Download - Revenue from Contracts with Customers

IFRS Symposium

Revenue from Contracts with Customers27 September 2011

www.pwc.com/se

Sigvard Heurlin

PwCRevenue Recognition

Agenda

Why have the IASB and the FASB taken on this project?

What is the principal approach taken? And what has been achieved during the last year?

Where do the IASB and the FASB stand now in this project?

What happens next?

Slide 2September 2011


Why need for a new standard?

A critical project for both the IASB and the FASB

- For the IASB: Existing standards on revenue recognition, IAS 11 and IAS 18, are based on two different principles

- Insufficient guidance in some cases. E.g. multiple elements arrangements. Reliance on US GAAP for specific guidance

- For the FASB: US GAAP has a wide range of very detailed industry specific requirements (about 200), but no single standard

- A need for consistent principles for use across industries. Slide 3

September 2011


What is the principal approach taken?

Employs an assets and liabilities approach - the cornerstone of the IASB and the FASB Framework

Current revenue guidance in IFRS and US GAAP focuses on an ´earnings process´

However, difficulties often arise in determining when an entity earns revenue.

The earnings process is therefore not referred to in the proposal.



Where do the IASB and the FASB stand in the project?

ED, Revenue from contracts with customers, published in June 2010

Nearly 1.000 comment letters received

Redeliberations of the proposal in the ED started in January 2011

A new ED to be published in Q3 with a 120-day comment period, will probably be delayed until October

Goal: to issue a final standard in 2012.

The following slides present the revenue model that the Boards have developed after recent decisions.

The decisions are tentative and subject to change. Slide 5

September 2011


Significant feedback on the 2010 ED

Overall views:

•Support for a converged revenue recognition model

•However, a need for further clarification of the operations of the proposed principles:

- the concept of control to service contracts and contracts for continuous transfer of control,

- distinct goods or services for identifying separate performance obligations,

- estimating the transaction price on a probability-weighted basis and including credit risk and time value of money calc.,

- cost-benefit considerations.

•Re-expose for further public comments.Slide 6

September 2011


The scope

Does not seem to imply any changes to the scope. Thus the proposedscope would refer to all contracts with customers, except:

Lease contracts, Insurance contracts, Certain contractual rights and obligations within the

scope of other standards, including financial instruments.



The basic model is unchanged from the 2010 ED

Thus the application of the revenue recognition model includes the following steps:

1.Identify the contracts with the customer(s)

2. Identify the separate performance obligations( ´prestationsförpliktelser´)

3.Determine the transaction price

4.Allocate the transaction price to the performance obligations

5.Recognise revenue when a performance obligation is satisfied.



Proposal in the ED

Definition of a contract:

An agreement between two or more parties that creates enforceable rights and obligations

Revised model

No change.

No change to the criteria for the existence of a contract (e.g. should have commercial substance, approval by the parties, identification by the entity of the enforcable rights and manner of payment).

Summary of the Revenue recognition model: Step 1: Identify the contract(s) with the customer



Summary of the Revenue recognition model: Step 1: Identify the contract(s) with the customer Proposal in the ED

Combining contracts:

Account for contracts together if the contract prices are interdependant.

Indicators to be applied.

Revised model

Combine contracts with the same customer if entered into at or near the same time.

Criteria to be applied:

•Negotiated as a package

• Consideration in one contractdepends on the the other contract

•Interrelated in terms of design, technology or function. Slide 10

September 2011


Summary of the Revenue recognition model. Step 1: Identify the contrac(s)

Proposal in the ED

Segmenting a contract:

Account for a single contract as two or more if goods or services are priced independently.

Revised model

(This step is eliminated. However, price independence used when allocating the transaction price.)



Summary of the Revenue recognition model. Step 2: Identify the separate performance obligationsProposal in the ED

Definition of a performance obligation:

An enforceable promise (´tvingande löfte´) to transfer a good or service.

Revised model

No material change. Includes promises that are implied by:

• business practices

• published policies

• specific statements if

valid expectations (´välgrundade förväntningar´) to perform arecreated.



Summary of the Revenue recognition model: Identify the separate performance obligation

Proposal in the ED

The separate performance obligation identified

Accounted for separately only if distinct (´tydligt urskiljbar´):

• if sold separately by the entity or another entity; or

• if a distinct function and a distinct profit margin.

Revised model

In some cases the risks to the entity of providing goods/services are inseparable: single performance obligation.

In all other cases a separate performance obligation if

• a good/service is distinct; and

• the pattern of transfer is different from other transfers.



Summary of the Revenue recognition model: Identify the separate performance obligation

Proposal in the ED

Warranties

(1) If for latent effects: not a separate performance obligation. A provision is recognised.

(2) If for faults that arise after the products are transferred to the customer: a separate performance obligation.

In both cases thus deferral of revenue.

Revised model

(1) If an option to purchase a warranty separately: a separate performance obligation and allocation of revenue to the service.

(2) If not such option: (a) a cost accrual, unless (b) the warranty provides a service to the customer (under circumstances specified in the revised model).



Example: Revenue allocation

Case 1. A telecom coy sells a mobile phone and unlimited calls and texts to Cust. A. The phone is free if the customer signs up for a year; the network service is CU40 pm.

Case 2. The coy also sells the same phone to Cust. B for CU300, with the same service provided for at CU15 pm.

At present: Case 1. Probably no revenue on the phone and revenue of CU40 pm. Case 2. Revenue on the phone CU300 and revenue of CU15 pm. Thus revenue attributed to main deliverables.

Under the proposal: Revenue would be recognised at similar amounts for each phone and service based on (estimated) selling prices, see Step 4 below. Thus revenue depicts transfer to customers and is allocated to all performance obligations, not just main deliverables.

September 2011Slide 15


Summary of Revenue recognition model. Step 3: Determining the transaction price

Proposal in the ED

Definition of the transaction price

The amount of consideration an entity receives, or expects to receive, in exchange for transferring goods or services.

Revised model

No significant change.



Summary of the Revenue recognition model. Determining the transaction price.

Proposal in the ED

Uncertain consideration

The transaction price should reflect the probability-weighted amont of the consideration.

Only if the transaction price can be reasonbly expected.

Conditions to be met (e.g similar types of contracts).

Revised model

What is most predictive:

•the probability weighted amount

•the most likely amount.

Allocate price to a satisfied performance obligation ´unless the entity is not reasonably assured (´saknar rimliga garantier´) to be entitled (´ha rätt ´) to that amount´.

Circumstances specified. Slide 17September 2011


Summary of the Revenue recognition model. Determining the transaction price.

Proposal in the ED

Other

Reduce the amount to reflect the customer´s credit risk.

Adjust the promised amount to reflect the time value of money

Revised model

Do not reflect the effects of a customer´s credit risk. Recognise an allowance for any expected impairment loss.

Adjust the promised amount to reflect the time value of of money, if the financing component is significant.

Various factors to be considered.



Summary of the Revenue recognition model. Step 4: Allocate the transaction price to the perf. oblig.Proposal in the ED

An entity should allocate the transaction price to the separate performance obligations in proportion to the standalone selling price (estimated if necessary).

Revised model

No material change.

If the standalone selling price is highly variable, a residual technique may be used (reference to the total transaction price less the less the standalone selling prices of other goods or services).

Conditions to be met when the transaction price is allocated to one or more performance obligations.



Summary of the Revenue recognition model. Step 5: Recognise revenue when a perf. obl. is satisfiedProposal in the ED

Recognise revenue when the customer obtains control of the promised goods or service (when the customer has the ability to direct the use of/receive the benefit from the good or service).

Indicators on when control has been obtained.

(No specific guidance for determining when a performance obligation is satisfied over time).

Revised model

No change to core principle.

Indicators on when the customer has obtained control of a good (e.g. physical poss., risks and rewards).

Criteria on when a performance obligation for services is satisfied over time, at least one of:

• The entity´s performance creates or enhances an asset,

• If not, a benefit received, (a few alternative criteria to be met).



Summary of Revenue recognition model: Contract costs

Proposal in the ED

Cost of obtaining a contract

As an expense when incurred.

Revised model

Recognise an asset for the incremental costs of obtaining a contract that the entity expects to recover.



Summary of Revenue recognition model.Recognise revenue when a perf. obl. Is satisfied. Proposal in the ED

Measuring progress

A performance obligation satisfied continuosly: select one method and apply it consistently..

Revised model

No change.

Recognise revenue only if the entity can reasonably measure its progress toward successful completion.



Summary of the Revenue recognition model.A short summary

•No change for many transactions

•Principles-based standard to give robust application

- Reduces need for interpretations

- Prevent gaps being filled by local or imported ´rules´

• A single, global revenue recognition framwork across all industries and all markets

• Revenue attributed to all performance obligations, not just main deliverables

• Use of estimates when separating obligations better reflects transfer of different deliverables.

Slide 23

September 2011


What happens next?

• As noted a new ED to be published in October 2011 (Q3 was intended)

• Focus is on drafting as well as re-exposure of a selected number of change in the 2010 ED

• Will be out for comments for 120 days

• Effective date?


Comments?

© 2011 All rights reserved. Not for further distribution without the permission of PwC. "PwC" refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm's professional judgment or bind another member firm or PwCIL in any way.

Questions?

Download - Revenue from Contracts with Customers

Top Related