The IASB and FASB met last month to discuss their joint project on revenue recognition. We outline the key decisions below.
The boards reached tentative decisions on certain topics relating to the constraint on recognizing variable consideration, collectibility, time value of money, and distributor and reseller arrangements.
The staff will conduct further analysis on certain items including aspects of the variable consideration constraint and presentation issues relating to collectibility. Other key issues still to be redeliberated include licences, contract modifications, allocation of transaction price, disclosures and transition.
Constraint on recognizing variable consideration
Variable consideration that is recognized as revenue will be constrained, under the proposed model, to the amount the entity is reasonably assured to be entitled to. This constraint applies to contracts with a variable price and to those contracts with a fixed price where it is uncertain whether the entity will be entitled to that consideration even after the performance obligation is satisfied.
The boards discussed enhancements to the guidance for determining when an entity’s experience is predictive of the amount of variable consideration to which it will be entitled. Further discussions are expected at a future meeting after additional outreach.
Initial and subsequent impairments of receivables should be presented in the same financial statement line item. The boards did not conclude, however, on where the impairment should be presented in the income statement. This debate also raised once again the question of whether collectibility should be a threshold for recognizing revenue. The staff will perform further analysis including evaluating the potential consequences of a collectibility threshold, and whether it would be consistent with the core principles of the proposed model. Further discussion is planned for a future meeting.
The boards also considered when revenue should be recognized for contracts with non-recourse, seller-based financing. They agreed to provide additional implementation guidance about whether a contract with a customer exists, based on when the parties may or may not be committed to perform their obligations under the contract.
Time value of money
The boards agreed to retain the proposed guidance that requires adjustment to the transaction price for the effect of time value of money if the contract has a significant financing component. They will, however, consider at a future meeting some additional implementation guidance for inclusion in the final standard. They also decided to retain the practical expedient that does not require an adjustment for the time value of money if the time difference between performance and payment is one year or less.
An entity does not need to reflect the effect of time value of money for advance payments when the timing of the transfer of goods or services is at the discretion of the customer.
Contract combinations for distribut0r and reseller arrangements
Promised goods or services in a contract might include offers to provide goods or services that the customer can resell or provide to its customer. These promises are performance obligations even if they are satisfied by another party, and are different from promises to pay cash to the customer, which are accounted for as a reduction of the transaction price.
Convergence is expected for revenue recognition, as the same principles will be applied to similar transactions under both IFRS and US GAAP. Differences might continue to exist to the extent that the guidance requires reference to other standards before applying the guidance in the revenue standard.
The proposal will affect most entities that apply IFRS or US GAAP. Entities that currently follow industry-specific guidance should expect the greatest impact.
We anticipate the final standard to have an effective date no earlier than 2015.
The boards’ timeline indicates that they will issue a final standard in the first half of 2013. They will continue to redeliberate over the next several months and perform targeted outreach on some of the more significant changes.
Partner in PwC’s Accounting Consulting Services in the UK, Peter Hogarth, provides an update on the leasing project and tells of his hopes for things to come.
Once upon a time, a namesake of mine annoyed his village neighbours by repeatedly telling them that the wolf was here. It never was, and so nobody believed him. We all know what happened to him, so it is with some nervousness that I tell you that the revised leases exposure draft should be here soon.
The the boards proudly announced in July that they had substantially completed their discussions and that a revised leases exposure draft would be published by the end of the year (It’s the wolf!). It didn’t take long for that deadline to slip to the first quarter of next year (I think I can see a wolf-like dot on the horizon), but nevertheless the boards do seem to be approaching the end of this phase of the project.
One of the principal criticisms of their 2010 proposals on expense recognition was that they would result in a front-loaded expense profile for lessees, regardless of the payment profile. The boards spent several fruitless months last year in search of a solution, but the issue refused to go away, even when the impact was reduced following decisions concerning lease terms and contingent rentals. The lobbying continued, and the boards have now agreed on an approach that will result in different expense recognition for different types of leases: some will apply the approach proposed in 2010, similar to today’s finance lease accounting with its resultant expense front-loading; others will apply a straight-line expense recognition pattern, similar to current operating lease accounting.
Now, you might want to pause here and get yourself a strong cup of tea before reading on.
This might sound as if several years of debate have resulted in the status quo adjusted only for the capitalization of operating leases. Actually, that is not too far from the reality, but importantly the new model will include a different basis for determining when each type of lessee accounting should be applied. In principle, the new “bright-line” will depend on whether the lessee acquires or consumes more than an insignificant portion of the underlying asset. But this might be quite difficult to work out, so the boards have decided on a couple of presumptions, depending on the nature of the underlying asset:
The same bright line tests would be applied by lessors.
Hopefully that strong cup of tea helped.
References to the leased asset’s useful life and fair value compared to the present value of the fixed lease payments might sound familiar, but the new test will be different, especially for equipment leases. And in order to accommodate a straight-line expense while measuring the lease liability by an effective interest method, asset amortization will in practice be a balancing figure. Early signs are that stakeholders involved with equipment leases have not warmed to the model. A few members of IASB and FASB don’t sound too keen either.
As I mentioned, we’ve been told to expect a revised exposure draft early next year. But if that doesn’t happen, I promise I did once see a wolf!
Deferred tax–you either know it or you don’t. Test yourself against one of our specialists, Cynthia Leung. You can find guidance to help you with the answers in our topic summary on taxation on pwcinform.com.
Q1: Deferred tax assets or liabilities that will be recovered within 12 months are presented as current assets or current liabilities in the balance sheet. True or false?
Q2: When the carrying amount of an asset is more than its tax base, is there a:
Q4: Which of the following disclosures are required by IAS 12?
Q4: Where can interest paid be classified?
Q5: When is a deferred tax liability recognized in a business combination?
Q6: When is a deferred tax liability recognized in consolidated financial statements for the temporary differences associated with investments in subsidiaries and associates?
Q7: A change in tax rate from 30% to 20% is enacted on December 31, 20XX. The new tax rate takes effect on April 1, 20XX. An entity has an accounting year-end on December 31, 20XX. How should the deferred tax be measured on temporary differences that are expected to reverse after April 20XX?
Q8: Where is the adjustment to the deferred tax balances arising from the change in tax rates in question 7 above recognized?
Q9: Entity A has unused tax losses of C500 with no expiry date. Management believes that a future taxable profit of C200 is probable and there are taxable temporary differences of C400. The tax rate is 20%. What deferred tax asset is recognized?
Q10: The income tax rate for undistributed profits is 30%. The income tax rate for distributed profits is 40%. For many years, the entity has distributed 50% of its profits. How should the deferred tax of undistributed profits be measured when no dividends have been declared?