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Project Updates
Revenue Recognition
Last Updated: July 11, 2008 (Updated sections are indicated with an asterisk *)
This project update summarizes the project activities and decisions of the IASB and FASB (the Boards). It was prepared by the staff and is for the information and convenience of the Boards’ constituents. All decisions of the Boards are tentative, may change at future Board meetings, and do not change current accounting and reporting requirements. Decisions of the Boards become final only after extensive due process.
Project Objectives
*Decisions Reached at the Last Meeting
*Next Steps
*Board/Other Public Meeting Dates
Related FASB Documents
*Background Information
Contact Information
PROJECT OBJECTIVES
The objective of the Revenue Recognition project is to develop coherent conceptual guidance for revenue recognition and a comprehensive Statement on revenue recognition based on those concepts. In particular, the project is intended to improve financial reporting by:
- Converging U.S. and international standards on revenue recognition
- Eliminating inconsistencies in the existing conceptual guidance on revenue recognition
- Providing conceptual guidance that would be useful in addressing future revenue recognition issues
- Eliminating inconsistencies in existing standards-level authoritative literature and accepted practices
- Filling voids in revenue recognition guidance that have developed over time
- Establishing a single, comprehensive standard on revenue recognition.
The Boards plan to develop a comprehensive standard that would apply to all business entities; however, they may conclude that certain transactions or industries requiring additional study should be excluded from the scope of that standard and addressed separately.
*DECISIONS REACHED AT THE LAST MEETING (May 2008)
Although the Boards coordinate the timing of their deliberations of the issues in the joint project, each Board deliberates and votes on each issue individually. As a result, at any given time, one Board may have reached a tentative conclusion on a given issue, while the other Board has not yet deliberated on it. Similarly, the Boards could reach different tentative conclusions on certain issues. Any differences in views or timing of discussion are noted below.
In the May 2008 Board meetings, the Boards discussed a draft of Chapter 5, “Measurement of the Contract,” for the upcoming discussion paper on revenue recognition. The Boards suggested a number of changes for both the structure and content of the chapter. In addition, the Boards voted on the two measurement approaches and expressed a preliminary view in favor of the customer consideration approach. The customer consideration approach (a) measures performance obligations at the price (or value of the consideration) promised by the customer at contract inception and (b) subsequently remeasures performance obligations only if they become onerous. The FASB expressed the view that they would only remeasure performance obligations if they become onerous. However, the IASB suggested there might be other limited circumstances in which they would want to remeasure performance obligations.
*NEXT STEPS
The Boards have been discussing and will continue to discuss drafts of the discussion paper. The staff plans to publish a discussion paper describing a single contract-based revenue recognition model using the customer consideration measurement approach.
*BOARD/OTHER PUBLIC MEETING DATES
The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement, Interpretation, FASB Staff Position, or Statement 133 Implementation Issue.
Below is a list of the FASB Board/Public meetings for this project with links to the minutes for each meeting.
| *May 14, 2008 | Board Meeting—Draft of Chapter 5 and Board Preference for Customer Consideration Approach |
| April 9, 2008 | Board Meeting—Drafts of Chapters 2, 3, and 4 for the Discussion Paper |
| January 30, 2008 | Board Meeting—Customer Consideration Model Measurement, Performance Obligations, and Examples |
| October 22, 2007 | FASB-IASB Joint Meeting—Due Process, Measurement Model, Customer Consideration Model, and Examples |
| October 24, 2006 | FASB-IASB Joint Meeting—Due Process Document |
| July 26, 2006 | Board Meeting—Application of the Board’s Decision on the Meaning of Performance |
| April 27, 2006 | FASB-IASB Joint Meeting—Accounting for Performance |
| March 1, 2006 | Board Meeting—Accounting for Wholly Executory Contracts and Assessing when Performance has Occurred |
| October 24, 2005 | FASB-IASB Joint Meeting—Identification and Initial Measurement of Performance Obligations and the Definition of Revenues |
| September 21, 2005 | Board Meeting—Identification and Initial Measurement of Performance Obligations in Revenue Contracts |
| June 21, 2005 | Financial Accounting Standards Advisory Council Meeting |
| May 11, 2005 | Board Meeting—Project Objective and Scope |
| October 20, 2004 | FASB-IASB Joint Meeting—Accounting for Contractual Obligations from a Customer Perspective versus a Reporting Entity Perspective and Accounting Treatment of "Residual" Created upon Contract Generation |
| August 4, 2004 | Board Meeting—Accounting for Contractual Obligations from a Customer Perspective versus a Reporting Entity Perspective and Accounting Treatment of "Residual" Created upon Contract Generation |
| June 22, 2004 | FASAC Meeting Handout |
| June 9, 2004 | Board Meeting—Reliability of Estimates in Present-Day Financial Statements and Evidence of Fair Value |
| April 23, 2004 | FASB-IASB Joint Meeting—Defining Revenues and Other Components of Comprehensive Income, Readily Marketable Commodities, Performance by Third Parties, and Nonreciprocal Transfers and Refining the Definition of Revenues |
| March 16, 2004 | Board Meeting—Revisions of Principles and Implementation Guidance, Initial Fair Value Measurement of Performance Obligations, and Obligations to Be Included in the Scope of the Standard on Revenue Recognition |
| February 18, 2004 | Board Meeting—Use of the Term Conditional Rights and Obligations; Consistency of Measurement Decisions between the Revenue Recognition and Fair Value Measurement Projects; Approaches to Developing the General Standard and Related Application Guidance; and Draft Recognition and Measurement Principles |
| December 17, 2003 | Board Meeting—Discussion of Enforceable Rights and Obligations |
| December 10, 2003 | Board Meeting—Recapitulation of Conceptual Decisions and Summary of Open Issues |
| December 4, 2003 | FASAC Meeting Handout |
| October 22, 2003 | FASB-IASB Joint Meeting—Measuring Performance Obligations and Application of the Conceptual Model to Certain Transactions |
| September 17, 2003 | Board Meeting—Application of the Conceptual Model to Certain Transactions |
| August 13, 2003 | Board Meeting—Analysis of Inventory of Existing Revenue Recognition Guidance |
| July 23, 2003 | Board Meeting—Revenues and Contractual Rights and Obligations |
| June 24, 2003 | FASAC Meeting Handout |
| June 11, 2003 | Board Meeting—Revenues and Contractual Rights and Obligations |
| May 7, 2003 | Board Meeting—Cases Illustrating Different Combination Sequences of the Two Views of Revenues |
| April 9, 2003 | Board Meeting—Review of the Alternate Views of Revenue and Revenue Issues Related to Specific Transactions |
| February 26, 2003 | Board Meeting—Comparing the Liability Extinguishment View and the Broad Performance View of Revenue Recognition |
| January 22, 2003 | Board Meeting—Definition of Revenue and Performance of Revenue-Generating Activities |
| December 18, 2002 | Board Meeting—Revenue Recognition in Conjunction with Obligations to Customers that Are Performed by Others and Issues Relating to EITF Issue No. 99-19 |
| November 13, 2002 | Board Meeting—Refining the Working Criteria of Revenue Recognition and Applying the Working Criteria to Cases from EITF Issue No. 00-21 |
| October 9, 2002 | Board Meeting—Conceptual Criteria Underlying Revenue Recognition |
| September 18, 2002 | FASB-IASB Joint Meeting—Formal Agreement to Joint Project on Revenue Recognition; Consideration of the Existing Conceptual Criteria for Revenue Recognition; and Illustration of the Assets and Liabilities Approach to Revenue Recognition |
| June 25, 2002 | FASAC Meeting Handout |
| May 15, 2002 | Board Meeting—Proposal for a New Agenda Project on Issues Related to the Recognition of Revenues and Liabilities |
| March 26, 2002 | FASAC Meeting Minutes |
The IASB meeting summaries and observer notes for meetings from March 2006 can be found by clicking here. Meeting summaries for meetings before March 2006 can be found in the IASB Update. These are available by clicking here.
RELATED FASB DOCUMENTS
Download the Revenue Recognition article from the December 24, 2002 FASB Report
*BACKGROUND INFORMATION
In January 2002, the FASB discussed the objective and scope of a potential major project on the recognition of revenues and liabilities in financial statements. That project would lead to a new comprehensive accounting standard on revenue recognition and also would amend the related guidance on revenues and liabilities in certain of the FASB Concepts Statements. The Board decided to issue a project proposal with a 60-day public comment period. In May 2002, after considering 32 comment letters received on the project proposal, the Board added to its technical agenda a project to develop a comprehensive accounting standard on revenue recognition and to amend the related guidance on revenues and liabilities in certain FASB Concepts Statements.
The project was conducted in two interrelated "parts" that were pursued simultaneously—the "top-down" approach and the "bottom-up" approach. Using the top-down approach, the staff developed the conceptual guidance pertaining to recognition and measurement of revenues that will form the basis for the comprehensive standard. The top-down stage is currently in progress. During the bottom-up stage, the staff analyzed existing authoritative guidance to gain an understanding of the existing revenue recognition models in that guidance. The bottom-up approach included an extensive examination of the existing authoritative revenue recognition literature and the transactions to which that literature is applied. It also considered other practices (such as industry-specific practices) that have not been codified but are regarded as accepted practices. As part of the bottom-up stage, the staff developed a comprehensive inventory of that guidance and those practices. The bottom-up stage identified accounting models and transaction families, which will help in identifying specific situations to be considered in the development of the comprehensive standard on revenue recognition. To the extent that different accounting models are applied to the same (or similar) transaction families, comparability issues may exist. The bottom-up stage was completed in August 2003 and was discussed at the August 13, 2003 Board meeting.
In October 2004, the Boards added to their agenda a joint project to develop an improved and common conceptual framework that is based on and builds on their existing frameworks. That project, which addresses certain recognition and measurement issues that were included in the scope of the original Revenue Recognition project, is concurrent with their goals of improving the quality of financial reporting and promoting the international convergence of accounting standards. The Boards are sharing staff resources and working to coordinate the eventual issuance of an initial due process document (Preliminary Views/Discussion Paper), an Exposure Draft, and a comprehensive final Statement/Standard.
Prior to May 2005, the Boards were developing a revenue recognition model that would measure assets and liabilities at fair value (the fair value model). (See Case in Point: Consumer Electronics Retailer for an example of the model.) Using that approach, the Boards tentatively agreed that the fair values of performance obligations should be measured at the legal layoff price—that is, the price that the reporting entity would have to pay an unrelated party to assume legal responsibility for performing all of its remaining obligations. However, some Board members had certain practical concerns about reasonably estimating fair values and other Board members had concerns about the pattern of revenue recognition under that model. As a result, the Boards agreed to develop an alternative measurement model—the customer consideration model. In this model, performance obligations would be measured using an allocation of the customer consideration amount rather than at the fair value of the obligation.
In October 2006, the Boards decided to complete the preliminary development of both the fair value model and the customer consideration model, rather than trying to develop customer consideration as a "compromise model" that would command broad support among Board members. This was undertaken by the staff using two small groups of Board advisors drawn from both Boards and was completed in July 2007. The Boards discussed the two models from October 2007 to May 2008. As a result of these discussions, the Boards coalesced around a single contract-based revenue recognition principle. The Boards then considered further the two measurement approaches, customer consideration and fair value, and reached a preliminary view in favor of the customer consideration measurement approach. Accordingly, the Boards currently envisage that the initial due process document will explain and illustrate a contract-based revenue recognition model with a customer consideration measurement approach.
More information on the fair value model can be found in the observer notes for the November 2007 meetings and on the customer consideration model in the observer notes for the January 2008 meetings.
Overview of the contract-based revenue recognition model and customer consideration measurement approach
The model focuses on the asset or liability that arises from the combination of the rights and obligations (performance obligations) in a contract (arrangement) with a customer. In other words, the model addresses the recognition of contractual revenues.
A contract can be either an asset or a liability of the entity, depending on the remaining rights and performance obligations in the contract. A contract would be an asset (a contract asset) to the entity if the remaining rights exceed the remaining obligations. A contract would be a liability (a contract liability) to the entity if the remaining obligations exceed the remaining rights.
In the customer consideration measurement approach, at contract inception the rights are measured at the value of the promised consideration (ie the customer consideration). This amount is allocated to the individual performance obligations in the contract pro rata based on the entity’s observed or estimated selling prices of the goods or services underlying those performance obligations at contract inception.
In principle, any good or service that is promised to the customer in accordance with the explicit or implicit terms of the contract constitutes a performance obligation. In practice, for the purpose of allocating the promised consideration, goods or services need to be treated as individual performance obligations only if they are transferred to the customer at different times.
As the entity satisfies each performance obligation in the contract, the entity recognizes the corresponding increase in the contract asset or decrease in the contract liability (ie increase in the contract’s net position) as revenue. The amount of revenue recognized is the amount of the consideration allocated to the satisfied performance obligation at contract inception.
The initial measurement of a performance obligation is locked in at inception and is not subsequently updated unless it is deemed onerous, at which point it is remeasured. The IASB has indicated that there may be other circumstances in which performance obligations might be remeasured.
As a result:
- An entity recognizes revenue only when a performance obligation is satisfied, ie when it transfers a promised good or service to the customer under the contract.
- Revenue is not recognized when a contract is obtained, although it may be recognized immediately after contract inception if a performance obligation is satisfied.
- At contract inception, neither a contract asset nor contract liability is recognized (except in the unusual circumstances that performance obligations are deemed onerous at contract inception). A contract asset or liability is recognized only when one party begins to perform in accordance with the contract (ie when the entity satisfies a performance obligation or the customer pays).
- The total amount of revenue recognized over the life of a contract is the amount of the customer consideration.
CONTACT INFORMATION
Jeff Wilks |
Henry Rees |
Todd Johnson |
April Pitman
|
Kenneth Bement
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