Revenue from Contracts with Customers

1. Revenue from Contracts with Customers Amaro Gomes, IASB Member Kristin Bauer, FASB Practice Fellow Allison McManus, IASB Technical Manager

2. Agenda 2 • Project status and objective • Overview of the revised revenue proposals • Questions

3. Project status 4 2010 2011 2012 / 2013 June 2010 Exposure draft Revenue from Contracts with Customers November 2011 Revised exposure draft Re-exposure of Revenue from Contracts with Customers March 2012 Comment letter deadline April 2012 Roundtables May 2012 onwards Redeliberations Q4 2012 / Q1 2013 Expected IFRS IFRS X Revenue from Contracts with Customers Effective date to be determined

4. Project objective 3 Objective: To develop a single, principle-based revenue standard for US GAAP and IFRSs • The revenue standard aims to improve accounting for contracts with customers by: • Providing a more robust framework for addressing revenue issues as they arise • Increasing comparability across industries and capital markets • Requiring better disclosure

5. Overview of revised proposals 5 Core principle: 2. Identify the separate performance obligations 5. Recognise revenue when a performance obligation is satisfied 3. Determine the transaction price 4. Allocate the transaction price 1. Identify the contract(s) with the customer Recognise revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Steps to apply the core principle:

6. Step 1: Identify the contract(s) 6 Objective: To identify the bundle of contractual rights and obligations to which an entity would apply the revenue model • Specified criteria must be met to apply the model to a contract • Some contracts would be combined and accounted for as one contract • Contract modifications • Some accounted for as a separate contract • Otherwise, reevaluate remaining performance obligations

7. Step 2: Identify the separate performance obligation(s) 7 Objective: To identify the promised goods or services that are distinct and, hence, that should be accounted for separately • A good or service is distinct if either: • The entity regularly sells the good or service separately • The customer can benefit from the good or service on its own or together with other readily available resources • A good or service that is part of a bundle of goods or services is not distinct if both: • The goods or services are highly interrelated and the contract requires the entity to provide a significant service to ‘integrate’ them into items for which the customer has contracted • The bundle of goods or services is significantly modified or customised to fulfil the contract

8. Step 3: Determine transaction price 8 Objective: To determine amount of consideration that an entity expects to be entitled in exchange for promised goods or services • Estimate variable consideration at expected value ormost likely amount • Use the method that is a better prediction of the amount of consideration to which the entity will be entitled • Adjust for time value of money only if there is a financing component that is significant to the contract • Customer credit risk accounted for under other standards and presented adjacent to revenue line on income statement

9. Step 4: Allocate the transaction price 9 Objective: To allocate to each separate performance obligation the amount to which the entity expects to be entitled • Allocating on a relative standalone selling price basis will generally meet the objective • Estimate selling prices if they are not observable • Residual estimation techniques may be appropriate • Discounts and contingent amounts are allocated entirely to one performance obligation if specified criteria are met

10. Step 5: Recognise revenue 10 Objective: To recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service • Performance obligations satisfied over time • A performance obligation is satisfied over time if: • the entity’s performance creates or enhances an asset (eg WIP) that the customer controls as the asset is created or enhanced; or • the criteria in paragraph 35(b) are met (see following slides) • Revenue is recognised by measuring progress towards complete satisfaction of the performance obligation • Performance obligations satisfied at a point in time • All other performance obligations are satisfied at a point in time • Revenue is recognised at the point in time when the customer obtains control of the promised asset. Indicators of control include: • a present right to payment • legal title • physical possession • risks and rewards of ownership • customer acceptance

11. Step 5: Recognise revenue 11 An overview of the paragraph 35(b) criteria • A performance obligation is satisfied over time if: • the entity’s performance does not create an asset with alternative use to the entity; and • at least one of the following three criteria is met: • the customer benefits as the entity performs (paragraph 35(b)(i)), or • another entity would not need to re-perform work to date, (paragraph 35(b)(ii)), or • the entity has a right to payment for work completed to date (paragraph 35(b)(iii)).

12. Step 5: Recognise revenue 12 A summary of the paragraph 35(b)(i) criteria • A performance obligation is satisfied over time if: • the entity’s performance does not create an asset with alternative use to the entity; and • the customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs. Example: transaction processing service

13. Step 5: Recognise revenue 13 A summary of the paragraph 35(b)(ii) criteria • A performance obligation is satisfied over time if: • the entity’s performance does not create an asset with alternative use to the entity; and • another entity would not need to substantially re-perform the work the entity has completed to date if that other entity were to fulfil the remaining obligation to the customer without the benefit of any asset (eg WIP) that is presently controlled by the entity. Example: transportation service

14. Step 5: Recognise revenue 14 A summary of the paragraph 35(b)(iii) criteria • A performance obligation is satisfied over time if: • the entity’s performance does not create an asset with alternative use to the entity; and • the entity has a right to payment for performance completed to date and it expects to fulfil the contract as promised. The right to payment must approximate the selling price of the goods or services transferred to date rather than for only the entity’s potential loss of profit if the contract is terminated. Example: consulting services

15. Step 5: Recognise revenue 15 Constraint: When the consideration is variable, the cumulative amount of revenue recognised is limited to the amount to which an entity is reasonably assured to be entitled • An entity is reasonably assured only if: • The entity has experience with (or has other evidence about) similar types of performance obligations, and • The entity’s experience (or other evidence) is predictive of the amount of consideration to which the entity will be entitled • Various factors might indicate that the entity’s experience is not predictive

16. Contract costs and onerous POs 16 Costs of obtaining a contract Costs of fulfilling a contract Onerous performance obligations • Recognised as an asset if they are incremental and are expected to be recovered • For example: • Selling commissions • Recognised as an asset if they: • Relate directly to a contract • Relate to future performance • Are expected to be recovered • For example: Pre-contract or setup costs • Recognise a loss if the least cost of settling the performance obligation satisfied over time exceeds the amount of transaction price allocated to that performance obligation

17. Disclosure 17 Objective: To enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers Information about contracts with customers Disaggregation of revenue Note disclosures Some disclosures required for interim reporting Reconciliation of contract balances Information about judgements used Information about long-term contracts

18. Transition and effective date 18 • Retrospective application • Some practical expedients available • Effective date no earlier than annual reporting periods beginning on or after 1 January 2015 • Effective date will be reconsidered by the Boards before finalising the standard

19. Implementation guidance 19 • Warranties • Licenses • Right of return • Customer options for additional goods or services • Breakage (customers’ unexercised rights) • Principal versus agent • Bill and hold arrangements • Repurchase agreements • Nonrefundable upfront fees • Customer acceptance

20. Feedback from outreach • Generally supportive of clarifications & simplifications • Clarify and refine further • Criteria for identifying separate performance obligations • Criteria for determining revenue over time • Difficulties in practically applying proposals • Time value of money • Retrospective transition • Disagreement • Disclosure requirements • Onerous performance obligations • Telecommunication industry

21. More information 21 Additional information about the revised proposals and the revenue recognition project is available at www.ifrs.org and www.fasb.org.

22. Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.