IFRS Newsletter: Revenue

14 Pages·2015·1.55 MB·English

IFRS NEWSLETTER  Issue 1,3 March 2015
RUNEV E E
Once again, the FASB
has shown a greater
appetite to make detailed
changes to the new
revenue standard than
the IASB.
Prabhaak r Kalavacherla P( K,)
KPMG’s global IFRS revenue
recognition leader
Problems iw th principals
hT is edition o f IFRS Newsletter: Revenue eax mines the latest
developments on the ne w standard, and hw at the decisions could
mean of r you.
The principal-agent guidance in the new revenue standard was the main focus of the March
meeting between the IASB and the FASB. The Boards discussed proposed improvements,
but decided that further research was needed before frm decisions could be taken.
However, in other areas – for the second time in two months – the Boards agreed to propose
changes to the new standard. The changes are intended to address implementation issues
discussed by the Boards’ joint Transition Resource Group for Revenue Recognition.
As in their February meeting, the FASB has proposed more extensive and more detailed changes
than the IASB.
iH ghlights
l  Principal-agent considerations – The Boards requested further research, with the aim of clarifying
how to apply the control principle.
l  Presentation of sales taxes – The FASB agreed a new practical expedient permitting a company to
present sales taxes net.
l  Collectibility considerations – The FASB agreed to clarify how the collectibility criterion applies
when assessing contract existence, and the meaning of contract termination.
l  Non-cash consideration – The FASB agreed to clarify that non-cash consideration is measured on contract
inception, and how to apply the constraint.
l  Transition to the new standard – The Boards proposed adding further practical expedients to the transition
options.
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CURRENT STATUS OF THE REVENUE PROJECT
What happened in March 2015?
The story so far …
In March, the oB ards met to consider ho w to address issues
In May 201,4 the IA BS and the FA BS t( he oB ards ) that have been reef rred to them by the RT G in the areas o :f
published their ne w oj int standard on revenue recognition
– IFR S 15A/ o CS T pic 06 6 Revenue from Contracts with • assessing hw ether a company is acting as a principal or as
Customers t( he ne w standard.) hT is replaces most o f the an agent – i.e. hw ether it should recognise revenue gross
guidance on revenue recognition that currently eix sts or net;
under IFR S and U S GAAP.
• ho w a company that acts as a principal should measure
At the same time, the oB ards of rmed the oj intr T ansition revenue hw en it does not nk o w the amount of
Resource Group of r Revenue Recognition RT( G.) Its consideration paid by the end customer;
primary purposes are to:
• hw ether a company should present sales taex s gross
• solicit, analyse and discuss staek holder issues arising orn� et;
rf om implementation o f the ne w standard; • the measurement o f nonc- ash consideration ; and
• inof rm the oB ards about those implementation issues, • hw ether to add practical epx edients to the ne w standard to
hw ich iw ll help them determine hw at, i f any, action iw ll provide uf rther transition relie,f particularly of r companies
be needed to address those issues ; and that enter into longt- erm contracts that are modie� d
• provide a of rum of r staek holders to learn about the new rf euq ently.
standard rf om others involved iw th implementation. A number o f these issues arise under currently eef f ctive
hT e RT G advises the oB ards and does not have standard- revenue recognition reuq irements. In the case o f principal-
setting authority. Its members include auditors, n� ancial agent considerations, the FA BS may also amend current
statement preparers and users iw th nk olw edge and UG�S AAP reuq irements and not uj st the ne w standard.
epx erience o f revenue recognition under U S GAAP ando/ r aE ch oB ard iw ll issue its proposed changes of r public
IFR S rf om various industries and geographies.ow T KPMG comment in separate epx osure dratf s sDE( .) hT e oB ards
partners are members. have not conr� med the precise timings o f their sDE , but it is
iS nce its of rmation, the RT G has met three times – in liek ly that the FA BS DE iw ll be issued shortly iw th a 54 d- ay
uJ ly 201,4 cO tober 201 4 and aJ nuary 2015. It is epx ected comment period.
to meet approix mately of ur times annually until 201 7 In addition, the oB ards are undertaik ng outreach iw th
or2� 01.8 staek holders over hw ether to deef r the eef f ctive date, hw ich
hT e agenda and papers o f the RT G are publicly available is currently 201 7 under IFR S and of r public business entities
and all meetings are held in public. A summary o f the under U S GAAP. hT ey plan to discuss the results o f this
issues discussed to date by the RT G is included at the outreach in 2Q 2015.
bac k o f this nesw letter.
hT e RT G discussion on most issues considered to
date has indicated that staek holders should be able to Contents
understand and apply the ne w standard. oH ew ver, in
some cases the discussion has identie� d the potential of r
diversity in practice to arise.
Folloiw ng the previous RT G discussion, the IA BS and
FA BS decided in February to propose amendments to the
ne w standard regarding:
• licences ; and
• identiyf ing separate perof rmance obligations.
hT ere are a number o f dief f rences betew en the
amendments to be proposed by the IA BS and the FA BS
respectively, as epx lained in our February nesw letter .
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MARCH DECISIONS AT A GLANCE
The Boards What’s the issue? IASB decisions FASB decisions
agreed to propose
Principal-agent considerations
amendments in a
How should a oC nduct uf rther research into principala- gent issues, iw th a vie w to
number of areas.
company assess clariyf ing ho w to apply the control principle.
whether it is a
principal or an agent?
Presentation of sales taxes
How should a oN action to be taek n. Add a practical epx edient under
company present sales hw ich a company can elect an
taxes? accounting policy to present
sales taex s net.
Collectibility considerations
How should a Conduct further research. Amend the ne w standard
company assess to clariyf ho w to assess
collectibility when collectibility and the meaning o f
determining whether contract termination.
a contract exists?
Non-cash consideration
What is the oN action to be taek n. lC ariyf that the af ir value o f non-
measurement cash consideration is measured
date for non-cash at the contract inception date.
consideration?
How is the variable oN action to be taek n. lC ariyf that the variable
consideration consideration guidance only
guidance applied applies to variability resulting
to contracts that rf om af ctors other than the of rm
include non-cash o f the consideration.
consideration?
Transition to the new standard
Should further Add a practical epx edient of r contracts that are modie� d beof re the
practical expedients date o f initial application.
be added to the
Permit companies not to apply oN action to be taek n.
transition options?
the ne w standard to contracts
completed under legacy GAAP
hw en applying the ne w standard
retrospectively.
oN action to be taek n – exE mpt companies rf om certain
eex mption already eix sts under disclosures in the year o f
IFR.S adoption o f the ne w standard.
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PRINCIPAL-AGENT CONSIDERATIONS
The Boards What’s the issue? A
requested further
How should a company assess whether it is a principal or an agent?
research into
principal-agent Under the ne w standard, i f more than one party is involved in providing goods or services to a
customer, then the company assesses hw ether it is:
considerations,
with the aim of • the principal in the transaction, in hw ich case it presents the gross amount o f consideration of r
the goods and services as revenue ; or
clarifying how to
apply the control • an agent, in hw ich case it presents only its ef e or commission as revenue.
principle. hT e ne w standards’ guidance on ho w to maek this assessment includes an overall principle,
indicators and illustrative eax mples. hT e overall reuq irement to assess hw ether a company is a
principal or an agent also eix sts in current revenue recognition guidance under IFR S and U S GAAP,
broadly iw thin a r‘ isa-k ndr- eaw rd ’ rf ameow r k rather than the c‘ ontrol ’ rf ameow r k o f the ne w
standard.
tS aek holders have epx ressed concerns about consistency o f application o f the principal-
agent guidance under both the ne w standard and the currently eef f ctive revenue recognition
reuq irements. Under the ne w standard, specic� areas o f concern include hw ether all o f the
indicators and eax mples are consistent iw th the control principle, and ho w to ew ight the indicators
in cases hw en they contradict each other. tS aek holders have also noted that the guidance can be
particularly dic� f ult to apply to n‘ e w economy ’ transactions involving virtual or intangible goods.
At the RT G meeting in uJ ly 201,4 concern aw s epx ressed that the guidance in the ne w standard
could be interpreted in various aw ys that could potentially result in diversity in practice. hT ereof re,
the oB ards instructed their sta f f to perof rm additional research to understand hw ether specic�
improvements are needed.
How should a principal assess gross revenue?
tS aek holders also noted that in some cases the company may not nk o w the amount that an
intermediary charges the end customer – e.g. i f the intermediary has discretion over setting
prices. In such cases, the company may n� d it dic� f ult to estimate the transaction price and
so measure revenue. hT is is a practice issue under currently eef f ctive revenue recognition
reuq irements, on hw ich there is no specic� guidance in the ne w standard.
At the RT G meeting in uJ ly 201,4 there ew re dief f ring viesw about hw ether, in such cases, the
company should recognise as revenue :
• only the cash received rf om the intermediary ; or
• an estimate o f the amount charged by the intermediary to the end customer.
What did the Boards decide? A
Further research required on principal-agent considerations
hT e oB ards ew re not asek d to vote on specic� proposals regarding the overall principala- gent
guidance at this meeting. oH ew ver, they acnk olw edged the signic� ance o f the issues, and
instructed the sta f f to conduct uf rther research.
In the course o f the discussion, many IA BS and FA BS members epx ressed initial support of r
targeted improvements to amend the principala- gent guidance to clariyf that the control principle is
alaw ys the determining af ctor hw en maik ng the principala- gent assessment. hT ese improvements
could include revisions to the indicators, designed to ensure that each indicator linsk to the control
principle. hT ere aw s less support of r an alternative approach that aw s tabled of r consideration,
hw ich ow uld have involved a more uf ndamental rea- rticulation o f the guidance.
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What are the implications? A
Increased clarity on principal-agent guidance in the works
It appears liek ly that the oB ards iw ll continue to ow r k toaw rds improving the principala- gent
guidance. hT is iw ll respond to concerns epx ressed by RT G members that the current guidance
could result in diversity in practice, iw th reasonable people reaching dief f rent conclusions of r the
same af ct patterns. It may also pave the aw y of r changes to currently eef f ctive U S GAAP. oH ew ver,
this is a broad, comple x issue and the timelines and precise changes that may be made to the ne w
standard have not been conr� med.
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PRESENTATION OF SALES TAXES
The FASB agreed What’s the issue? B
a new practical
How should a company present sales taxes?
expedient
permitting a Under the ne w standard, the transaction price – and thereof re revenue – ecx ludes amounts
collected on behal f o f third parties – e.g. some sales taex s. A company assesses sales taex s on a
company to
caseb- yc- ase basis to determine hw ether it should present them :
present sales
• gross – i.e. include them in revenue and cost o f sales ; or
taxes net.
• net – i.e. ecx lude them rf om revenue.
hT e reuq irement to assess each ta x collected rf om a customer and remitted to a governmental
body is similar to current IFR.S oH ew ver, it dief f rs rf om current U S GAAP, hw ich permits a
company to maek an accounting policy election to present these sales either gross or net. hT e
UG�S AAP election covers sales taex s, use taex s, valuea- dded taex s and some ecx ise taex s.
Folloiw ng a RT G discussion o f the issue, some U S staek holders asek d the oB ards to add a practical
epx edient to the ne w standard to lessen the compleix ty and practical dic� f ulties in assessing
hw ether a ta x is collected on behal f o f a third party.
What did the Boards decide? B
FASB supports but IASB rejects a new practical expedient
hT e IA BS decided that no standards- etting is needed on this issue because the ne w standard
is clear that sales taex s are ecx luded rf om the transaction price i f collected on behal f o f the
ta x authorities. uJ dgement iw ll be reuq ired to determine the appropriate presentation o f each
salest� a.x
yB contrast, the FA BS decided to propose amendments to the ne w standard to introduce a ne w
practical epx edient. hT is ow uld permit, but not reuq ire, a company to present sales taex s that are
in the scope o f the epx edient on a net basis. Alternatively, the company could apply the current
reuq irements o f the ne w standard. iE ther aw y, the company ow uld disclose the approach taek n.
What are the implications? B
Reinstating an existing GAAP difference
hT e FA BS proposal ow uld reinstate an eix sting IFRU/S S GAAP dief f rence that the ne w standard
sought to eliminate. hT is ow uld reduce the comparability o f n� ancial statements under IFR S and
U S GAAP, and iw thin U S GAAP to the etx ent that dief f rent companies adopt dief f rent approaches.
Users ow uld have to rely on additional disclosures to maek meaninguf l comparisons betew en
aef f cted companies.
hT e FA BS sta f f noted that under current U S GAAP, companies iw thin a given sector tend to select
the same approach, so it is possible that current sectorb- ys- ector preef rences ow uld be carried
of raw rd. hT is ow uld be contrary to one o f the ek y aims o f the ne w standard, hw ich aw s to reduce
sectors- pecic� accounting.
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COLLECTIBILITY CONSIDERATIONS
The FASB agreed What’s the issue? D
to clarify how
How should a company assess collectibility when determining whether a
the collectibility
contract exists?
criterion applies
The new standard’s revenue recognition model applies only to contracts that pass the ‘contract
when assessing
existence’ criteria in Step 1 of the model. These criteria include assessing whether it is probable
contract that the customer will pay the consideration to which the company expects to be entitled – i.e. the
existence, and the ‘collectibility criterion’.
meaning of If a contract fails any of the contract existence criteria – including the collectibility criterion – then
contract the company recognises any consideration received from the customer as revenue only when:
termination. • t
he contract existence criteria are met subsequently and application of the model would result
in revenue recognition;
• the company has no remaining obligations and all, or substantially all, of the consideration has
been received and is non-refundable; or
• the contract has been terminated and the consideration received is non-refundable.
The TRG discussed a number of issues relating to collectibility at its meeting in January 2015.
Following this discussion, the Boards agreed to do more research on:
• how to apply the collectibility criterion and how to determine when the contract has been
terminated; and
• whether the accounting required when a contract fails the contract existence criteria is a faithful
depiction of the economics.
What did the Boards decide? D
FASB to clarify how to assess collectibility and the meaning of contract
termination
The FASB agreed to propose amendments to the new standard, which are intended to clarify:
• how to apply the collectibility criterion; and
• for contracts that fail the contract existence test, how to assess when a contract has
been terminated.
Specifcally, the FASB proposes to clarify that:
• when assessing collectibility, a company considers the consideration “to which it will be
entitled in exchange for the goods or services that will be transferred to the customer” rather
than all consideration – i.e. collectibility is a forward-looking assessment that considers the
company’s exposure to credit risk and the tools available to the company to manage that
exposure to credit risk throughout the contract; and
• contract termination means that the company has the ability to stop transferring goods and
services under the contract, and has done so.
The IASB does not plan to make corresponding clarifcations to the IFRS version of the new
standard at this time.
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What are the implications? D
Only a clarifcation …
hT e FA BS regards the proposals on assessing collectibility and the meaning o f contract
termination purely as claric� ations. hT e aim o f the proposals ow uld be to ensure that the ne w
standard is applied in the manner originally intended by the oB ards. hT e IA BS considers that no
claric� ation is necessary.
… at this stage
yB contrast, a change in the accounting of r contracts that af il the contract eix stence criteria ow uld
represent a more signic� ant change. Although some may consider the accounting reuq ired in
these circumstances to be punitive – notably, it is more prudent than cash accounting – the oB ards
did not epx ect it to be applied rf euq ently in practice. A ek y of cus o f the sta f f ow r k in this area iw ll
be to assess the etx ent o f contracts to hw ich the guidance ow uld apply of lloiw ng the claric� ations
agreed at this meeting.
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NON-CASH CONSIDERATION
The FASB What’s the issue? F
agreed to clarify
What is the measurement date for, and how is the constraint applied to,
that non-cash
contracts that include non-cash consideration?
consideration
Under the ne w standard, nonc- ash consideration is included in the transaction price and
is measured
is measured at af ir value, unless this cannot be reliably measured. I f the af ir value o f non-
on contract cash consideration varies only because o f the of rm o f the consideration, then it is not
inception, and variablec� onsideration.
how to apply the tS aek holders have raised uq estions about the date at hw ich the af ir value o f nonc- ash
constraint. consideration should be determined. hT ey have also uq estioned ho w the variable consideration
guidance should be applied to contracts that include nonc- ash consideration, specic� ally hw en the
af ir value o f nonc- ash consideration varies due to its of rm and also of r other reasons.
At the RT G meeting in aJ nuary 2015, RT G members epx ressed miex d viesw on both uq estions.
What did the Boards decide? F
IASB decides that no action is required
hT e IA BS decided not to address these issues at this stage. It highlighted that this ow uld allo w the
issue to be considered more comprehensively, and also avoid potential unintended conseuq ences
arising rf om the interaction iw th other standards.
FASB proposes to introduce specifc guidance on both issues
yB contrast, the FA BS decided to propose amendments to the ne w standard to speciyf that:
• the measurement date of r nonc- ash consideration is the contract inception date ; and
• the variable consideration guidance does not apply to variations in the af ir value o f the nonc- ash
consideration that arise because o f its of rm.
What are the implications? F
hT e FA BS proposals on the measurement date ow uld increase consistent application o f the ne w
standard under U S GAAP.
hT e FA BS proposals on variable consideration ow uld also promote consistent application under U S
GAAP. oH ew ver, the FAs’BS chosen approach may be dic� f ult to apply in some cases, as it reuq ires
a company to split movements in the af ir value o f nonc- ash consideration betew en those related
to the of rm o f the consideration and those arising of r other reasons. hT e IAs’BS decision not to
provide guidance leaves open the possibility that companies of lloiw ng IFR S may see k to of llo w
the FAs’BS approach, but they may instead preef r a simpler approach that avoids the allocation o f
changes in af ir value to dief f rent causes than the FAs’BS approach reuq ires.
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TRANSITION TO THE NEW STANDARD
The Boards What’s the issue? E
proposed adding
Should further practical expedients be added to the transition options?
further practical
expedients to the oC mpanies can transition to the ne w standard using one o f tow methods.
transition options.
Retrospective approach A company may adopt the ne w standard retrospectively
Cumulative effect approach A company may choose not to restate comparatives, and
instead adopt the ne w standard iw th eef f ct rf om the date o f
initial application, aduj sting retained earnings at that date
hT e ne w standard also ef atures optional practical epx edients intended to provide transition relie f
under the retrospective approach.
tS aek holders have epx ressed concerns that transition to the ne w standard may be especially
burdensome of r companies that enter into longt- erm contracts that have been rf euq ently modie� d
beof re the date o f initial application.
At the RT G meeting in aJ nuary 2015, there aw s general support of r investigating hw ether uf rther
practical epx edients could be identie� d that ow uld provide additional relie f in such cases.
What did the Boards decide? E
A new practical expedient for contract modifcations
hT e oB ards agreed to propose adding a practical epx edient to the ne w standard of r contracts that
are modie� d beof re the date o f initial application. Under this proposal, a company ow uld:
• identiyf all satise� d and unsatise� d perof rmance obligations rf om contract inception to the
contract modic� ation aduj stment date MC( AD 1;)
• determine the transaction price based on inof rmation available at the MC A ;D and
• allocate the transaction price to those perof rmance obligations using the historical standa- lone
selling prices o f the goods or services.
IASB to simplify transition for completed contracts
hT e IA BS also agreed to propose an additional practical epx edient that ow uld apply under the
retrospective approach, alloiw ng companies to not apply the ne w standard to contracts that
completed under previous GAAP on or beof re the date o f initial application.
FASB to simplify disclosures on transition
In addition, the FA BS decided to propose amendments to the ne w standard, so that a company
applying the retrospective approach ow uld not be reuq ired to disclose of r the current period :
• the eef f ct o f adoption o f the ne w standard on n� ancial statement line items ; and
• any aef f cted per share amounts.
oH ew ver, a company ow uld still apply the remaining accounting change disclosure reuq irements
in its year o f transition.
hT e IFR S version o f the ne w standard already includes such an eex mption.
1. Under IFR,S the MC A D ow uld be the beginning o f the earliest period presented. Under U S GAAP, the MC A D
ow uld be the beginning o f the earliest period of r companies applying the retrospective approach, and the date o f
initial application of r companies applying the cumulative eef f ct approach.
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