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IASB meeting summaries and observer notes

 IASB March 2009


In the discussion paper Preliminary Views on Revenue Recognition in Contracts with Customers, the Board and the FASB propose a revenue recognition model based on increases in an entity�s net contract position. The entity�s net contract position is a contract asset or a contract liability depending on the combination of the remaining rights and performance obligations in the contract. In that model, an entity initially measures those rights and performance obligations at the transaction price - ie the amount of promised customer consideration.

The discussion paper does not consider how an entity would determine the transaction price when the promised consideration is (a) paid at a time significantly different from performance by the entity, (b) uncertain or (c) in a form other than cash. At this meeting, the Board discussed these issues.

Time value of money

The Board decided tentatively that:

  • an entity�s net contract position should reflect the time value of money whenever the effect would be material. In considering whether to provide guidance on materiality in this context, the Board noted that IAS 39 states that
    short-term receivables and payables with no stated interest rate may be measured at the original invoice amount if the effect of discounting is immaterial.
  • the discount rate should be the rate at which the entity and its customer would have entered into a financing transaction that did not involve the provision of other goods and services.
  • the effect of financing should be presented separately from the revenue for other goods and services.

Uncertain consideration

The Board considered how an entity should determine the transaction price when the promised customer consideration amount is uncertain for reasons other than the customer�s credit risk and modifications of the contract. The Board decided tentatively that:

  • at contract inception, the transaction price is the amount of the expected customer consideration�ie the probability-weighted estimate of customer consideration.
  • after contract inception, an entity should update the measurement of rights to reflect changes in the transaction price, and allocate those changes to the performance obligations. If changes are allocated to performance obligations that have been satisfied, the effects of the changes should be recognised as revenue. If the effects of the changes relate to obligations that are unperformed, they increase or decrease the measurement of those obligations. The staff will consider further how to allocate a change in the transaction price to performance obligations.

Non-cash consideration

The Board decided tentatively that:

  • an entity should measure non-cash consideration at its fair value.
  • if an entity cannot estimate reliably the fair value of non-cash consideration, it should measure the consideration indirectly by reference to the fair value of the promised goods and services.
  • an entity should not recognise revenue if a transaction lacks commercial substance. The staff will consider further whether an exchange of similar assets (with commercial substance) should generate revenue.

Next steps

The Board will consider collectibility and some contract-related issues (such as renewal and cancellation options, and combining and segmenting contracts) at its meetings in April and May.

Date: 3/17/2009