IASB-only education session
On 28 October 2013, the IASB held an education session on Revenue Recognition to discuss the following topics:
a. The constraint on estimates of variable consideration—including the objective of the constraint and accounting for sales-based royalties on licences of intellectual property;
b. Implementation guidance for licences—specifically, improvements to the criteria for distinguishing between two types of licences (ie those that provides access to the entity's intellectual property and those that provide a right to use the entity's intellectual property); and
c. Including assessments of customer credit risk (ie collectability) in the revenue model.
No decisions were made. The FASB and the IASB will discuss these topics at a joint decision-making session on Wednesday 30 October 2013.
Joint session with FASB
The IASB and the FASB met on 30 October 2013 to discuss the following topics to be included in the final Standard on Revenue from Contracts with Customers:
a. constraint on estimates of variable consideration;
b. implementation guidance: licences; and
Paper 7A Constraint on estimates of variable consideration
The boards discussed the application of the constraint on estimates of variable consideration (ie when those estimates should be included in the transaction price). Specifically, the boards discussed the objective of the constraint, reassessment, and the application of the constraint to sales- and usage-based royalties on licences of intellectual property.
Objective of the constraint
The boards tentatively decided to specify a confidence level in the objective of the constraint of 'highly probable'. (For the FASB, the confidence level will be expressed as 'probable'. The boards acknowledge that different terms were necessary, even though they convey the same outcome, because of existing definitions in IFRS and US GAAP.) The boards also tentatively decided that if an entity expects that including some, but not all, of the estimated amount of variable consideration (that is, a minimum amount) in the transaction price would not result in a significant revenue reversal, the entity should include that amount in the estimate of the transaction price. The objective of the constraint should be stated in the final revenue Standard broadly as follows:
"An entity shall include an estimate of variable consideration in the transaction price to the extent it is [highly] probable that a significant revenue reversal will not occur. A significant revenue reversal will occur if there is a significant downward adjustment on the amount of cumulative revenue recognised from that contract with that customer."
The boards tentatively decided that an entity should update the estimated transaction price at each reporting date to represent faithfully the circumstances present at the reporting date and the changes in circumstances during the reporting period.
Sales- and usage-based royalties on licences of intellectual property
The boards discussed the pattern of revenue recognition that would result from the application of the constraint to licences of intellectual property with sales- or usage-based royalties. In the light of the resulting revenue pattern, the boards tentatively decided to include a specific requirement for licences of intellectual property in which the consideration is in the form of a sales- or usage-based royalty. That requirement specifies that an entity should include consideration from the sales- or usage-based royalty in the transaction price when the uncertainty has been resolved (that is, when the subsequent sales or usage occur).
Fifteen IASB members and four FASB members agreed with the above decisions. One FASB member abstained.
Paper 7B Implementation Guidance: Licences
The boards discussed improvements to the implementation guidance for licences and to the criteria for distinguishing between two types of licences—licences that provide access to the entity's intellectual property (that is, a performance obligation satisfied over time) and licences that provide a right to use the entity's intellectual property (that is, a performance obligation satisfied at a point in time). The boards suggested further drafting improvements and tentatively decided to:
a. place greater emphasis in the implementation guidance on the importance of identifying performance obligations before applying the criteria to distinguish between the two types of licences;
b. include additional rationale in the implementation guidance that explains the intention of the criteria; and
c. provide further examples to clarify the objective and application of the criteria.
Sixteen IASB members and six FASB members agreed. One FASB member abstained.
Paper 7C Collectability
The boards discussed assessments of customer credit risk (ie collectability) in the revenue model. The boards reaffirmed previous tentative decisions to measure the transaction price, and therefore revenue, at the amount of consideration to which the entity is entitled (that is, an amount that is not adjusted for customer credit risk). The boards also tentatively decided to clarify the requirements relating to estimates of variable consideration, specifically as they relate to assessing whether an entity has provided a price concession. The boards also tentatively decided to clarify the criteria that must be met before an entity can apply the revenue model to a contract with a customer, by including an explicit collectability threshold. To meet that threshold and apply the revenue model, an entity must conclude that it is probable that it will collect the consideration to which it will be ultimately entitled to in exchange for the goods or services that will be transferred to the customer. In making that assessment, the boards noted that an entity would only consider customer credit risk and not other uncertainties, such as those related to performance or measurement, which would be accounted for in the timing of recognition and measurement of revenue. In setting the threshold, the boards also acknowledged that the term 'probable' has different meanings in US GAAP and IFRS; however the boards tentatively decided to set the threshold at a level that is consistent with current practice and existing Standards for revenue recognition in US GAAP and IFRS.
Fifteen IASB members agreed and five FASB members agreed. One FASB member abstained.
This meeting marks the completion of the planned joint board discussions on revenue. The staff will continue drafting the final Standard and will confirm with each respective Board the finalisation of the remaining due process steps.