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Revenue Recognition

IASB meeting summaries and observer notes


 IASB November 2012


 

Revenue recognition


The IASB and the FASB met on 19 November to continue their joint redeliberations on the revised Exposure Draft Revenue from Contracts with Customers (the 2011 ED). The boards discussed the following topics:

  1. constraining the cumulative amount of revenue recognised;
  2. collectibility; and
  3. implementation guidance: licences.

Constraining the Cumulative Amount of Revenue Recognised ('the Constraint') (Papers 7A-7C)

Paper 7C—Placement of Constraint (Step 3 v Step 5)

The boards considered whether the constraint on revenue recognition should be applied as either:

  1. a constraint on the cumulative amount of revenue recognised when an entity satisfies a performance obligation (Step 5); or
  2. a constraint on the transaction price (Step 3), which the 2010 Exposure Draft had previously proposed as the location of the constraint.

On the basis that the location of the constraint (that is, either in Step 5 or in Step 3) should not affect the amount or timing of revenue recognition, the boards tentatively decided to move the constraint to Step 3 unless, during the process of drafting the Revenue Standard, it becomes apparent that such a decision would result in unintended consequences.

Fourteen IASB members and all FASB members agreed with this decision.

Paper 7B—Application of the Requirements

The boards tentatively decided that the Revenue Standard should state that the objective of the constraint on revenue recognition is for an entity to recognise revenue at an amount that should not be subject to significant revenue reversals (that is, to any downward adjustment) that might arise from subsequent changes in the estimate of the amount of variable consideration to which the entity is entitled. An entity should reassess this objective as subsequent facts and circumstances change.

The boards tentatively decided that an entity would meet that objective if the entity has sufficient experience or evidence that supports its assessment that the revenue recognised should not be subject to a significant revenue reversal. The boards tentatively decided that the assessment is qualitative and that the entity needs to consider all the facts and circumstances associated with both the risk of a revenue reversal arising from an uncertain future event and the magnitude of the reversal if that uncertain event were to occur. The boards did not define the level of confidence that an entity would need to achieve to recognise revenue. However, the boards indicated that their intention is that the level of confidence would need to be relatively high for an entity to recognise revenue for variable consideration.

All IASB and FASB members agreed with this decision.

The boards also tentatively decided to retain the indicators in paragraph 82 of the 2011 ED (subject to improvements and clarifications) to help entities in assessing whether to recognise revenue based on estimates of variable consideration, including estimates of price concessions.

Fourteen IASB members and all FASB members agreed with this decision.

Collectibility (Paper 7E)

The boards considered possible approaches for addressing customer credit risk in accounting for contracts with customers without a significant financing component. The boards tentatively decided:

  1. to reaffirm their proposal in the 2011 ED that the transaction price, and therefore revenue, should be measured at the amount of consideration to which the entity is entitled (that is, an amount that is not adjusted for customer credit risk and the revenue recognised is not subject to a collectibility threshold); and
  2. to present any corresponding impairment losses (recognised initially and subsequently in accordance with the respective financial instruments Standards) arising from those contracts with customers prominently as an expense in the statement of comprehensive income.

The boards also tentatively reaffirmed the proposals in the 2011 ED for accounting for contracts with customers with significant financing components.

Twelve IASB members and four FASB members agreed with these decisions.

Implementation Guidance: Licences (Papers 7F-7G)

The boards discussed improvements to the implementation guidance in the 2011 ED for licence arrangements in which an entity grants a customer a right to use the entity’s intellectual property. The boards tentatively decided that an entity should assess the nature of the promise for the licence before applying the revenue recognition model to a licence arrangement. This assessment is necessary because the boards tentatively concluded that some licence arrangements represent the promise to transfer a right, whereas others represent a promise to provide access to the entity's intellectual property. That conclusion is consistent with View B as explained in Paper 7F.

In determining the nature of the promise in a licence, the boards tentatively decided that an entity should consider the characteristics of the licence. The boards also tentatively decided that the following characteristics may indicate that the nature of the promise in a licence represents a promise to provide a right:

  1. The right transferred to the customer in the form of a licence represents an output of the entity’s intellectual property, similar to a tangible good.
  2. The licence can be easily reproduced by the entity with little or no effect on the value of the entity’s intellectual property.
  3. The customer can determine how and when to use the right (that is, when the benefits from the asset can be consumed) and the customer does not require any further performance from the entity to be able to consume those benefits.

When those characteristics are not present, the licence would represent a promise to provide a service of access to the entity’s intellectual property. In these cases, access to the intellectual property is required because the customer obtains a right to use only a portion of the intellectual property (defined by the terms of the licence) and that portion is closely connected to the remaining intellectual property. This may be evidenced by the fact that changes in the nature or value of the intellectual property may directly affect the portion that the customer has a right to use by virtue of the licence. This assessment of the nature of the promise for the licence is important. That is because when the licence is distinct, the nature of the promise would affect whether the licence results in a performance obligation satisfied at a point in time (that is, when the licence is a promise to transfer a right) or a performance obligation satisfied over time (that is, when the licence is a promise to provide access to the entity’s intellectual property).

Fourteen IASB members and all FASB members agreed with this decision.

The boards also tentatively decided to clarify the application of the other parts of the model to licence arrangements. In particular, the boards noted that after determining the nature of the promise related to the licence, an entity would need to assess:

  1. whether the entity has promised to transfer other goods or services in addition to the licence and, if so, whether the licence is distinct from those other goods or services;
  2. the time when the licence, goods, and services or the bundle of those promises are transferred to the customer (that is, whether the separate performance obligations are satisfied over time or at a point in time); and
  3. whether the cumulative amount of revenue recognised is subject to the constraint.

All IASB and FASB members agreed with this decision.

Next steps

The boards will continue their joint redeliberations on the 2011 ED in December 2012.

Date: 11/19/2012