EFRAG welcomes work being carried out on this subject because it believes that revenue recognition is the cause of many practical problems and that it will help all the IASB's constituents if the existing material on the subject could be enhanced.
However, EFAG has a fundamentally different view as to when revenue should be recognised to the one proposed in the paper. The DP proposes that revenue should be recognised only when a performance obligation is satisfied. EFRAG thinks it is unfortunate that the DP does not explain why the IASB regards revenue as an important figure because, had it done so, we might have had a better understanding of what it is that the IASB thinks revenue should represent and why it thinks that. EFRAG believes the financial statements would be most decision-useful were revenue a measure of activity carried out to fulfil a contract with a customer; in other words, if revenue was recognised as the entity progresses towards performance obligation fulfilment, rather than just on fulfilment.
Putting that fundamental concern aside and focusing on the model proposed, EFRAG agrees with much of what the DP proposes:
· that a single, universally-applied set of revenue recognition and measurement principles is desirable—although whether it is achievable at the moment is another matter.
· with the proposed definition of a performance obligation and the proposals on the separation of performance obligations. However, we think they will need to be supplemented by some carefully targeted further guidance if entities are to be able to apply the definitions and principles, and identify the deliverables in (or components of) a contract, in a consistent way. We are also concerned about the cost/benefits implications of applying the approach proposed in certain circumstances.
· that the rights arising under the contract and the performance obligations should both be measured on initial recognition at the original transaction price.
· that, if there are separate performance obligations involved, the transaction price should be allocated to performance obligations on the basis of the entity‘s stand-alone selling price of the goods or services.
· that performance obligations should be measured initially at the transaction price.
· that performance obligations should not be remeasured unless they are onerous. If they nevertheless are to be remeasured, we believe that this remeasurement should not affect revenue. We also agree with the paper‘s proposals on the identification and measurement of onerous performance obligations.
© EFRAG - European Financial Reporting Advisory Group
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