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IASB meeting summaries and observer notes

 IASB July 2013


IASB-only education session

On 23 July 2013, the IASB held an education session on Revenue Recognition to discuss topics related to:

a. collectability;
b. accounting for contracts that do not meet Step 1 of the revenue model; and
c. constraint—minimum requirements.

No decisions were made.

Next steps

The IASB and the FASB will meet on 24 July 2013 to discuss the issues above.

Joint session with FASB

The IASB and the FASB met on 24 July 2013 to discuss topics raised in the drafting of the final Standard Revenue from Contracts with Customers. Those topics are as follows:

    a.     collectability;
    b.     accounting for contracts that do not meet Step 1 of the revenue model; and
    c.     constraint—minimum requirements.

Paper 7A—Collectability

The boards tentatively decided to clarify the determination of the transaction price by including additional guidance to enable an entity to distinguish between doubts about collectability arising from customer credit risk that should be accounted for as either (a) variable consideration (ie a price concession or discount) or (b) an impairment loss (that is recognised in accordance with financial instruments Standards). In particular, the guidance will state that, in determining whether the promised consideration is variable (and therefore subject to the constraint on estimates of variable consideration), an entity should:

    a.     assess all relevant facts and circumstances related to the contract and the customer’s credit risk that might indicate that the entity would grant a price concession and, therefore, expects to be entitled to an amount that is less than the contractually stated price; and

    b.     consider whether attributes of the contract with a customer might indicate that the promised consideration is variable (because, for example, the incremental cost to the entity to transfer the good or service to the customer is negligible or the good that transfers to the customer is not expected to substantially diminish in value and it therefore serves as adequate collateral).

Sixteen members of the IASB and five members of the FASB agreed.

Step 1 of the revenue model (ie paragraph 14 of the 2011 Exposure Draft Revenue from Contracts with Customers, as amended) specifies criteria that must be met in order for an entity to apply the revenue model to a contract with a customer. The boards tentatively decided that an entity should make an overall qualitative assessment of the facts and circumstances of the contract with the customer to determine whether “the parties are committed to perform their respective obligations and they intend to enforce their respective contractual rights”. In relation to that criterion, the boards also tentatively decided to clarify that:

    a.     The assessment of the commitment and intention of the parties to the contract is to identify whether the contract is a substantive arrangement. A contract can be substantive even if the entity does not intend to enforce all of its rights under the contract.
    b.     The assessment about the amount of consideration to which the entity expects to be entitled is considered when determining the transaction price. That assessment does not affect whether a contract meets the criteria in paragraph 14.
All members of the IASB and the FASB agreed.

Paper 7B—Accounting for contracts that do not meet Step 1 of the revenue model

The boards tentatively decided that if a contract does not meet the criteria in paragraph 14, consideration received by the entity should not be recognised as revenue until the entity’s performance is complete and either:

    a.     all of the consideration in the arrangement has been collected and is non-refundable; or
    b.     the contract is cancelled and the consideration received is non-refundable.

The boards also tentatively decided to clarify that the criteria in paragraph 14 should be reassessed if they are initially not met.

All IASB and FASB members agreed.

Paper 7C—Constraint—minimums requirements

The boards discussed the application of the constraint on including estimates of variable consideration in the transaction price, specifically when an entity should include some, but not all, of an estimate of variable consideration (that is, a minimum amount) in the transaction price.

The boards tentatively decided:

    a.     to specify that, for all contracts, an entity should include a minimum amount of variable consideration in the estimate of the transaction price, when including that amount would not result in a significant revenue reversal; and 
    b.     not to specify the circumstances when that minimum amount would be zero, nor to specify an exception for sales-based royalties on licences of intellectual property.

Fifteen IASB members and five FASB members agreed.

Next steps

The staff are drafting the final revenue Standard. In the near future, the FASB staff will present an analysis of the FASB’s due process undertaken on the project.



Date: 7/23/2013