BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
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
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
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
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
US GAAP IAS/IFRS GAAP
JOINT PROJECTJOINT PROJECT
CONVERGENCE
Revenue recognition
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
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
Proactive Accounting Activities in Europe
PAAinE!
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
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
Revenue Recognition
Framework
Pensions
Equity/ liability split
Performance Reporting
PAAinE - projects
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?
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.
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.
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
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
THE DRAFT DISCUSSION PAPER
DISCUSSES FOUR DIFFERENT APPROACHES TO RECOGNITION
Revenue recognition
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
COMPLETED CONTRACT
COMPLETED PART CONTRACTS
PART-OUTPUT HAS VALUE TO CUSTOMER
FOUR APPROACHES
CONTINUOUS APPROACH
Revenue recognition
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
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.
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
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
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
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
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
• Critical events approach
• Who’s perspective – Supplier versus customer
• Customer acceptance
• Contingent customer acceptance
• Exchange
Matters considered
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
• Service concessions?
• Customer loyalty programmes?
Other examples
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
Revenue recognition
Measurement might influence conclusions!!!
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
Critical event
Performance obligation
Right to consideration
Asset
Liability
Revenue recognition
BRUSSELS 18. OCTOBER 2006 ©2006 EFRAG
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