This update was first published in the January 2012 International edition of Accounting and Business magazine.
In 2010, the International Accounting Standards Board (IASB) issued an exposure draft (ED) proposing a new framework for revenue recognition.
The core principle set out in that ED was that an entity should recognise revenue to reflect the transfer of promised goods or services to a customer. The revenue would be measured at an amount representing the consideration to which the entity expects to be entitled, in exchange for those goods and services.
The ED proposed five steps to apply the principle:
- Identify the contract or contracts.
- Identify the separate performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price.
- Recognise revenue when a performance obligation is satisfied.
While feedback from the ED showed broad support for the overriding principle and the steps needed to achieve it, a number of areas were considered to require either further clarification or simplification.
Accordingly, the IASB has made a number of changes from the original ED, but, recognising the importance of revenue to financial statements, has chosen to re-expose its proposed standard, Revenue From Contracts With Customers.
While the broad principles of the standard remain the same, there have been a number of changes from the 2010 exposure draft, which include the following:
- Amending the principle for identifying separate performance obligations in a contract.
- Adding criteria to determine when a performance obligation is satisfied over time and, therefore, when revenue is recognised over time.
- Simplifying the measurement of the transaction price.
- Aligning the accounting for product warranties more closely with existing requirements.
- Limiting the scope of the test in the previous version to identify onerous performance obligations.
- Adding practical expedients for retrospective application of the proposals.
- Any impairment losses relating to contracts with customers being presented as a separate line immediately after revenue.
- Specifying the disclosures required for interim financial reports.
The comment period closes on 13 March 2012 with a final standard planned for the second half of 2012, but with an effective date of at least 1 January 2015.
Yvonne Lang, director, and Kern Roberts. associate director, Smith & Williamson