revenue from contracts with customers

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  • 1. IFRS SymposiumRevenue from Contracts with Customers27 September 2011
    Sigvard Heurlin

2. 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 2
September 2011
Revenue Recognition
3. 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
Revenue Recognition
4. What is the principal approach taken?
Employs an assets and liabilities approach - the cornerstone of the IASB and the FASB Framework
Currentrevenueguidance in IFRS and US GAAP focuses on an earnings process
However, difficultiesoftenarise in determiningwhen an entityearnsrevenue.
The earnings process is therefore not referred to in the proposal.
Slide 4
September 2011
Revenue Recognition
5. Wheredo the IASB and the FASB stand in the project?

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

6. Nearly 1.000 comment letters received 7. Redeliberations of the proposal in the ED started in January 2011 8. A new ED to be published in Q3 with a 120-day comment period, willprobably be delayeduntilOctober 9. Goal: to issue a final standard in 2012.The followingslides present the revenuemodel that the Boards havedeveloped after recent decisions.
The decisions are tentative and subject to change.
Slide 5
September 2011
Revenue Recognition
10. Significant feedback on the 2010 ED
Overall views:

  • Support for a convergedrevenuerecognitionmodel

11. However, a need for furtherclarification of the operations of theproposedprinciples: 12. the concept of control to service contracts and contracts forcontinuous transfer of control, 13. distinctgoods or services for identifying separate performance obligations, 14. estimating the transaction price on a probability-weighted basis and including credit risk and time value of moneycalc., 15. cost-benefitconsiderations. 16. Re-expose for further public comments.Slide 6
September 2011
Revenue Recognition
17. The scope
Does not seem to implyanychanges to the scope. Thus the proposedscopewouldrefer to all contracts with customers, except:

  • Leasecontracts,

18. Insurance contracts, 19. Certaincontractual rights and obligations within the scope of other standards, includingfinancial instruments.Slide 7
September 2011
Revenue Recognition
20. The basicmodel is unchanged from the 2010 ED
Thus the application of the revenuerecognitionmodelincludes the following steps:
Identify the contracts with the customer(s)
Identify the separate performance obligations( prestationsfrpliktelser)
Determine the transaction price
Allocate the transaction price to the performance obligations
Recogniserevenuewhen a performance obligation is satisfied.
Slide 8
September 2011
Revenue Recognition
21. Proposal in the ED
Definition of a contract:
An agreementbetweentwo or moreparties that createsenforceable rights and obligations
No change.
No change to the criteria for the existence of a contract (e.g. shouldhavecommercialsubstance, approval by the parties, identification by the entity of the enforcable rights and manner of payment).
Summary of the Revenue recognitionmodel: Step 1: Identify the contract(s) with the customer
Slide 9
September 2011
Revenue Recognition
22. Summary of the Revenue recognitionmodel: Step 1: Identify the contract(s) with the customer
Proposal in the ED
Account for contractstogetherif the contractprices are interdependant.
Indicators to be applied.
Combinecontracts with the same customerifenteredinto at or near the same time.
Criteria to be applied:

  • Negotiated as a package

23. Consideration in onecontractdepends on the theothercontract 24. Interrelated in terms of design,technology or function.Slide 10
September 2011
Revenue Recognition
25. Summary of the Revenue recognitionmodel. Step 1: Identify the contrac(s)
Proposal in the ED
Segmenting a contract:
Account for a singlecontract as two or moreifgoods or services are pricedindependently.
(This step is eliminated. However, priceindependenceusedwhenallocating the transaction price.)
Slide 11
September 2011
Revenue Recognition
26. Summary of the Revenue recognitionmodel. Step 2: Identify the separate performance obligations
Proposal in the ED
Definition of a performance obligation:
An enforceablepromise (tvingande lfte) to transfer a good or service.
No material change. Includespromises that are implied by:
business practices

  • specificstatementsif

valid expectations(vlgrundade frvntningar) to performarecreated.
Slide 12
September 2011
Revenue Recognition
27. Summary of the Revenue recognitionmodel: Identify the separate performance obligation
Proposal in the ED
The separate performance obligation identified
Accounted for separatelyonlyifdistinct (tydligt urskiljbar):

  • if sold separately by the entity or anotherentity; or

28. if a distinctfunction and a distinct profit margin.Revisedmodel
In somecases the risks to the entity of providinggoods/services are inseparable: single performance obligation.
In all othercases a separate performance obligation if

  • a good/service is distinct; and

29. the pattern of transfer is different from other transfers.Slide 13
September 2011
Revenue Recognition
30. Summary of the Revenue recognitionmodel: Identify the separate performance obligation
Proposal in the ED
(1) If for latent effects: not a separate performanceobligation. A provision is recognised.
(2) If for faults that arise after theproducts are transferred to thecustomer: a separate performance obligation.
In bothcasesthusdeferral of revenue.
If an option to purchase a warrantyseparately: a separate performance obligation and allocation of revenue to the service.
If not such option: (a) a costaccrual, unless (b) the warranty provides a service to the customer (undercircumstancesspecified in the revisedmodel).
Slide 14
September 2011
Revenue Recognition
31. Example: Revenue allocation
Case 1. A telecomcoysells a mobile phone and unlimitedcalls and texts to Cust. A. The phone is freeif the customersigns up for a year; the network service is CU40 pm.
Case 2. The coyalsosells 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. Thusrevenueattributed to maindeliverables.
Under the proposal: Revenue would be recognised at similaramounts for eachphone and service based on (estimated) sellingprices, see Step 4 below. Thusrevenuedepicts transfer to customers and is allocated to all performance obligations, not just maindeliverables.
September 2011
Slide 15
Revenue Recognition
32. Summary of Revenue recognitionmodel. Step 3: Determining the transaction price
Proposal in the ED
Definition of the transaction price
The amount of consideration an entityreceives, or expects to receive, in exchange for transferring goods or services.
No significantchange.
Slide 16
September 2011
Revenue Recognition
33. Summary of the Revenue recognitionmodel. Determining the transaction price.
Proposal in the ED
The transaction priceshouldreflect the probability-weighted amont of the consideration.
Onlyif the transaction pricecan be reasonblyexpected.
Conditions to be met (e.gsimilartypes of contracts).
What is mostpredictive:

  • the probabilityweightedamount

34. the mostlikelyamount.Allocateprice to a satisfied performance obligation unless the entity is not reasonablyassured (saknar rimliga garantier)to be entitled (ha rtt ) to that amount.
Slide 17
September 2011
Revenue Recognition
35. Summary of the Revenue recognitionmodel. Determining the transaction price.
Proposal in the ED
Reduce the amount to reflect the customers credit risk.
Adjust the promisedamount to reflect the time value of money
Do not reflect the effects of a customers credit risk. Recognise an allowance for anyexpectedimpairment loss.
Adjust the promisedamount to reflect the time value of ofmoney, if the financingcomponent is significant.
Variousfactors to be considered.
September 2011
Slide 18
Revenue Recognition
36. Summary of the Revenue recognitionmodel. Step 4: Allocate the transaction price to the perf. oblig.
Proposal in the ED
An entityshouldallocate the transaction price to the separate performance obligations in proportion to the standalonesellingprice (estimatedifnecessary).
No material change.
If the standalonesellingprice is highly variable, a residualtechniquemay be used (reference to the total transaction price less the less the standalonesellingprices of othergoods or services).
Conditions to be metwhen the transaction price is allocated to one or more performance obligations.
September 2011
Slide 19
Revenue Recognition
37. Summary of the Revenue recognitionmodel. Step 5: Recogniserevenuewhen a perf. obl. is satisfied
No change to coreprinciple.
Indicators on when the customer has obtainedcontrol of a good (e.g. physical poss., risks and rewards).Criteria on when a performance obligation for services is satisfied over time, at leastone of:

  • The entitys performance creates or enhances an asset,

38. If not, a benefitreceived, (a few alternative criteria to be met).Proposal in the ED
Recogniserevenuewhen the customerobtainscontrol of the promisedgoods or service (when the customer has the ability to direct the useof/receive the benefit from the good or service).
Indicators on whencontrol has beenobtained.
(No specificguidance for determiningwhen a performance obligation is satisfied over time).
September 2011
Slide 20
Revenue Recognition
39. Summary of Revenue recognitionmodel: Contractcosts
Proposal in the ED
Cost of obtaining a contract
As an expensewhenincurred.
Recognise an asset for the incrementalcosts of obtaining a contract that the entityexpects to recover.
September 2011
Slide 21
Revenue Recognition
40. Summary of Revenue recognitionmodel.Recogniserevenuewhen a perf. obl. Is satisfied.
Proposal in the ED
Measuring progress
A performance obligation satisfiedcontinuosly: selectonemethod and apply it consistently..
No change.
Recogniserevenueonlyif the entitycanreasonablymeasureits progress towardsuccessfulcompletion.
September 2011
Slide 22
Revenue Recognition
41. Summary of the Revenue recognitionmodel.A shortsummary

  • No change for manytransactions

42. Principles-based standard to give robust applicationReducesneed for interpretations
Prevent gaps being filled by local or imported rules
A single, global revenuerecognitionframworkacross all industries and all markets
Revenue attributed to all performance obligations, not just maindeliverables
Use of estimateswhenseparating obligations betterreflects transfer of different deliverables.
Slide 23
September 2011
Revenue Recognition
43. Whathappensnext?

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

Focus is on drafting as well as re-exposure of a selectednumber of change in the 2010 ED
Will be out for comments for 120 days
Effective date?
Slide 24
September 2011
Revenue Recognition
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.