17 April 2012

FEE commented on the revised IASB Exposure Draft 'Revenue from Contracts with Customers'

FEE published its comment letter to the IASB on the revised Exposure Draft 'Revenue from Contracts with Customers'. In FEE's view, the revised ED is more closely aligned with the existing revenue recognition model but requires further clarifications to increase consistency in application.

FEE still has some reservations regarding the operability of the proposed model, and thinks that the IASB needs to clarify further some of the key elements of the proposal.

FEE supports the IASB’s proposal for additional requirements assisting companies in determining when performance obligation is satisfied over time. Differentiating between continuous performance and point in time performance is a fundamental component of the proposed revenue recognition model.

Nevertheless, FEE thinks that the ‘right to payment’ criterion in paragraph 35 (b)(iii) results in a too legalistic approach for determining when a performance obligation is satisfied over time. The focus should rather be on a reasonable expectation to recover the payment, and therefore FEE recommends replacing this criterion with the principle of reasonable assured as described in paragraph 81 or B3 of the ED.

FEE disagrees with the proposal that the onerous test should be performed at the performance obligation level and should be limited to obligations that an entity satisfies over a specified period of time. The requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, are adequate – and indeed preferable – for the purpose of providing reserves against onerous revenue contracts. Therefore FEE urges the IASB not to scope out revenue contracts of IAS 37.

In principle, FEE agrees that disclosing the effect of credit risk as a separate item is an appropriate presentation, subject to materiality consideration. However, FEE does not support the proposal prescribing that the impairment loss arising on the initial recognition of the receivable and impairment loss arising after the initial recognition of the assets should be presented as a separate line item adjacent to the revenue line item, but rather the principles established in IAS 1 should apply.

FEE agrees that when the amount of consideration is variable the amount of revenue recognised should not exceed the amount to which the entity is reasonably assured to be entitled. However, FEE considers that the rule-based exception to the general requirements in paragraph 85 of the ED has not been appropriately justified; the Basis for Conclusions seems to be insufficiently explanatory. Furthermore, FEE encourages the IASB to clarify further instances where variable consideration can be reasonably estimated but not be reasonably assured.

FEE agrees that the receivable should be accounted for in accordance with IFRS 9 (IAS 39) while the contract assets should be accounted for under a guidance to be developed that is to be in the scope of revenue recognition standard.

The revenue forms an important part of the financial statements and therefore it should also be included in the interim financial reports. However, FEE does not think that the new revenue standard should mandate specific disclosures in the interim financial statements. The contents of this document should be governed by IAS 34 'Interim Financial Reporting'.

In FEE's view, the guidance on scope is unclear on determining whether or not a contract is a contract with a customer or a contract with a partner or collaborator. Further, it would be helpful to clarify which standard would apply to the transactions that are scoped out of the revised standard.

Full paper

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