At its meeting in May, the Board expressed a preliminary view in favour of measuring performance obligations at the inception of a contract by allocating part of the transaction price (the customer consideration amount) to each obligation.
At this meeting, the Board considered when performance obligations should be remeasured after the contract�s inception to reflect changes in prices and circumstances (ie changes other than in the entity�s performance).
Remeasure when deemed onerous
The Board tentatively decided that in most cases it would not be necessary to remeasure a performance obligation at each financial statement date. Instead, a performance obligation would be remeasured by exception when deemed onerous.
The Board considered two main approaches for an onerous test. It tentatively decided that a performance obligation is deemed onerous when the entity�s expected cost of performance exceeds the carrying amount of the performance obligation. The performance obligation is then remeasured to the entity�s
expected cost of performance. In the other approach, the performance obligation is deemed onerous when its measurement in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets exceeds the carrying amount of the performance obligation. The performance obligation is then remeasured to the amount in accordance with IAS 37. Copyright � 2008 International Accounting Standards Committee Foundation 6
Remeasure at each financial statement date
The Board noted that in some cases remeasuring a performance obligation only when deemed onerous might not provide decision-useful information about that obligation after the contract�s inception (ie information about the current expected outflow of resources required to satisfy the obligation). The Board tentatively decided that another measurement approach might be required in such cases. In that approach, performance obligations would be remeasured at each financial statement date.
The Board did not discuss when such an approach would be required, but noted that it might be appropriate for performance obligatons in which:
- uncertainty is a significant inherent characteristic of the contract (eg insurance and similar type contracts in which the eventual outcome depends on specified uncertain future events)
- prices of the underlying goods and services are volatile (eg some contracts to supply commodities)
- the contract is of such duration that changes in circumstances are highly likely (eg some construction contracts).
The Board also did not discuss how the performance obligation would be remeasured at each financial statement date. However, it noted that, to be consistent with the initial measurement, the subsequent measurement would have to replicate and update either elements implicit in the transaction price or at least some of those elements (eg the expected cash flows).
The Board tentatively decided that the discussion paper should seek input about the types of performance obligations that might need to be remeasured at each financial statement date even if they are not deemed onerous. The discussion paper will also consider some of the possible approaches for subsequently measuring such obligations, but will not express a preliminary view.
The Board will not discuss other issues before the staff submit a draft discussion paper. The discussion paper is expected to be published later this year.