Revenue – a recipe for confusion?

08 November 2013

By John Hitchins

The IASB and FASB met last week for what is likely to be the final joint board meeting on their revenue project. There were three issues on the agenda – variable consideration, licences and collectability – all of which have attracted significant controversy over the project’s life and particularly during the last few months.

On that basis, you might have expected some good debate, but it was all over in 90 minutes, less than half the allocate time. And the meeting could be summarised in simple words… “boards agree with staff proposals”. Others however might use different words… “Compromise for convergence…a recipe for confusion?” Let’s look at the decisions and you can decide.

Variable consideration is only recognised if it is ‘highly probable’ that there will not be a significant reversal. The exception for royalties is also back; revenue is not recognised until the contingency is resolved. The key changes – a threshold and a clear exception – might be helpful but let’s see about the rest.

On licences, the line is not so well-defined. Revenue recognition depends on whether the IP is ‘dynamic’ (recognised over time) or ‘static’ (recognised at a point in time). Licences are dynamic when the licensor undertakes activities that significantly affect the IP in a way that also affects the customer. But what are ‘activities’ and when are they different from performance obligations? And what about the age old question of how significant is ‘significant’?

On collectability, revenue is not recognised unless it is ‘probable’ of collection. The boards however have dismissed such a threshold several times already. It seems inconsistent with both the control model and recent discussions on the Conceptual Framework. In the end, it appears concerns about recognising revenue that might not be collected outweighed those about consistency. The ‘threshold’ is applied to determine if a contract exists, rather than as a ‘recognition’ threshold. This approach might dampen the voice of critics today but will anyone understand it in 20 years?

And there’s also something else unusual about this threshold: both boards agreed to a ‘probable’ threshold, but ‘probable’ means something different to each. Under IFRS, it means ‘more likely than not’, but the threshold is higher under US GAAP. It is not clear why convergence was not sought, but the threshold selected by each is consistent with existing practice. The implications of this in practice may or may not be significant but the difference is likely to create confusion and could cloud the success of convergence.

What next?

No further decision-making sessions are planned but it will be next year before we see a final standard. The 2017 effective date might be in jeopardy if the process drags on too long. And there has been no news on next steps for the implementation group announced in July. Looking at the decisions above, they might be busy.

But we do now, finally have a full picture of the proposals. What do you think?

John Hitchins:
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