IFRS SymposiumRevenue from Contracts with Customers27 September 2011 www.pwc.com/se Sigvard Heurlin
Agenda Why have the IASB and the FASB taken on this project? What is the principal approach taken? And what has been achieved during the last year? Where do the IASB and the FASB stand now in this project? What happens next? Slide 2 September 2011 Revenue Recognition
Why need for a new standard? A critical project for both the IASB and the FASB For the IASB: Existing standards on revenue recognition, IAS 11 and IAS 18, are based on two different principles Insufficient guidance in some cases. E.g. multiple elements arrangements. Reliance on US GAAP for specific guidance For the FASB: US GAAP has a wide range of very detailed industry specific requirements (about 200), but no single standard A need for consistent principles for use across industries. Slide 3 September 2011 Revenue Recognition
What is the principal approach taken? Employs an assets and liabilities approach - the cornerstone of the IASB and the FASB Framework Currentrevenueguidance in IFRS and US GAAP focuses on an ´earnings process´ However, difficultiesoftenarise in determiningwhen an entityearnsrevenue. The earnings process is therefore not referred to in the proposal. Slide 4 September 2011 Revenue Recognition
Wheredo the IASB and the FASB stand in the project?
ED, Revenue from contracts with customers, published in June 2010
Certaincontractual rights and obligations within the scope of other standards, includingfinancial instruments.
Slide 7 September 2011 Revenue Recognition
The basicmodel is unchanged from the 2010 ED Thus the application of the revenuerecognitionmodelincludes the following steps: Identify the contracts with the customer(s) Identify the separate performance obligations( ´prestationsförpliktelser´) Determine the transaction price Allocate the transaction price to the performance obligations Recogniserevenuewhen a performance obligation is satisfied. Slide 8 September 2011 Revenue Recognition
Proposal in the ED Definition of a contract: An agreementbetweentwo or moreparties that createsenforceable rights and obligations Revisedmodel No change. No change to the criteria for the existence of a contract (e.g. shouldhavecommercialsubstance, approval by the parties, identification by the entity of the enforcable rights and manner of payment). Summary of the Revenue recognitionmodel: Step 1: Identify the contract(s) with the customer Slide 9 September 2011 Revenue Recognition
Summary of the Revenue recognitionmodel: Step 1: Identify the contract(s) with the customer Proposal in the ED Combiningcontracts: Account for contractstogetherif the contractprices are interdependant. Indicators to be applied. Revisedmodel Combinecontracts with the same customerifenteredinto at or near the same time. Criteria to be applied:
Negotiated as a package
Consideration in onecontractdepends on the theothercontract
Interrelated in terms of design, technology or function.
Slide 10 September 2011 Revenue Recognition
Summary of the Revenue recognitionmodel. Step 1: Identify the contrac(s) Proposal in the ED Segmenting a contract: Account for a singlecontract as two or moreifgoods or services are pricedindependently. Revisedmodel (This step is eliminated. However, priceindependenceusedwhenallocating the transaction price.) Slide 11 September 2011 Revenue Recognition
Summary of the Revenue recognitionmodel. Step 2: Identify the separate performance obligations Proposal in the ED Definition of a performance obligation: An enforceablepromise (´tvingande löfte´) to transfer a good or service. Revisedmodel No material change. Includespromises that are implied by: business practices publishedpolicies
valid expectations (´välgrundade förväntningar´) to perform arecreated. Slide 12 September 2011 Revenue Recognition
Summary of the Revenue recognitionmodel: Identify the separate performance obligation Proposal in the ED The separate performance obligation identified Accounted for separatelyonlyifdistinct (´tydligt urskiljbar´):
if sold separately by the entity or anotherentity; or
if a distinctfunction and a distinct profit margin.
Revisedmodel In somecases the risks to the entity of providinggoods/services are inseparable: single performance obligation. In all othercases a separate performance obligation if
a good/service is distinct; and
the pattern of transfer is different from other transfers.
Slide 13 September 2011 Revenue Recognition
Summary of the Revenue recognitionmodel: Identify the separate performance obligation Proposal in the ED Warranties (1) If for latent effects: not a separate performance obligation. A provision is recognised. (2) If for faults that arise after theproducts are transferred to thecustomer: a separate performance obligation. In bothcasesthusdeferral of revenue. Revisedmodel If an option to purchase a warrantyseparately: a separate performance obligation and allocation of revenue to the service. If not such option: (a) a costaccrual, unless (b) the warranty provides a service to the customer (under circumstancesspecified in the revisedmodel). Slide 14 September 2011 Revenue Recognition
Example: Revenue allocation Case 1. A telecomcoysells a mobile phone and unlimitedcalls and texts to Cust. A. The phone is freeif the customersigns up for a year; the network service is CU40 pm. Case 2. The coyalsosells the same phone to Cust. B for CU300, with the same service provided for at CU15 pm. At present: Case 1. Probably no revenue on the phone and revenue of CU40 pm. Case 2. Revenue on the phone CU300 and revenue of CU15 pm. Thusrevenueattributed to maindeliverables. Under the proposal: Revenue would be recognised at similaramounts for eachphone and service based on (estimated) sellingprices, see Step 4 below. Thusrevenuedepicts transfer to customers and is allocated to all performance obligations, not just maindeliverables. September 2011 Slide 15 Revenue Recognition
Summary of Revenue recognitionmodel. Step 3: Determining the transaction price Proposal in the ED Definition of the transaction price The amount of consideration an entityreceives, or expects to receive, in exchange for transferring goods or services. Revisedmodel No significantchange. Slide 16 September 2011 Revenue Recognition
Summary of the Revenue recognitionmodel. Determining the transaction price. Proposal in the ED Uncertainconsideration The transaction priceshouldreflect the probability-weighted amont of the consideration. Onlyif the transaction pricecan be reasonblyexpected. Conditions to be met (e.gsimilartypes of contracts). Revisedmodel What is mostpredictive:
Allocateprice to a satisfied performance obligation ´unless the entity is not reasonablyassured (´saknar rimliga garantier´) to be entitled (´ha rätt ´) to that amount´. Circumstancesspecified. Slide 17 September 2011 Revenue Recognition
Summary of the Revenue recognitionmodel. Determining the transaction price. Proposal in the ED Other Reduce the amount to reflect the customer´s credit risk. Adjust the promisedamount to reflect the time value of money Revisedmodel Do not reflect the effects of a customer´s credit risk. Recognise an allowance for anyexpectedimpairment loss. Adjust the promisedamount to reflect the time value of ofmoney, if the financingcomponent is significant. Variousfactors to be considered. September 2011 Slide 18 Revenue Recognition
Summary of the Revenue recognitionmodel. Step 4: Allocate the transaction price to the perf. oblig. Proposal in the ED An entityshouldallocate the transaction price to the separate performance obligations in proportion to the standalonesellingprice (estimatedifnecessary). Revisedmodel No material change. If the standalonesellingprice is highly variable, a residualtechniquemay be used (reference to the total transaction price less the less the standalonesellingprices of othergoods or services). Conditions to be metwhen the transaction price is allocated to one or more performance obligations. September 2011 Slide 19 Revenue Recognition
Summary of the Revenue recognitionmodel. Step 5: Recogniserevenuewhen a perf. obl. is satisfied Revisedmodel No change to coreprinciple. Indicators on when the customer has obtainedcontrol of a good (e.g. physical poss., risks and rewards).Criteria on when a performance obligation for services is satisfied over time, at leastone of:
The entity´s performance creates or enhances an asset,
If not, a benefitreceived, (a few alternative criteria to be met).
Proposal in the ED Recogniserevenuewhen the customerobtainscontrol of the promisedgoods or service (when the customer has the ability to direct the useof/receive the benefit from the good or service). Indicators on whencontrol has beenobtained. (No specificguidance for determiningwhen a performance obligation is satisfied over time). September 2011 Slide 20 Revenue Recognition
Summary of Revenue recognitionmodel: Contractcosts Proposal in the ED Cost of obtaining a contract As an expensewhenincurred. Revisedmodel Recognise an asset for the incrementalcosts of obtaining a contract that the entityexpects to recover. September 2011 Slide 21 Revenue Recognition
Summary of Revenue recognitionmodel.Recogniserevenuewhen a perf. obl. Is satisfied. Proposal in the ED Measuring progress A performance obligation satisfiedcontinuosly: selectonemethod and apply it consistently.. Revisedmodel No change. Recogniserevenueonlyif the entitycanreasonablymeasureits progress towardsuccessfulcompletion. September 2011 Slide 22 Revenue Recognition
Summary of the Revenue recognitionmodel.A shortsummary
No change for manytransactions
Principles-based standard to give robust application
Reducesneed for interpretations Prevent gaps being filled by local or imported ´rules´ A single, global revenuerecognitionframworkacross all industries and all markets Revenue attributed to all performance obligations, not just maindeliverables Use of estimateswhenseparating obligations betterreflects transfer of different deliverables. Slide 23 September 2011 Revenue Recognition