Revenue recognition

Introduction

The project Revenue recognition was jointly initiated by the IASB and the FASB as part of the Memorandum of Understanding in order to eliminate the differences between IFRS and U.S. GAAP. The resulting standard will replace IAS 11 Construction contracts and IAS 18 Revenue.
In December 2008, the IASB published a Discussion Paper Preliminary Views on Revenue Recognition on Contracts with Customers. On 24 June 2010, the IASB and the FASB published Exposure Draft (ED) Revenue from Contracts with Customers, in consultation until 22 October 2010.

Objective

The project’s objectives are:
– to identify a single principle-based model of recognition of revenue applicable to every type of industry;
– to develop a logic of recognition of revenue based on changes in assets and liabilities in the balance sheet that can overcome the inconsistencies that currently exist in the U.S. GAAPs and IFRSs.

Summary

The revenue recognition model proposed in the ED presents the following phases:
a) identification of the contract with the customer;
b) identification of individual performance obligations within the contract. Having defined the scope of the contract, it is necessary to distinguish the contractual obligations that it entails. If the entity agrees to transfer individual assets and services within the same contract, the delivery of each item separately or each service separately entails different performance obligations;
c) determination of the transaction price;
d) allocation of the transaction price to the individual performance obligations. The ED provides that the transaction price is allocated to individual performance obligations on the basis of the stand-alone selling price of these, namely the price at which they would be sold if the subject of self-negotiation;
e) recognition of revenues in line with the performance of individual performance obligations. The fulfillment of the performance obligations, and hence the simultaneous recognition of the proceeds, happens when control of a good or service is transferred. For the purpose of recognizing revenue, the transfer of significant risks and rewards inherent to the ownership of the good being sold no longer has any significance unlike as is currently required by IAS 18.

IASB Work plan

On 14 November 2011 the re-exposure of the proposals was published. It is open for comment until 13 March 2012. The IASB plans to issue the final version by the first half of 2013.

For more information, please refer to the IASB website.

The EFRAG and the OIC organized jointly an outreach event on Revenue Recognition project. The event held in Rome on 5 May 2011. More information on the initiative and the feedback report, prepared by EFRAG, are available cliccking here.