The IASB and FASB met last month to discuss their joint project
on revenue recognition. We outline the key decisions below.
The boards reached tentative decisions on certain topics
relating to the constraint on recognizing variable consideration,
collectibility, time value of money, and distributor and reseller
The staff will conduct further analysis on certain items
including aspects of the variable consideration constraint and
presentation issues relating to collectibility. Other key issues
still to be redeliberated include licences, contract modifications,
allocation of transaction price, disclosures and transition.
What were the key decisions?
Constraint on recognizing variable consideration
Variable consideration that is recognized as revenue will be
constrained, under the proposed model, to the amount the entity is
reasonably assured to be entitled to. This constraint applies to
contracts with a variable price and to those contracts with a fixed
price where it is uncertain whether the entity will be entitled to
that consideration even after the performance obligation is
The boards discussed enhancements to the guidance for
determining when an entity's experience is predictive of the
amount of variable consideration to which it will be entitled.
Further discussions are expected at a future meeting after
Initial and subsequent impairments of receivables should be
presented in the same financial statement line item. The boards did
not conclude, however, on where the impairment should be presented
in the income statement. This debate also raised once again the
question of whether collectibility should be a threshold for
recognizing revenue. The staff will perform further analysis
including evaluating the potential consequences of a collectibility
threshold, and whether it would be consistent with the core
principles of the proposed model. Further discussion is planned for
a future meeting.
The boards also considered when revenue should be recognized for
contracts with non-recourse, seller-based financing. They agreed to
provide additional implementation guidance about whether a contract
with a customer exists, based on when the parties may or may not be
committed to perform their obligations under the contract.
Time value of money
The boards agreed to retain the proposed guidance that requires
adjustment to the transaction price for the effect of time value of
money if the contract has a significant financing component. They
will, however, consider at a future meeting some additional
implementation guidance for inclusion in the final standard. They
also decided to retain the practical expedient that does not
require an adjustment for the time value of money if the time
difference between performance and payment is one year or less.
An entity does not need to reflect the effect of time value of
money for advance payments when the timing of the transfer of goods
or services is at the discretion of the customer.
Contract combinations for distributor and reseller
Promised goods or services in a contract might include offers to
provide goods or services that the customer can resell or provide
to its customer. These promises are performance obligations even if
they are satisfied by another party, and are different from
promises to pay cash to the customer, which are accounted for as a
reduction of the transaction price.
Is convergence achieved?
Convergence is expected for revenue recognition, as the same
principles will be applied to similar transactions under both IFRS
and US GAAP. Differences might continue to exist to the extent that
the guidance requires reference to other standards before applying
the guidance in the revenue standard.
The proposal will affect most entities that apply IFRS or US
GAAP. Entities that currently follow industry-specific guidance
should expect the greatest impact.
What's the effective date?
We anticipate the final standard to have an effective date no
earlier than 2015.
The boards' timeline indicates that they will issue a final
standard in the first half of 2013. They will continue to
redeliberate over the next several months and perform targeted
outreach on some of the more significant changes.
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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