The Board discussed how a performance obligation should be measured after initial recognition under the customer-consideration model. Specifically, the Board considered an example of a two-year product warranty, in which estimates about the number of expected claims changed at the end of the first year. (The example is included in the observer notes for the meeting.)
The staff presented two possible approaches for subsequent measurement.
- Under the first approach, all estimates about the performance obligation (ie the obligation to provide warranty coverage) are locked in at inception. Those estimates are not revised until the measurement of the liability is deemed inadequate compared with a direct measure of the liability (eg under IAS 37 Provisions, Contingent Liabilities and Contingent Assets). In such a case, the liability is remeasured.
- Under the second approach, the subsequent measurement of the performance obligation reflects current estimates of future cash flows. However, the margin used for subsequent measurement is derived from the initial customer consideration amount and is not revised for subsequent changes.
The Board noted that the second approach would be more consistent with the model for non-financial liabilities that is being developed in the IAS 37 project. This is because the measurement under the second approach would reflect current estimates of future cash flows. The main difference between this approach and that under IAS 37 is that IAS 37 also requires a current estimate of the amount and price of risk.
The Board favoured exploring the second approach. However, it expressed concern about not reflecting changes in the amount of risk in a contract such as a warranty, in which the service being provided is risk protection.
The Board also noted that it would need to consider how a change in an estimate of a performance obligation should be reported in profit or loss.