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BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

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Page 1: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

REVENUE RECOGNITION

ADVISORY FORUM

Stig Enevoldsen

18 October 2006

Page 2: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue recognition

IAS 18 problems•Very little specific guidance• Inconsistent guidance•Somewhat based on matching•Examples not always consistent with the standard

•Little guidance on multiple-element contracts

Page 3: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue recognition

IAS 11 and 18 problems•The two standards are inconsistent•Somewhat based on matching•Little guidance on more complex transactions

•Little guidance on new sophisticated transactions such as multiple-element contracts related to construction

Page 4: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue recognition

USA has a big number of rules •The rules are in many different pronouncements

•Specific guidance to specific transactions

•SEC has issued SAB 104 somewhat based on an earnings principle

•US GAAP also urgently needed improvement

Page 5: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

US GAAP IAS/IFRS GAAP

JOINT PROJECTJOINT PROJECT

CONVERGENCE

Revenue recognition

Page 6: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

IASB/FASB could have chosen•Amendments to the present standards and rules

•Ad hoc changes to facilitate new types of transactions

IASB/FASB decided to undertake a comprehensive project with fundamental rethink

IASB/FASB joint project

Page 7: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Proactive Accounting Activities in Europe

PAAinE!

Page 8: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

OBJECTIVES:

•Partnership with National standard setters

•High quality proactive input to IASB(+FASB)

•More consistent messages to IASB

•Create debates in Europe

•Involvement in the convergence work

•Monitor work of IASB & FASB

•Thought leadership

EFRAG – PAAinE

Page 9: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue Recognition

Framework

Pensions

Equity/ liability split

Performance Reporting

PAAinE - projects

Page 10: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

•Top-line figure – Turnover – Revenue

•Revenue is a gross number

•Revenue is a measure of activity pursuant to a contract with a customer (reflects the activity of supplying goods and services to customers)

•Based on the asset liability approach – like the Framework

PAAinE project Revenue Recognition

Is it strange to start Revenue based on assets and liabilities?

Page 11: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Examples

The Chair

A customer buys an already-made chair from the supplier, and takes it home in his car.

The Washing Machine

A customer with a washing machine enters into a contract with a separate supplier (the

plumber) that requires the supplier to connect the washing machine, to the customer’s

existing plumbing and do all that is necessary to make the washing machine work.

Page 12: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

ExamplesThe Cleaner

A customer enters into a contract that requires the supplier (the cleaner) to visit his office

every work day evening for a year and carry out on each of those visits an identical set of

cleaning tasks. Bridge

A customer enters into a contract with the supplier (a construction company) that requires the supplier to build a bridge to the customer’s

design and specification. The contract envisages that the bridge will take three years

to complete.

Page 13: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

The Computer

A customer orders from the supplier a particular specification of computer along with a

specified package of off-the-shelf software. The supplier is required to supply and deliver

the computer with the software already loaded, connect up all the wires and make sure

everything works, and provide the customer with ten hours of tuition on how best to use the

computer and its software.

Examples

Page 14: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

THE DRAFT DISCUSSION PAPER

DISCUSSES FOUR DIFFERENT APPROACHES TO RECOGNITION

Revenue recognition

Page 15: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

COMPLETED CONTRACT

COMPLETED PART CONTRACTS

PART-OUTPUT HAS VALUE TO CUSTOMER

FOUR APPROACHES

CONTINUOUS APPROACH

Revenue recognition

Page 16: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue arises when the supplier fulfils the performance obligations arising under a contract with a customer.

A Completed contract

The supplier gets a right to consideration when it has met its

performance obligation.

The consideration constitutes a new asset either cash or receivable

Page 17: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue arises when the entity fulfils all the performance obligations arising under a part-

contract with a customer.

(A part-contract comprises one or more of the performance obligations required by the

whole contract that, when fulfilled, will result in a right to consideration arising).

B Completed part contract

The contractual terms allows the supplier to get right to consideration

before full completion.

Page 18: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue arises when the entity fulfils all the performance obligations arising under a part-

contract with a customer.

Each part-contract comprises the work necessary to produce an item of output that the customer can either use for its intended

purpose or can be sold at an amount that reflects its worth when used for that intended

purpose.

C Part-output has value to customer

Page 19: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue arises when the entity has produced comprises the work necessary to produce an

item of output that the customer can either use for its intended purpose or can be sold at an amount that reflects its worth when used

for that intended purpose.

C Part-output/value to customer

Necessary to establish criteria for “intended purpose” and “can be sold”

(as outlined in C60)

Seems suitable for multiple elements contracts

Page 20: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue should be recognised when activity undertaken pursuant to a contract with a

customer gives rise to an asset that reflects performance towards completion.

D Continuous approach

The supplier must expect the contract to be fully completed

Disaggregating also important here because of potential different margins of the elements

Page 21: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

A COMPLETED CONTRACT

B COMPLETED PART CONTRACTS

C PART-OUTPUT HAS VALUE TO

CUSTOMER

Chair

D CONTINUOUS APPROACH

Revenue recognition

Washing machine

Cleaner

Bridge

Computer

Page 22: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

• Critical events approach

• Who’s perspective – Supplier versus customer

• Customer acceptance

• Contingent customer acceptance

• Exchange

Matters considered

Page 23: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

• Service concessions?

• Customer loyalty programmes?

Other examples

Page 24: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Revenue recognition

Measurement might influence conclusions!!!

Page 25: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

Critical event

Performance obligation

Right to consideration

Asset

Liability

Revenue recognition

Page 26: ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG

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