Project Updates

Revenue Recognition—Joint Project of the FASB and IASB

Last Updated: November 10, 2009 (Updated sections are indicated with an asterisk *)

This project update summarizes the project activities and decisions of the FASB and IASB (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 Objective 
 Due Process Documents 
*Decisions Reached at the Last Meeting 
*Summary of Decisions Reached to Date
Next Steps 
*Board/Other Public Meeting Dates 
Related FASB Documents 
Background Information 
Contact Information 

*SUMMARY OF DECISIONS REACHED TO DATE (As of September 23, 2009)

The Proposed Model and Receivables Accounting

The proposed revenue recognition model focuses on contracts with customers. A contract comprises rights and performance obligations. The Board affirmed its preliminary view in the Discussion Paper, Preliminary Views on Revenue Recognition in Contracts with Customers, that unperformed rights and performance obligations of a contract should be reported on a net basis as either a contract asset or a contract liability.

The Board considered the relationship between accounts receivable and a contract asset or contract liability. The Board decided that an entity should account for an unconditional right to consideration in accordance with existing guidance on receivables. A right to consideration is unconditional when nothing other than the passage of time makes payment of that consideration due.

Control

The Discussion Paper proposed that an entity should recognize revenue when it satisfies its performance obligations to a customer by transferring goods or services to the customer. An entity has transferred a good or a service when the customer obtains control of it.

The Board decided that the proposed standard would require an entity to assess whether control has been transferred from the perspective of the customer. The proposed standard also would provide a definition of control and accompanying indicators to help entities assess the transfer of control from a customer perspective.

The Board considered the following working definition of control and related indicators:

Control of a good or a service is an entity’s present ability to direct the use of and receive the benefit from that good or service.

  1. The customer has an unconditional obligation to pay for the asset (and the payment is nonrefundable).
  2. The customer has legal title to the asset.
  3. The customer can sell the asset to (or exchange the asset with) another party.
  4. The customer has physical possession of the asset.
  5. The customer has the practical ability to take possession of the asset.
  6. The customer specifies the design or function of the asset.
  7. The customer has continuing managerial involvement with the asset.
The customer can secure or settle debt with the asset.

The staff will continue to refine the definition of control and the indicators for discussion at future meetings.

Options to Acquire Additional Goods and Services

The Board considered how an entity would determine whether options to acquire additional goods and services are part of a present contract with a customer, and, if so, how the entity would account for them.

The Board decided that an option to acquire additional goods and services in a contract with a customer would be recognized as a performance obligation only if the option provides a material right to the customer that the customer would not receive without entering into that contract. An entity would account for that performance obligation by allocating to it a portion of the transaction price.

The Board decided that an entity can use various methods to allocate consideration to those optional goods and services. In some cases, an entity can estimate the standalone selling price of an option as a basis for allocation. That estimate would reflect the discount the customer would obtain when exercising the option, adjusted for the following:

  1. The discount that the customer could receive without exercising the option
  2. The likelihood that the option would be exercised.
The Board decided that with renewal and cancellation options, an entity could allocate the transaction price to the optional goods and services by reference to the goods and services expected to be provided and the corresponding expected consideration.

Presentation of Contracts with Customers:

The Discussion Paper, Preliminary Views on Revenue Recognition in Contracts with Customers, proposes that revenue recognition should be based on a single asset or liability—an entity’s contract with a customer. The combination of the remaining rights and obligations in that contract gives rise to a (net) contract asset or a (net) contract liability.

At this meeting, the Board discussed various issues related to the presentation of contracts with customers. Those issues include:
  1. When, if ever, an entity should present contractual rights and obligations as assets and liabilities, respectively
  2. Whether an entity should present net contract assets separately from net contract liabilities
  3. Whether and how an entity should present short-term contracts separately from long-term contracts
  4. The relationship between an entity’s contract position and accounts receivable.

The Board did not reach any decisions and asked the staff to further analyze these issues for a future meeting.

Comment Letter Summary:

At the July 23 joint Board meeting, the Boards considered a summary of the responses to the Discussion Paper, Preliminary Views on Revenue Recognition in Contracts with Customers. After reviewing those responses, the Boards affirmed the objective of the project to develop a single revenue recognition model for IFRSs and U.S. GAAP that can be applied consistently across various industries and transactions. They agreed to focus on developing the model proposed in the Discussion Paper and clarifying how that model would apply to continuous delivery contracts (for example, some construction contracts). The Boards will then decide whether to exclude any specific industries from the scope of that model.

Gross versus net presentation of revenues

When other parties are involved in providing goods and services to an entity’s customer, the entity must determine what amounts to recognize as revenue; that is, whether to recognize revenue in the gross amount collected from the customer or the net amount the entity retains after compensating those other parties for their goods and services.  

The Board decided that the amount an entity recognizes as revenue depends on the identification of performance obligations. In other words, the entity must determine whether its performance obligation is to provide goods and services itself or to arrange for another party to provide those goods and services. The Board directed the staff to further develop application guidance that would help entities to identify performance obligations consistently.

The Board decided that an entity should disclose separately revenue in the same line of business from (1) providing goods and services itself and (2) arranging for the provision of goods and services. The Board also decided that an entity should disclose the basis for its assessment and any significant judgment in identifying performance obligations when other parties are involved in providing goods and services to the entity’s customer.

The Board also agreed that if an entity transfers a performance obligation to another party so that the entity is no longer obliged to provide the underlying good or service to the customer, the entity should not recognize revenue for that performance obligation.

Combination, segmentation, and modification of contracts

The Boards’ proposed revenue recognition model applies to contracts with customers. In most cases, a single contract gives rise to a single net contract position when applying the proposed model. However, in some cases, an entity’s pattern of revenue (and profit) recognition can vary depending on how an entity combines contracts (or segments of a contract) into net contract positions.

The Board tentatively decided that two or more contracts with the same customer should be accounted for as a single net contract position if the prices of those contracts are interdependent.   An entity should consider various indicators and exercise judgment when determining whether prices are interdependent.

The Board tentatively decided that an entity should account for a single contract with a customer as multiple contracts only if each contract segment is priced independently. At future meetings, the Board will further discuss some related issues involving the identification and measurement of performance obligations.

The Board also decided that when an entity modifies an existing contract, the modification should be accounted for as a separate contract if it is priced independently from the original contract. If the prices are interdependent, an entity should account for the original contract and modification as a single net contract position, recognizing the effect of the modification on a cumulative catch-up basis.

Nonmonetary exchanges

The Board decided that an entity should recognize revenue for a nonmonetary exchange transaction only if the transaction has commercial substance. The Board also decided an entity should not recognize revenue from a nonmonetary exchange transaction if the purpose was to facilitate a sale to another party.

The Board decided that an entity should measure the nonmonetary consideration received at its fair value or, if it cannot be estimated reliably, by reference to the selling price of the promised goods and services. If neither of those amounts can be estimated reliably, then the transaction would not generate revenue.   The Board also decided that a new revenue recognition standard should not provide additional guidance on specific barter transactions.

Measurement of Rights:

At the April 1, 2009, meeting, the Board discussed an issue that was not included in the Discussion Paper, that is, how an entity would determine the transaction price when the promised consideration is payable at a time significantly different from performance by the entity, uncertain (variable) in amount, or in a form other than cash.

Payable at a time significantly different from performance by the entity

The Board decided that when measuring a net contract position, an entity would reflect the time value of money whenever that effect would be material. It would use the discount rate that would be reflected in a financing transaction between the entity and its customer that did not involve the provision of other goods and services. The reporting entity would report the effect of financing separately from the revenue from other goods and services.

Uncertain in amount

The Board decided that when the customer consideration is uncertain (variable) in amount, the transaction price at inception is the amount of the expected customer consideration, defined as the probability-weighted estimate of customer consideration. An entity would update the measurement of rights to reflect changes in the transaction price and allocate those changes to all the performance obligations. The effects of those changes on satisfied performance obligations would be recognized as revenue in the period of change.

At a joint meeting with the IASB on May 21, the Boards tentatively agreed that revenue recognition should be constrained only if the consideration amount cannot be reliably estimated.   The Boards directed the staff to develop proposed application guidance that an entity would use to determine whether an estimate is reliable.   The Boards also asked the staff to develop potential disclosures that an entity might provide about contracts with uncertain consideration and the estimates used in the financial statements.

In a form other than cash

The Board tentatively decided that an entity should measure noncash consideration at fair value. If an entity cannot reliably estimate the fair value of noncash consideration, it should measure the consideration indirectly by reference to the selling price of the promised goods and services.

Discussion Paper:

See the FASB Discussion Paper, Preliminary Views on Revenue Recognition in Contracts with Customers for decisions prior to December 19, 2008.

NEXT STEPS

Over the next few months, the staff plans to further develop the proposed revenue recognition model, taking into consideration the input received from respondents. The staff and Boards will then consider how the model will be applied to various industries and will begin writing an Exposure Draft, along with any necessary application guidance. The Boards expect to publish the Exposure Draft in 2010.
 
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