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Project Updates
Revenue Recognition
Last Updated: April 30, 2008 (Updated sections are indicated with an asterisk *)
This project update summarizes the project activities and decisions of the IASB and FASB (the Boards). It was prepared by the staff and is for the information and convenience of the Boards’ constituents. All decisions of the Boards are tentative, may change at future Board meetings, and do not change current accounting and reporting requirements. Decisions of the Boards become final only after extensive due process.
Project Objectives
*Decisions Reached at the Last Meeting
*Next Steps
*Board/Other Public Meeting Dates
Related FASB Documents
Background Information
Contact Information
PROJECT OBJECTIVES
The objective of the Revenue Recognition project is to develop coherent conceptual guidance for revenue recognition and a comprehensive Statement on revenue recognition based on those concepts. In particular, the project is intended to improve financial reporting by:
- Converging U.S. and international standards on revenue recognition
- Eliminating inconsistencies in the existing conceptual guidance on revenue recognition
- Providing conceptual guidance that would be useful in addressing future revenue recognition issues
- Eliminating inconsistencies in existing standards-level authoritative literature and accepted practices
- Filling voids in revenue recognition guidance that have developed over time
- Establishing a single, comprehensive standard on revenue recognition.
The Boards plan to develop a comprehensive standard that would apply to all business entities; however, they may conclude that certain transactions or industries requiring additional study should be excluded from the scope of that standard and addressed separately.
*DECISIONS REACHED AT THE LAST MEETING (April 2008)
Although the Boards coordinate the timing of their deliberations of the issues in the joint project, each Board deliberates and votes on each issue individually. As a result, at any given time, one Board may have reached a tentative conclusion on a given issue, while the other Board has not yet deliberated on it. Similarly, the Boards could reach different tentative conclusions on certain issues. Any differences in views or timing of discussion are noted below.
In separate meetings held in April 2008, the Boards discussed drafts of Chapters 2, 3, and 4 for the upcoming discussion paper on revenue recognition. These chapters cover accounting for contracts with customers and the identification and satisfaction of performance obligations. The Boards were not asked to make any decisions. Instead, the Boards offered suggestions for improving the draft chapters of the discussion paper.
In particular, the staff was asked to consider how the proposed revenue recognition model could be articulated based on the existing definition of an asset, rather than the Boards’ working definition from the conceptual framework project. The staff was also asked to explain the alternative view held by some Board members that revenue cannot arise at contract inception. In general, the Boards agreed with the staff's approach in the upcoming revenue recognition discussion paper.
*NEXT STEPS
The Boards have been discussing and will continue to discuss drafts of the discussion paper through the month of May. The staff plans to publish a discussion paper describing a single contract-based revenue recognition model that has two different measurement approaches in the third quarter of 2008.
*BOARD/OTHER PUBLIC MEETING DATES
The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement, Interpretation, FASB Staff Position, or Statement 133 Implementation Issue.
Below is a list of the FASB Board/Public meetings for this project with links to the minutes for each meeting.
| *April 9, 2008 | Board Meeting—Drafts of Chapters 2, 3, and 4 for the Discussion Paper |
| January 30, 2008 | Board Meeting—Customer Consideration Model Measurement, Performance Obligations, and Examples |
| October 22, 2007 | FASB-IASB Joint Meeting—Due Process, Measurement Model, Customer Consideration Model, and Examples |
| October 24, 2006 | FASB-IASB Joint Meeting—Due Process Document |
| July 26, 2006 | Board Meeting—Application of the Board’s Decision on the Meaning of Performance |
| April 27, 2006 | FASB-IASB Joint Meeting—Accounting for Performance |
| March 1, 2006 | Board Meeting—Accounting for Wholly Executory Contracts and Assessing when Performance has Occurred |
| October 24, 2005 | FASB-IASB Joint Meeting—Identification and Initial Measurement of Performance Obligations and the Definition of Revenues |
| September 21, 2005 | Board Meeting—Identification and Initial Measurement of Performance Obligations in Revenue Contracts |
| June 21, 2005 | Financial Accounting Standards Advisory Council Meeting |
| May 11, 2005 | Board Meeting—Project Objective and Scope |
| October 20, 2004 | FASB-IASB Joint Meeting—Accounting for Contractual Obligations from a Customer Perspective versus a Reporting Entity Perspective and Accounting Treatment of "Residual" Created upon Contract Generation |
| August 4, 2004 | Board Meeting—Accounting for Contractual Obligations from a Customer Perspective versus a Reporting Entity Perspective and Accounting Treatment of "Residual" Created upon Contract Generation |
| June 22, 2004 | FASAC Meeting Handout |
| June 9, 2004 | Board Meeting—Reliability of Estimates in Present-Day Financial Statements and Evidence of Fair Value |
| April 23, 2004 | FASB-IASB Joint Meeting—Defining Revenues and Other Components of Comprehensive Income, Readily Marketable Commodities, Performance by Third Parties, and Nonreciprocal Transfers and Refining the Definition of Revenues |
| March 16, 2004 | Board Meeting—Revisions of Principles and Implementation Guidance, Initial Fair Value Measurement of Performance Obligations, and Obligations to Be Included in the Scope of the Standard on Revenue Recognition |
| February 18, 2004 | Board Meeting—Use of the Term Conditional Rights and Obligations; Consistency of Measurement Decisions between the Revenue Recognition and Fair Value Measurement Projects; Approaches to Developing the General Standard and Related Application Guidance; and Draft Recognition and Measurement Principles |
| December 17, 2003 | Board Meeting—Discussion of Enforceable Rights and Obligations |
| December 10, 2003 | Board Meeting—Recapitulation of Conceptual Decisions and Summary of Open Issues |
| December 4, 2003 | FASAC Meeting Handout |
| October 22, 2003 | FASB-IASB Joint Meeting—Measuring Performance Obligations and Application of the Conceptual Model to Certain Transactions |
| September 17, 2003 | Board Meeting—Application of the Conceptual Model to Certain Transactions |
| August 13, 2003 | Board Meeting—Analysis of Inventory of Existing Revenue Recognition Guidance |
| July 23, 2003 | Board Meeting—Revenues and Contractual Rights and Obligations |
| June 24, 2003 | FASAC Meeting Handout |
| June 11, 2003 | Board Meeting—Revenues and Contractual Rights and Obligations |
| May 7, 2003 | Board Meeting—Cases Illustrating Different Combination Sequences of the Two Views of Revenues |
| April 9, 2003 | Board Meeting—Review of the Alternate Views of Revenue and Revenue Issues Related to Specific Transactions |
| February 26, 2003 | Board Meeting—Comparing the Liability Extinguishment View and the Broad Performance View of Revenue Recognition |
| January 22, 2003 | Board Meeting—Definition of Revenue and Performance of Revenue-Generating Activities |
| December 18, 2002 | Board Meeting—Revenue Recognition in Conjunction with Obligations to Customers that Are Performed by Others and Issues Relating to EITF Issue No. 99-19 |
| November 13, 2002 | Board Meeting—Refining the Working Criteria of Revenue Recognition and Applying the Working Criteria to Cases from EITF Issue No. 00-21 |
| October 9, 2002 | Board Meeting—Conceptual Criteria Underlying Revenue Recognition |
| September 18, 2002 | FASB-IASB Joint Meeting—Formal Agreement to Joint Project on Revenue Recognition; Consideration of the Existing Conceptual Criteria for Revenue Recognition; and Illustration of the Assets and Liabilities Approach to Revenue Recognition |
| June 25, 2002 | FASAC Meeting Handout |
| May 15, 2002 | Board Meeting—Proposal for a New Agenda Project on Issues Related to the Recognition of Revenues and Liabilities |
| March 26, 2002 | FASAC Meeting Minutes |
The IASB meeting summaries and observer notes for meetings from March 2006 can be found by clicking here. Meeting summaries for meetings before March 2006 can be found in the IASB Update. These are available by clicking here.
RELATED FASB DOCUMENTS
Download the Revenue Recognition article from the December 24, 2002 FASB Report
BACKGROUND INFORMATION
In January 2002, the FASB discussed the objective and scope of a potential major project on the recognition of revenues and liabilities in financial statements. That project would lead to a new comprehensive accounting standard on revenue recognition and also would amend the related guidance on revenues and liabilities in certain of the FASB Concepts Statements. The Board decided to issue a project proposal with a 60-day public comment period. In May 2002, after considering 32 comment letters received on the project proposal, the Board added to its technical agenda a project to develop a comprehensive accounting standard on revenue recognition and to amend the related guidance on revenues and liabilities in certain FASB Concepts Statements.
The project was conducted in two interrelated "parts" that were pursued simultaneously—the "top-down" approach and the "bottom-up" approach. Using the top-down approach, the staff developed the conceptual guidance pertaining to recognition and measurement of revenues that will form the basis for the comprehensive standard. The top-down stage is currently in progress. During the bottom-up stage, the staff analyzed existing authoritative guidance to gain an understanding of the existing revenue recognition models in that guidance. The bottom-up approach included an extensive examination of the existing authoritative revenue recognition literature and the transactions to which that literature is applied. It also considered other practices (such as industry-specific practices) that have not been codified but are regarded as accepted practices. As part of the bottom-up stage, the staff developed a comprehensive inventory of that guidance and those practices. The bottom-up stage identified accounting models and transaction families, which will help in identifying specific situations to be considered in the development of the comprehensive standard on revenue recognition. To the extent that different accounting models are applied to the same (or similar) transaction families, comparability issues may exist. The bottom-up stage was completed in August 2003 and was discussed at the August 13, 2003 Board meeting.
In October 2004, the Boards added to their agenda a joint project to develop an improved and common conceptual framework that is based on and builds on their existing frameworks. That project, which addresses certain recognition and measurement issues that were included in the scope of the original Revenue Recognition project, is concurrent with their goals of improving the quality of financial reporting and promoting the international convergence of accounting standards. The Boards are sharing staff resources and working to coordinate the eventual issuance of an initial due process document (Preliminary Views/Discussion Paper), an Exposure Draft, and a comprehensive final Statement/Standard.
Prior to May 2005, the Boards were developing a revenue recognition model that would measure assets and liabilities at fair value (the fair value model). (See Case in Point: Consumer Electronics Retailer for an example of the model.) Using that approach, the Boards tentatively agreed that the fair values of performance obligations should be measured at the legal layoff price—that is, the price that the reporting entity would have to pay an unrelated party to assume legal responsibility for performing all of its remaining obligations. However, some Board members had certain practical concerns about reasonably estimating fair values and other Board members had concerns about the pattern of revenue recognition under that model. As a result, the Boards agreed to develop an alternative measurement model—the customer consideration model. In this model, performance obligations would be measured using an allocation of the customer consideration amount rather than at the fair value of the obligation.
In October 2006, the Boards decided to complete the preliminary development of both the fair value model and the customer consideration model, rather than trying to develop customer consideration as a "compromise model" that would command broad support among Board members. This was undertaken by the staff using two small groups of Board advisors drawn from both Boards and was completed in July 2007. The Boards discussed the two models from October 2007 to January 2008. Because they have more similarities than differences, and those differences primarily relate to measurement, the Boards currently envisage that the initial due process document will explain and illustrate a single contract-based revenue recognition model with two different measurement approaches. Those approaches will be compared without either of them necessarily being described as the Boards’ "preliminary view."
Overview of the Two Measurement Approaches
Both measurement approaches focus on the asset or liability that arises from the combination of the rights and obligations (performance obligations) in a contract (arrangement) with a customer. A contract can be either an asset or a liability of the entity, depending on the remaining rights and obligations in the contract. A contract would be an asset (a contract asset) to the entity if the remaining rights exceed the remaining obligations. A contract would be a liability (a contract liability) to the entity if the remaining obligations exceed the remaining rights.
At contract inception, the initial accounting of the contract will depend on the measurement approach. Subsequently, as each performance obligation in the contract is satisfied, either the entity’s contract asset will increase or its contract liability will decrease. This increase in the contract asset or decrease in the contract liability from satisfying the performance obligations (from transferring goods and services to customers) is reported as revenue.
In the measurement (formerly called fair value) approach, the contract asset or liability is measured at its current exit price. This is the amount that the entity would expect to receive or pay to transfer its remaining contractual rights and obligations to a market participant. The contract asset or liability is measured this way at inception and subsequently. Because of this measurement approach, an entity may recognize a contract asset at inception of the contract. This increase in the contract asset upon obtaining a contract is also reported as revenue.
In contrast, in the customer consideration approach, the contract rights are measured at the amount of consideration stated in the contract (customer consideration). This customer consideration amount is then allocated to the individual performance obligations pro rata based on the separate selling prices of each underlying good or service. As a result, at contract inception, the total performance obligations are measured at an amount equal to the customer consideration so that neither a contract asset nor contract liability is recognized. Subsequently, the performance obligations are measured at the amount of the customer consideration allocated to them at contract inception. They are not remeasured except when the contract is judged to be onerous.
The two approaches can be summarized as follows:
|
Measurement Approach |
Customer Consideration Approach |
Contract Inception |
||
Measurement of contract at inception |
Measure the remaining rights and performance obligations in the contract at their current exit price. |
Measure the rights in the contract at the amount of consideration received or receivable. The amount of consideration received or receivable is then allocated to the identified performance obligations based on the separate selling price of the underlying good or service. |
Can some revenue arise at contract inception? |
Yes (if current exit price of rights obtained > current exit price of obligations incurred). |
No |
Can some profit arise at contract inception? |
Yes (if current exit price of rights obtained less current exit price of obligations incurred > contract acquisition expenses). |
No |
Can some loss arise at contract inception? |
Yes (if the contract acquisition expenses > current exit price of rights obtained less current exit price of obligations incurred; or if current exit price of obligations incurred > current exit price of rights obtained). |
Yes (for any contract acquisition expenses. An additional loss will also arise if the contract is judged to be onerous.) |
After Contract Inception |
||
Measurement of contract after inception |
Measure remaining rights and obligations in the contract at their current exit price. |
Measure remaining rights at the amount of remaining consideration receivable. Measure remaining obligations at the amount of consideration that was allocated to those obligations at contract inception unless those obligations are judged to be onerous. If onerous, recognize an additional liability. |
If there is a change in price for goods and services still to be provided, does the carrying amount of the performance obligations change? |
Yes, if there is a change in the current exit price of the goods and services to be provided. |
No, unless the contract is determined to be onerous. |
When is revenue recognized? |
As performance obligations are satisfied (that is, as goods and services transfer to customer). |
As performance obligations are satisfied (i.e. as goods and services transfer to customer). |
How is the amount of revenue determined? |
By reference to the current exit price of the obligations that have been satisfied—i.e. current price of goods and services provided in the period. |
By reference to the contract consideration that was initially allocated to the obligations that have been satisfied—i.e. amount of contract consideration attributed to goods and services provided in the period. |
More information on the measurement approach can be found in the observer notes for the November 2007 meetings and on the customer consideration in the observer notes for the January 2008 meetings.
CONTACT INFORMATION
Jeff Wilks |
Henry Rees |
Todd Johnson |
April Pitman
|
Kenneth Bement
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