Canada: Revenue Recognition Exposure Draft – "Take Two"

Last Updated: June 25 2012
Article by Diane Kazarian

The comment period for the November 2011 exposure draft (ED), Revenue from contracts with customers, ended in March 2012. Andrea Allocco, from PwC's Accounting Consulting Services Central Team, looks at the responses.


Preparers, users and auditors have again provided feedback to the IASB and FASB (the boards) on their project, Revenue from contracts with customers, this time on the second ED. The volume of letters dropped significantly from those received on the 2010 ED. This could reflect the boards' success in responding to many of the matters raised on the first ED.

The boards requested feedback on six areas, as well as general input about whether the proposed guidance was clear and operational. Many respondents did not restrict their comments to the six areas; as a result, some additional matters were identified that might warrant attention. Most respondents continue to support the boards' efforts, but a number of concerns remain, including the accounting for onerous performance obligations, the extent of disclosures and transition.

The majority vote

The responses to some of the questions and other topics that attracted comment are explained in table below.

Some industries have collaborated in crafting comment letters and providing other feedback to the boards. We will look in more detail at those industry views in our practical guide due to be released in the next month.

What's next?

The boards are expected to begin redeliberations in June, and the final standard is expected in late 2012 or early 2013. The effective date will be no earlier than 2015 but is likely be 2016 or beyond, given the timetable and practical challenges of implementation.

Management should consider evaluating the effect of the proposals, including any implications on processes and controls, at a high level sooner rather than later. There will continue to be opportunities to influence the redeliberations through the boards' consultation. Management needs to understand the effect of the standard on its accounting for contracts if it is to provide valuable feedback and influence the debate.

Summary of responses to significant issues

Common themes

Summary of observations

Performance obligations satisfied over time. The boards provided criteria to determine when a performance obligation is satisfied over time.

Respondents support the additional guidance but asked for clarity about how to apply the guidance in practice. Some also disagree with how "alternative use" is defined, highlighting the potential for unintended consequences.

Presenting credit risk. The proposals require the effects of credit risk to be presented in a line item adjacent to revenue unless the contract has a significant financing component.

Respondents generally disagree with the proposals and believe that credit risk should be presented as an expense. There are also concerns about the complexity that might result from presenting credit risk arising from different types of contracts in different places on the income statement.

Time value of money. Management should reflect the time value of money if the contract has a significant financing component and covers a period greater than one year.

Respondents continue to express concern over the complexities and practical challenges of applying this guidance. Those who agree with the principle suggest the practical expedient be removed, as a one-year bright line is arbitrary.

Variable consideration. Variable consideration is only recognized when management has predictive experience of the consideration to which it is entitled (that is, the amount that is "reasonably assured"). There is an exception for licences with sales-based royalties that states that they are never reasonably assured.

Most respondents support the principle but want further clarity on how to apply the reasonably assured constraint. Views are mixed on the sales-based royalty exception; some respondents are supportive but many oppose it – for example, those in the retail and consumer industry.

Onerous performance obligations. The proposals limit the onerous test to performance obligations that are satisfied over time and over one year.

The scope limitation did not change the general discontent with the onerous performance obligation test. Most suggest that existing guidance is used to determine when to record an onerous contract provision.

Annual disclosures. The proposals continue to require extensive disclosures, including a reconciliation of contract balances and a maturity analysis of performance obligations.

Preparers and respondents have split views on this topic. Preparers have identified a number of disclosures that are not useful on the basis that they are not used to manage the business. Users support the proposals, citing that improvement to existing disclosures is crucial.

Interim disclosures. The ED proposes modifying IAS 34 to require many of the annual disclosure requirements in interim financial information.

Most argue that the amendments to IAS 34 are inconsistent with the principle that only significant changes from the last annual financial statements should be disclosed.

Transition. The ED requires retrospective application with the choice of certain reliefs.

Preparers remain concerned about whether retrospective application is cost-beneficial, despite the reliefs offered by the boards.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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