The IASB and the US FASB have published for public comment a revised draft standard to improve and converge the financial reporting requirements of IFRSs and US GAAP for revenue from contracts with customers.
Published: 14 November 2011
Comments by: 13 March 2012
ICAEW draft response - last chance to comment
ICAEW will be responding to the IASB and has been offered an extension to the official comment deadline. The first draft of our response was published on this page on 20 February 2012 and was publicised through February's All-Member Alert. The letter has now been updated and the proposed final version can be viewed below.
ICAEW members are invited to submit comments on this draft letter, and these can be emailed to john.boulton@icaew.com. There is still time to send us your thoughts before we finalise our response on Monday 26 March.
ICAEW draft response to the IASB
FAQs
The Financial Reporting Faculty has prepared a set of FAQs to provide further information on the proposals:
FAQs - Revenue recognition
Webinar
ICAEW hosted a webinar on the proposals with the IASB on 6 February 2012. Access the recording here.
Background
On 24 June 2010 the IASB published for comment an exposure draft on a new IFRS on revenue recognition. This proposed a single revenue recognition standard for IFRSs and US GAAP that could be applied across various transactions, industries and capital markets.
The core principle of this exposure draft was that an entity would recognise revenue from contracts with customers when it transfers promised goods or services to the customer. The amount of revenue recognised would be the amount of consideration promised by the customer in exchange for the transferred goods or services.
Nearly 1000 comment letters were received in response to these proposals. The boards also undertook extensive outreach activities. Although there was support for the exposure draft, many respondents raised serious concerns about key aspects of the proposals. As a consequence of the feedback received the boards have made a number of amendments to their original proposals. They therefore decided to re-expose their proposals. While the core principle of the revised proposals is the same as that of the 2010 exposure draft, the boards felt that re-exposure was necessary because of the importance of the financial reporting of revenue to all entities. They also wanted to avoid unintended consequences arising from the final standard.
Summary of the original proposals
To recognise revenue, an entity should apply the following five steps:
- Identify the contract(s) with a customer.
- Identify the separate performance obligations in the contract (ie, obligations to deliver goods and/or services).
- Determine the transaction price.
- Allocate the transaction price to the separate performance obligations.
- Recognise the allocated revenue when the entity satisfies each performance obligation.
The proposals also included specific guidance on issues such as onerous performance obligations, warranties, rights of return, licences of intellectual property and contract costs.
Summary of the revised proposals
On 14 November, the IASB and the US FASB published for public comment a revised draft standard to improve and converge the financial reporting requirements of IFRSs and US GAAP for revenue from contracts with customers.
As noted above, the core principle of this revised proposed standard is the same as that of the 2010 exposure draft. Moreover, the overall five step approach outlined above remains unchanged. However, much of the detail has changed. In particular the boards have:
- added guidance on how to determine when a good or service is transferred over time;
- simplified the proposals on warranties;
- simplified how an entity would determine a transaction price (including collectibility, time value of money and variable consideration);
- modified the scope of the onerous test to apply to long-term services only;
- added a practical expedient that permits an entity to recognise as an expense costs of obtaining a contract (if one year or less); and
- provided exemption from some disclosures for non-public entities that apply US GAAP.
If adopted, the proposed standard would replace IAS 18 Revenue, IAS 11 Construction Contracts and related Interpretations. In US GAAP, it would replace the guidance on revenue recognition in Topic 605 of the FASB Accounting Standards Codification®.
The IASB is asking specific questions on certain aspects of the new exposure draft that are different from its previous proposals. Beyond that, the main question asked is whether the proposed requirements are clear and can be applied in a way that effectively communicates to users of financial statements the economic substance of an entity’s contracts with customers.
The IASB requests comments on the exposure draft by 13 March 2012.
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