Revenue Recognition

Transcription

Revenue Recognition

Deutsches Rechnungslegungs Standards Committee e.V.
Accounting Standards Committee of Germany
®
Revenue Recognition
- A European Contribution Dr. Mareike Kühne, DRSC
Leipzig, 17. Oktober 2007
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Why does EFRAG deal with Revenue Recognition issues?
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Pro-active Accounting Activities in Europe
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PAAinE: Revenue Recognition
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The GASB view on Revenue Recognition
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What‘s next?
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Why does EFRAG deal with Revenue
Recognition issues?
- The IASB/FASB Project -
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Background
Joint Project IASB and FASB (since 2002)
Purpose:
IASB: (Conceptual) Revision of IAS 18 & IAS 11
FASB: Development of one single Statement on Revenue Recognition
together: Convergence!
Output:
Discussion Paper end in 2008 (?)
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IFRSs on Revenue Recognition:
IAS 18 Revenue
IAS 11 Construction Contracts
IAS 17 Leases
IAS 39 Financial Instruments: Recognition and Measurement
IAS 41 Agriculture
+ recourse to US GAAP
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IAS 18 Revenue – Underlying Principle
Definition
Gross inflow of economic benefits during the period arising in the
course of the ordinary activities (IAS 18.7)
Recognition
- Probable that economic benefits will flow to the entity
- Amount of revenue can be measured reliably
Measurement
Fair value of the consideration received or receivable (IAS 18.9)
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IAS 18 Revenue – Underlying Principles (cont.)
Critical Events for the Recognition of Revenue
Sale of goods
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Transfer of the significant risks and rewards to the buyer
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Entity retains neither continuing managerial involvement nor effective
control
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Costs incurred can be measured reliably
Rendering of services
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Stage of completion can be measured reliably
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Costs incurred can be measured reliably
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Problems arising
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From a conceptual perspective
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Recourse to the realization principle in IAS 18 is said to be contradictory
to the definition of revenues in the framework (income = measurable
changes in assets and liabilities)
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Application of IAS 18 can lead to recognition of deferred assets and
deferred liabilities (which do not meet the definition of assets and
liabilities)
From a practical perspective
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Content of the realization principle often unclear (as evidenced by the
need for extensive additional explanations in the appendix of IAS 18)
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No sufficient guidance for accounting for multiple element
arrangements
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IASB/FASB Project Revenue Recognition
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IASB addresses the issue of revenue recognition starting from the
Framework definition of income
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That is: “Income is measurable changes in assets and liabilities”
(= Assets and Liabilities Approach)
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This approach shall not be overridden by notions of realization and
completion of the earnings process.
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Revenue (under IASB Approach):
Revenue shall reflect measurable changes in net assets under contracts
with customers
= Contractual Asset ./. Contractual Liability
= Expected consideration ./. Performance obligation
Resulting questions:
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Does signing of a contract lead to (measurable) changes in net assets?
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Recognition of selling revenue?
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Measurement of performance obligations?
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Approach discussed by IASB until June 2005
Revenue = Expected Consideration ./. Performance Obligation
Measurement of performance obligation: legal layoff amount (= fair value)
Re-measurement: yes!
Recognition:
- Selling revenue at contract inception
- Changes of value (re-measurement)
- At extinguishment of performance obligation
Information given includes:
- Profitability of separate parts of a contract
- Efficiency of entity in comparison with market
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Approach discussed by IASB until June 2005 (cont.)
Problems:
- Identification of project segments
- Fair value measurement of performance obligations
Does this approach lead to
- Recognition of executory contracts?
- Revenue recognition at contract inception?
- Fair value measurement of performance obligations?
- Re-measurement of performance obligations?
YES!
But: IASB/FASB have decided against such an approach.
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IASB has modified its “revolutionary” approach!
Revenue = Expected Consideration ./. Performance Obligation
Measurement of performance obligation:
customer consideration amount
= price at which good/service can be sold to customer
(fair value, if existent)
Re-measurement: no
Recognition:
- No selling revenue at contract inception
- No changes of value (re-measurement)
- At extinguishment of performance obligations
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Modified IASB Approach
Information given include:
- Profitability of contract
Problems:
- Identification of project segments
- When is performance obligation extinguished?
Does this approach lead to
- Recognition of executory contracts?
- Revenue recognition at contract inception?
- Fair value measurement of performance obligations?
- Re-measurement of performance obligations?
No!
(Yes, if observable market value of performance obligation exists)
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Current Discussion
Two sub-groups:
Æ Legal layoff amount
Æ Customer consideration amount
Meetings outside the boardroom!
October 2007:
Topic expected to be on the agenda of the IASB meeting
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Pro-active Accounting Activities in Europe
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PAAinE – Proactive Accounting Activities in Europe (1)
= Initiative of EFRAG and the 17 National Standard Setters
Why?
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Pooling some of their resources and working more closely together
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Improving the input of Europe to the global accounting debate
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Gaining greater influence on the global standard-setting process
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Focussing on long-term pro-active work
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Stimulating debate on important items on the IASBs agenda at an
early stage in the standard-setting process
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PAAinE – Proactive Accounting Activities in Europe (2)
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Objectives of PAAinE Discussion Papers:
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To stimulate, carry out and manage pro-active development activities
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To encourage the development of common views
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To ensure that Europe gives consistent messages to the IASB
Issued so far:
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Conceptual Framework, Equity/Liability, Pensions, Performance
Reporting and
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Revenue Recognition
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PAAinE: Revenue Recognition
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Background
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Established in June 2004
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Joint working group of EFRAG and DRSC
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11 members (academia, standard settíng, auditing, preparer)
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Rejection of “revolutionary” IASB Assets and Liabilities Approach
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How to solve the problems addressed by IASB without completely changing IAS
18 but still employing an assets and liabilities approach?
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First draft of discussion paper rejected by TEG, GASB and the majority of the
working group
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Set up of a task force to re-draft the original paper
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TEG and GASB have decided to focus on assets/liabilities approaches
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Discussion paper in 2006
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REVENUE is an important number!
… but there are significant weaknesses in existing standards
→ No sufficient guidance on Multiple Element Arrangements
→ Conceptual inconsistencies: two different approaches used
IAS 18
IAS 11
sale of goods
construction contracts,
services
transfers of risks
and rewards
as work progresses
(percentage of completion)
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Consider the following cases:
A real estate company sells …
Case A
Case B
… a building, which it owns.
… a building, that it has to build.
Transfer of title will be in 15 month
time.
Contract says it has to be ready 15
month from now. Construction work
starts right away.
= sale of goods:
= long-term construction contract:
Revenue is recognized
15 month from now
Revenue is recognized as
construction progresses
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Form over substance??
NEED FOR A COMMON SET OF PRINCIPLES THAT APPLY TO
ALL TRANSACTIONS
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®
IASB/FASB project Revenue Recognition
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IASB/FASB address the issue of revenue recognition starting from the
Framework definition of income
-
That is: “Income is measurable changes in assets and liabilities”
Assets/Liabilities Approach
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The PAAinE Paper on Revenue Recognition:
- The GASB view -
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Key questions to be answered
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What shall revenue reflect?
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Performance towards fulfillment (as in IAS 11)?
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Fulfillment (meaning completion, as in IAS 18)?
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Existence of a claim against the customer as a result of past action?
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One approach for all types of transactions?
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Choice of approaches depending on context?
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Assets/Liabilities-Approach
= revenue is measurable changes in assets and liabilities
Critical events approach
Continuous approach
(similar to IAS 18)
(similar to IAS 11)
revenue = arises when the supplier
fulfils the performance
obligations arising under
a contract
Approach IA
fulfils all performance
obligations
revenue = measured progress towards
contract completion (percentage of completion)
Approach IB
Approach IC
Approach II
fulfils all performance obligations under a
part-contract
(part-contract
as defined by
contract)
substantively fulfils
performance obligations of part-contract
(part-contract as
defined by economic
measures)
recognised continuously over
the course of
contract, as the
contract progresses and the
entity perfoms
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When does revenue arise?
Critical events approach Continuous approach
Sale of goods
(Supermarket, …)
Services (cleaning,
painting, …)
Manufacturing
(chair, table, …)
Long term
construction work
(bridge, …)
at point of sale
when contractual
obligation is fulfilled
as manufacturing is
completed
as construction is
completed
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at point of sale
as service is performed
as manufacturing
progresses
as construction
progresses
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Quest for one single approach to be applied to all transactions!
Critical events approach Continuous approach
Sale of goods
(Supermarket, …)
Services (cleaning,
painting, …)
Manufacturing
(chair, table, …)
Long term
construction work
(bridge, …)
at point of sale
when contractual
obligation is fulfilled
as manufacturing is
completed
at point of sale
as service is performed
as manufacturing
progresses
as construction is
completed
No PoC for construction
contracts and services!
as construction
progresses
No changes for simple
sales transactions and
PoC remains in place!
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If one approach is to be chosen:
Continuous Approach!
Revenue should be recognised when activity undertaken
pursuant to a contract with a customer gives rise to an asset
that reflects performance towards completion.
•
•
•
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No changes in accounting for over the counter sales transactions
Revenue follows performance of the entity, that is PoC for services
and construction contracts
Focus on economic substance (and not on legal form)
In line with notion of assets/liabilities approach
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Why is the continuous approach an assets/liabilities approach?
Revenue
= measurable changes in assets and liabilities
FW.49(a) asset = resource controlled by the entity as a result of past events
and from which future economic benefits are expected to
flow to the entity
Assets:
raw material, inventory, customer lists, newspaper
mastheads, non-competition agreements, …
not only
receivables!
If the entity expects to fulfil the contract and it expects the
customer to pay, performance of the entity results in „a
resource controlled by it as a result of past events and from
which future economic benefits are expected to flow to the
entity.“
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How to account for Multiple Element Arrangements?
There are basically two alternatives:
No disaggregation of the
contract
Disaggregation of the contract
- Recognition of revenue
according to costs incurred
- Continuous approach is applied
to the elements of a transaction
- No disaggregation necessary
- Criteria for disaggregation
needed
- Disaggregation should follow
economic substance
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How reliable is the resulting revenue number?
Starting point for application of the continuous approach:
•
There must be a binding contract with a customer.
•
The approach is only applicable,
… if entity has reliable projections regarding contract fulfillment,
… if entity expects to fulfil the contract and
… if entity expects customer to pay.
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What‘s next?
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Invitation to Comment
… Comment deadline: 10 December 2007
Round Table Discussions
… will be held 24 October 2007 in Berlin
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®
Zimmerstr. 30
10969 Berlin
Tel. 030 20 64 12 0
Fax 030 20 64 12 15
www.drsc.de
[email protected]
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Revenue Recognition

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