The IASB and the FASB met on October 30, 2013 and discussed the following topics to be included in the final standard on Revenue from Contracts with Customers:
Constraint on Estimates of Variable Consideration
Constraint on estimates of variable consideration
- Implementation guidance: licenses
Objective of the Constraint
The Boards tentatively decided to specify a confidence level in the objective of the constraint of probable. (For the IASB, the confidence level will be expressed as “highly probable.” The Boards acknowledge that different terms were necessary to convey the same outcome because of existing definitions in US GAAP and IFRS.)
The Boards also tentatively decided that if an entity expects that including some, but not all, of the estimated amount of variable consideration (that is, a minimum amount) in the transaction price would not result in a significant revenue reversal, the entity should include that amount in the estimate of the transaction price. The objective of the constraint should be stated in the final revenue standard broadly as follows:
An entity shall include an estimate of variable consideration in the transaction price to the extent it is probable that a significant revenue reversal will not occur. A significant revenue reversal will occur if there is a significant downward adjustment on the amount of cumulative revenue recognized from that contract with that customer.
The Boards tentatively decided that an entity should update the estimated transaction price at each reporting date to represent faithfully the circumstances present at the reporting date and the changes in circumstances during the reporting period.
Sales- and Usage-Based Royalties on Licenses of Intellectual Property
The Boards discussed the pattern of revenue recognition that would result from the application of the constraint to licenses of intellectual property with sales- or usage-based royalties. In light of the resulting revenue pattern, the Boards tentatively decided to include a specific requirement for licenses of intellectual property in which the consideration is in the form of a sales- or usage-based royalty. That requirement specifies that an entity should include consideration from the sales- or usage-based royalty in the transaction price when or as the uncertainty has been resolved (that is, when the subsequent sales or usage occurs).
Implementation Guidance: Licenses
The Boards discussed improvements to the implementation guidance for licenses and to the criteria for distinguishing between two types of licenses—licenses that provide access to the entity’s intellectual property (that is, a performance obligation satisfied over time) and licenses that provide a right to use the entity’s intellectual property (that is, a performance obligation satisfied at a point in time).
Collectibility – Transaction Price
The Boards discussed assessments of customer credit risk (that is, collectibility) in the revenue model. The Boards affirmed previous tentative decisions to measure the transaction price, and therefore revenue, at the amount of consideration to which the entity is entitled (that is, an amount that is not adjusted for customer credit risk). The Boards also tentatively decided to clarify the requirements relating to estimates of variable consideration, specifically as they relate to assessing whether an entity has provided a price concession.
The Boards also tentatively decided to clarify the criteria that must be met before an entity can apply the revenue model to a contract with a customer by including an explicit collectibility threshold. To meet that threshold and apply the revenue model, an entity must conclude that it is probable that it will collect the consideration to which it will be ultimately entitled to in exchange for the goods or services that will be transferred to the customer. In making that assessment, the Boards noted that an entity would only consider customer credit risk and not other uncertainties, such as those related to performance or measurement, which would be accounted for in the timing of recognition and measurement of revenue. In setting the threshold, the Boards also acknowledged that the term probable has different meanings in US GAAP and IFRS; however, the Boards tentatively decided to set the threshold at a level that is consistent with current practice and existing standards for revenue recognition in US GAAP and IFRS.
The FASB met on November 6, 2013 to discuss its compliance with the due process requirements to issue a final Accounting Standards Update on revenue, including a consideration of the expected costs and benefits. The Board directed the staff to draft a final Update for vote by written ballot. The staff will continue drafting the final Update.