in the recognition of revenue.
The Board also considered the nature of performance obligations. Both revenue recognition models had been developed on the basis of the principle that after contract inception revenue is recognised when performance obligations are satisfied.
The staff suggested that a performance obligation is a promise in a contract between the entity and a customer to transfer an economic resource to a customer. Therefore, a performance obligation would be satisfied (and revenue recognised) when the economic resource is transferred to the customer. The staff proposed that:
- in the case of a good, this is when the entity relinquishes its enforceable right (or other access) to the good and the customer obtains that right (or other access) to that good;
- in the case of a service, this is when the activities undertaken by the entity result in an immediate benefit to the customer (because the activities enhance an economic resource of the customer or the activities produce cash inflows for the customer or reduce cash outflows).
The Board asked the staff to explore further the examples discussed at the meeting in order to identify the different views about the identification of performance obligations and the timing of their satisfaction.