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Issue 9, May 2013IFRS NEWSLETTER 

REVENUE

The Boards’ decision that there is no need for the standard to include a specific example on reward programmes provided by credit card issuers is further evidence of their desire to minimise sector-specific guidance in the final standard.

Phil Dowad, KPMG’s global IFRS revenue recognition leader Transaction declined – No new

guidance for credit card issuersThis edition of IFRS Newsletter: Revenue examines the current

thinking on the revenue project, and what the proposals could mean for you.

Despite the IASB and FASB (the Boards) completing substantive redeliberations in February, they continued their discussions of sweep issues in May.

Responding to queries from the financial services industry, at their May meeting the Boards decided not to provide specific guidance on applying the revenue model to credit card reward

programmes. Without this guidance, credit card issuers would need to use judgement to determine the appropriate accounting for their reward programmes based on their specific facts

and circumstances.

The IASB also decided that first-time adopters of IFRS could elect not to apply the new revenue standard to contracts that were closed under local GAAP before the date of transition. This would

reduce the cost of applying the new standard, but might further compromise comparability. This additional option is similar to the one that would be available to entities currently applying IFRS, based

on the Boards’ decision at their February meeting.

There is no change to the Boards’ tentatively agreed effective date for the new standard – i.e. annual periods beginning on or after 1 January 2017. Early adoption would be permitted for entities applying IFRS.

A full summary of the redeliberations to date is included at back of this newsletter.

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CREDIT CARD REWARD PROGRAMMES

What’s the issue?

How does the revenue model apply to credit card reward programmes?

In its 2011 exposure draft Revenue from Contracts with Customers (the ED), the IASB included an illustrative example on accounting for customer loyalty programmes – Example 24 – in which the entity concludes that the reward points are a separate performance obligation and so defers revenue when accounting for sales in which reward points are granted.

Respondents to the ED from the financial services industry wanted to know whether Example 24 was intended to be applied to reward programmes offered by credit card issuers. This would potentially preclude a cost-deferral approach to accounting for such programmes, because the reward points under such programmes would be treated as an unfulfilled separate performance obligation. They highlighted differences between a typical credit card reward programme and the fact pattern in Example 24, including the fact that credit card transactions generally include at least three parties – the credit card issuer, the cardholder and the retailer.

What’s new in May?

Boards decide that specific guidance is not required

The Boards decided not to provide specific guidance on applying the revenue model to credit card reward programmes. They also agreed that Example 24 would be amended to clarify that an entity should consider all of the facts and circumstances in identifying the customer in an arrangement that gives rise to award points – i.e. the accounting in Example 24 is not necessarily applicable to all customer loyalty programmes.

What are the implications?

Judgement required when identifying the customer in the arrangement

Credit card arrangements can be complex, with varying terms and conditions. Different arrangements may have a different economic substance.

Determining whether the revenue model should be applied to the specific facts and circumstances of an arrangement would require judgement. A key part of the analysis for a credit card issuer would be identifying which of its customers the reward program relates to – i.e. whether the reward program relates to the card issuer’s contract with the credit card holder or the retailer. These judgements may be similar to those being made under current IFRS, such that the required accounting may not be significantly different from current practice – i.e. an entity may continue to follow either a revenue-deferral or a cost-accrual approach to accounting for the reward points.

Further discussion on applying the revenue model to credit card reward programmes can be found in our IFRS Newsletter: The Bank Statement – Issue 5, Q1 2012.

The Boards decided not to develop specific guidance on reward programmes offered by credit card issuers.

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FIRST-TIME ADOPTER TRANSITION REQUIREMENTS

What’s the issue?

Should the prospective-application method be available to first-time adopters?

In February 2013, the Boards agreed the transition options that would be available to entities currently using IFRS. As well as the two options outlined in the ED, the Boards agreed an additional transition option that would allow entities to apply the standard prospectively from the date of initial application of the new standard. A significant benefit of the new transition option is that an entity would not need to re-analyse contracts that were completed under legacy GAAP before the date of initial application. See our IFRS Newsletter: Revenue – Issue 7 and Issue 8 for further discussion on the transition options.

At the February meeting, the Boards did not discuss whether such an option should also be made available to first-time adopters of IFRS.

What’s new in May?

IASB adds a new transition option for first-time adopters

The Boards decided that a first-time adopter could elect not to apply the new standard to contracts that were closed under local GAAP before its date of transition. In addition, the IASB reaffirmed that first-time adopters could apply the practical expedients that were proposed in the ED. A first-time adopter would also be able to apply the new transition option in combination with those practical expedients.

What are the implications?

Costs of applying the new standard may be reduced, but comparability could be compromised

The new transition option agreed by the IASB would give first-time adopters the option to avoid considering contracts that were closed before the date of transition under local GAAP. Preparers will see this option as providing relief from otherwise onerous and costly transition requirements. However, users may be disappointed that the variety of approaches available would further reduce comparability between entities within the same jurisdiction that select different transition options, and also between first-time adopters and entities already applying IFRS.

Transition relief differs from that available to IFRS entities

The additional option is similar to the one that would be available to entities currently applying IFRS, based on the Boards’ decision at their February meeting. However, it differs in three main ways.

• The date at which the options are applied is different. IFRS entities would apply their new option from the start of the first reporting period – e.g. 1 January 2017 if an entity does not early adopt. However, first-time adopters would apply their new option from the start of the earliest presented comparative period – e.g. 1 January 2016 for an entity adopting IFRS for the first time in its annual reporting period beginning on 1 January 2017.

• A first-time adopter could potentially apply its new option in combination with the practical expedients set out in the ED.

• An IFRS entity would be required to make additional disclosures if it elects to apply its new transition option – e.g. disclosing the total amount of revenue that would have been recorded under legacy GAAP in the current year.

For a detailed discussion on the new transition option available to IFRS entities, see our IFRS Newsletter: Revenue – Issue 7.

First-time adopters of IFRS would have the option not to apply the new revenue standard to contracts that were closed under local GAAP before the date of transition.

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Summary of transition options for first-time adoptersThe following timelines set out the potential impacts of the transition options available for a first-time adopter whose first IFRS reporting period begins on 1 January 2017. The entity presents one year of comparatives and so its date of transition under IFRS 1 First-time Adoption of International Financial Reporting Standards is 1 January 2016. The same transition options would be available if an entity adopted IFRS in a reporting period beginning before 1 January 2017 and elected to early adopt the new revenue standard.

Date of transition

Local GAAPNew revenue standard applied to all

contracts open at 1 January 2016under new revenue standard

New revenuestandard

Comparative year Current year

1 January 2016 1 January 2017

Approach 1 – Full retrospective (no practical expedients elected)

Under this approach, customer contracts open under local GAAP, and contracts closed under local GAAP but open under the new revenue standard, would require restatement as at 1 January 2016. This approach would maximise the comparability of the financial information presented in the comparative and current year.

Approach 2 – Prospective application from date of transition elected

Local GAAPNew revenue standard applied to all

contracts open at 1 January 2016under local GAAP

New revenuestandard

Comparative year Current year

1 January 2016 1 January 2017

Date of transition

Under this approach, only contracts that are open under local GAAP at the date of transition would be considered for restatement – i.e. there would be no requirement to assess whether contracts that are considered closed under local GAAP would be open under the new revenue standard. This may reduce the comparability of trend information.

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In addition, a first-time adopter may take advantage of the following practical expedients, which are available to current users of IFRS.

• For contracts completed before the beginning of the first IFRS reporting period, a first-time adopter need not restate contracts that begin and end within the same annual reporting period.

• For contracts completed before the beginning of the first IFRS reporting period and that have variable consideration, an entity may use the transaction price at the date on which the contract was completed, rather than estimating variable consideration amounts in the comparative reporting periods.

• For all periods presented before the beginning of the first IFRS reporting period, an entity may elect not to disclose the amount of the transaction price allocated to remaining performance obligations, or to provide an explanation of when the entity expects to recognise that amount as revenue.

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Meeting date

Topics discussedIFRS

Newsletter

July 2012

• Recognition of onerous obligations

• Identification of separate performance obligations

• Criteria for when revenue should be recognised over time

• Licensing

• Rights to useIssue 1

Significantly, the Boards decided to remove guidance on identification and measurement of onerous obligations from the revenue project.

September 2012

• Collectibility – Presentation of credit risk adjustments

• Constraining the cumulative amount of revenue recognised

• Time value of money

• Contract issues and distribution networks

Issue 2

October 2012

• Measuring progress to completion

• Contract modificationsIssue 3

Significantly, the Boards rejected a practical expedient that would have allowed contract manufacturers to automatically apply the units-of-delivery or units-produced method to measure progress.

November 2012

• When to recognise revenue from licences

• Presentation of collectibility adjustments

• Constraining the cumulative amount of revenueIssue 4

Significantly, the Boards agreed on a new approach for licences, under which they would be analysed and then separated into two categories with different revenue profiles – at a point in time and over time.

December 2012

• Contract acquisition costs

• Allocating the transaction price – Residual method, discounts and contingent consideration

• Bundled arrangements – Application to the telecommunications and satellite and cable television sectors

• Licences of intellectual property – Sales-based royalties

Issue 5

Significantly, the Boards reaffirmed the ED’s core proposals in a number of key areas, rejecting exceptions that might have permitted current practice to continue in certain sectors.

SUMMARY OF DISCUSSIONS

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Meeting date

Topics discussedIFRS

Newsletter

January 2013

• Applying the general recognition and measurement principles for asset managers

• Collaborative arrangements and financial services contracts

• Accounting for repurchase agreements that some would view as economically similar

• Applying the revenue constraint to the disposal of a non-current asset

Issue 6

Significantly, the Boards reaffirmed the ED’s proposals in these areas, despite the counterintuitive outcomes that may arise in some common situations.

February 2013

• Effective date and early adoption

• Transition requirements

• Annual disclosures – Revenue

• Annual disclosures – Reconciliations

• Interim reporting

Issue 7

Significantly, the Boards decided on an effective date of 1 January 2017 with no early adoption.

March 2013

• Early adoption

Issue 8Significantly, the IASB reversed its February decision on early adoption – it will now be permitted for entities reporting under IFRS.

May 2013

• Credit card reward programmes

• Transition requirements – First-time adopters of IFRSIssue 9

Significantly, the Boards decided not to provide specific guidance on applying the revenue model to credit card reward programmes.

AcknowledgementsWe would like to acknowledge the effort of the principal authors of this publication: Glenn D’Souza, Katja van der Kuij-Groenberg, Amy Luchkovich, Brian O’Donovan and Anthony Voigt.

We would also like to thank the following reviewers for their input: Phil Dowad, Catherine Morley and Paul Munter.

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KPMG International Standards Group is part of KPMG IFRG Limited.

Publication name: IFRS Newsletter: Revenue

Publication number: Issue 9

Publication date: May 2013

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

The IFRS Newsletter: Revenue contains links to third party websites not controlled by KPMG IFRG Limited. KPMG IFRG Limited accepts no responsibility for the content of such sites or that these links will continue to function. The use of third party content is to be governed by the terms of the site on which it is hosted and KPMG IFRG Limited accepts no responsibility for this.

Descriptive and summary statements in this newsletter may be based on notes that have been taken in observing various Board meetings. They are not intended to be a substitute for the final texts of the relevant documents or the official summaries of Board decisions which may not be available at the time of publication and which may differ. Companies should consult the texts of any requirements they apply, the official summaries of Board meetings, and seek the advice of their accounting and legal advisors.

kpmg.com/ifrs

IFRS Newsletter: Revenue is KPMG’s update on the joint IASB/FASB revenue project.

If you would like further information on any of the matters discussed in this Newsletter, please talk to your usual local KPMG contact or call any of KPMG firms’ offices.

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IFRS NEWSLETTERFINANCIAL INSTRUMENTS

Issue 8, December 2012

We welcome the plan for the IASB to discuss stakeholder feedback on the general hedging review draft before issuing a final standard. 

Andrew Vials,KPMG’s global IFRS Financial Instruments leaderKPMG International Standards Group The future of IFRS financial

instruments accountingThis edition of IFRS Newsletter: Financial Instruments highlights

the discussions and tentative decisions of the IASB in December 2012 on the financial instruments (IAS 39 replacement) project.

Highlights

Impairment

l    Re-exposure is expected in the first quarter of 2013, with a 120-day comment period.

Hedge accounting

General hedging

l    The IASB will discuss feedback received on the general hedging review draft in January 2013.

l    A final general hedging standard is now expected later in the first quarter of 2013.

Macro hedging

l    The portfolio revaluation approach for macro hedging activities may be extended to commodity price risk and foreign exchange risk.

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IFRS NEWSLETTER 

INSURANCEIssue 32, December 2012

In December, the IASB discussed the residual margin and impairment of reinsurance contracts held by an insurer.

Moving towards global insurance accountingThis edition of IFRS Newsletter: Insurance highlights the results of the

IASB-only discussions in December 2012 on the joint insurance contracts project. In addition, it provides the current status of the project and an

expected timeline for completion.

Highlights

l   The residual margin would be unlocked for differences between current and previous estimates of cash flows relating to future coverage or other future services.

l   The residual margin for participating contracts would not be adjusted for changes in the value of the underlying items as measured using IFRS.

l   At inception, a cedant would determine the residual margin on a reinsurance contract by reflecting in the expected fulfilment cash flows all the effects of non-performance, including those associated

with expected credit losses. Subsequent changes in expected cash flows resulting from changes in expected credit losses would be recognised in profit or loss.

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Issue 4, November 2012IFRS NEWSLETTER 

THE BALANCING ITEMS

Another cycle of proposed annual improvements has been issued – what are your views?

Proposed improvements to IFRS – 2011-2013 cycle

This IFRS Newsletter: The Balancing Items brings into focus the latest cycle of proposed narrow-scope amendments to IFRS.

The IASB has published Exposure Draft ED/2012/2 Annual Improvements to IFRSs – 2011-2013 Cycle as part of its annual improvements process to make non-urgent but necessary

amendments to IFRS. The exposure draft includes proposed improvements to the following standards. Comments are due by 18 February 2013.

Questions for constituents to consider

l   IFRS 1 First-time Adoption of International Financial Reporting Standards Which version of an IFRS should a first-time adopter apply in its first IFRS financial statements, if

there is a new/revised IFRS that is not yet mandatory?

l   IFRS 3 Business Combinations Does IFRS 3 apply to the formation of joint operations in IFRS 11 Joint Arrangements?

l   IFRS 13 Fair Value Measurement Do all contracts within the scope of IAS 39 Financial Instruments: Recognition and Measurement /

IFRS 9 Financial Instruments potentially qualify for the ‘portfolio exception’?

l   IAS 40 Investment Property Is the acquisition of an investment property an acquisition of a business?

IFRS

New on the Horizon: Leases

May 2013

kpmg.com/ifrs

FIND OUT MORE

For more information on the revenue project, please speak to your usual KPMG contact or visit the IFRS – revenue hot topics page, which includes line of business insights.

You can also go to the Revenue Recognition page on the IASB website.

Visit KPMG’s Global IFRS Institute at kpmg.com/ifrs to access KPMG’s most recent publications on the IASB’s major projects and other activities.

Our IFRS – financial instruments hot topics page brings together our materials on the financial instruments project, including our IFRS Newsletter: Financial Instruments. Our IFRS – insurance hot topics page brings together our materials on the insurance project, including our IFRS Newsletter: Insurance.

Our IFRS – leases hot topics page brings together our materials on the leases project, including our New on the Horizon, which provides detailed analysis on the leases exposure draft published in May 2013. Our IFRS Newsletter: The Balancing Items, which brings into focus narrow-scope amendments to IFRS, is available at kpmg.com/ifrs.