At the October joint meeting of the IASB and FASB, the staff provided a summary of two revenue recognition models that have been developed over the past year by the staff and a group of board members (drawn from both boards). At this meeting, the principal objective was to begin considering one of those models in greater depth.
In the model considered at the meeting, revenue arises from recognising and explicitly measuring increases in specified assets and decreases in specified liabilities, rather than from a separate evaluation of how much performance occurred in a period. In other words, the amount of revenue to be recognised is determined by considering how much assets and liabilities change in a period.
The specified assets and liabilities in the model are those that arise directly from enforceable contracts with customers.
A contract can be either an asset or a liability of the entity, depending on the remaining rights and obligations in the contract. A contract would be an asset
(a contract asset) of the entity if the remaining rights exceed the remaining obligations. A contract would be a liability (a contract liability) of the entity if the remaining obligations exceed the remaining rights.
To measure the contract, the underlying rights and obligations in the contract are measured at their current exit price. This is the price that a market participant would pay (or require) to obtain (or assume) the remaining rights and obligations in the contract. The contract asset or liability is measured this way at inception and subsequently.
Because the model focuses on the contract asset or liability, revenue is defined as an increase in a contract asset or a decrease in a contract liability that results from the provision of goods and services to a customer. Hence, revenue is recognised when:
- an entity obtains a contract in which the underlying rights exceed the underlying obligations (because this would result in a new contract asset).
- the entity subsequently satisfies its obligations in the contract by providing goods or services to the customer (because this would either increase a contract asset or decrease a contract liability).
The amount of revenue that is recognised is derived from the increase in the exit price of the contract asset or decrease in the exit price of the contract liability.
The full description of the model was included in the observer notes for the meeting, available on the Website.
The meeting was primarily educational and no decisions were made. However, the Board noted some issues for further consideration, including:
- assessing whether the model would assist users to predict future cash flows better
- clarifying when an entity has become a party to a contract, particularly if that contract is cancellable
- clarifying whether the concern about the revenue that might arise on contract inception relates only to concerns about the possibility of error in the initial measurement of the contract asset.
At its meeting in December, the Board will consider some of the presentation issues in profit or loss raised by measuring the contract asset or contract liability at current exit price. The Board will also consider whether, and if so how, the contract-based model summarised above should be extended in particular circumstances to capture a broader set of assets and liabilities than only those arising directly from the contract.