IASB and FASB release revenue recognition exposure draft
What is the issue?
On June 24th, the FASB and IASB issued an exposure draft proposing a new revenue recognition model that could fundamentally alter the way entities across a variety of industries recognise revenue. The proposal is an output of the boards' joint efforts to develop a converged revenue recognition standard based on the same principles. A key objective is to increase the consistency of revenue recognition for similar contracts, regardless of industry. The proposed model requires a contract-based approach that focuses on the assets and liabilities that are created when an entity enters into and performs under a contract. The proposed model requires that revenue is recognised when an entity satisfies its obligations to its customer (performance obligations). The proposal defines a performance obligation as an enforceable promise in the contract that includes both explicit and implicit promises to transfer goods and services to a customer. Performance obligations are satisfied when control of a good or service transfers to the customer, which is when the customer is able to use, and receive benefits from, the good or service. Identifying the performance obligations in a contract will be critical in applying the proposed model and will require significant judgment. This may be particularly challenging for service arrangements and long-term contracts. It will also be challenging to determine when performance obligations should be combined and when they should be separated, which will be a key driver in determining the amount and timing of revenue recognition. Revenue is measured based on the transaction price, which is the amount the customer promises to pay in exchange for goods or services. The transaction price is usually easy to determine when it is a fixed amount of cash at the time of sale. It may be more difficult to determine if the consideration could vary in the future depending on the...
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