REVENUE RECOGNITION

1. REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

2. Revenue recognition • IAS 18 problems • Very little specific guidance • Inconsistent guidance • Somewhat based on matching • Examples not always consistent with the standard • Little guidance on multiple-element contracts

3. Revenue recognition • IAS 11 and 18 problems • The two standards are inconsistent • Somewhat based on matching • Little guidance on more complex transactions • Little guidance on new sophisticated transactions such as multiple-element contracts related to construction

4. Revenue recognition • USA has a big number of rules • The rules are in many different pronouncements • Specific guidance to specific transactions • SEC has issued SAB 104 somewhat based on an earnings principle • US GAAP also urgently needed improvement

5. Revenue recognition US GAAP IAS/IFRS GAAP CONVERGENCE JOINT PROJECT

6. IASB/FASB joint project • IASB/FASB could have chosen • Amendments to the present standards and rules • Ad hoc changes to facilitate new types of transactions IASB/FASB decided to undertake a comprehensive project with fundamental rethink

7. Proactive Accounting Activities in Europe PAAinE!

8. EFRAG – PAAinE • OBJECTIVES: • Partnership with National standard setters • High quality proactive input to IASB(+FASB) • More consistent messages to IASB • Create debates in Europe • Involvement in the convergence work • Monitor work of IASB & FASB • Thought leadership

9. PAAinE - projects Revenue Recognition Framework Pensions Equity/ liability split Performance Reporting

10. PAAinE project Revenue Recognition • Top-line figure – Turnover – Revenue • Revenue is a gross number • Revenue is a measure of activity pursuant to a contract with a customer (reflects the activity of supplying goods and services to customers) • Based on the asset liability approach – like the Framework Is it strange to start Revenue based on assets and liabilities?

11. Examples The Chair A customer buys an already-made chair from the supplier, and takes it home in his car. The Washing Machine A customer with a washing machine enters into a contract with a separate supplier (the plumber) that requires the supplier to connect the washing machine, to the customer’s existing plumbing and do all that is necessary to make the washing machine work.

12. Examples The Cleaner A customer enters into a contract that requires the supplier (the cleaner) to visit his office every work day evening for a year and carry out on each of those visits an identical set of cleaning tasks. Bridge A customer enters into a contract with the supplier (a construction company) that requires the supplier to build a bridge to the customer’s design and specification. The contract envisages that the bridge will take three years to complete.

13. Examples The Computer A customer orders from the supplier a particular specification of computer along with a specified package of off-the-shelf software. The supplier is required to supply and deliver the computer with the software already loaded, connect up all the wires and make sure everything works, and provide the customer with ten hours of tuition on how best to use the computer and its software.

14. Revenue recognition THE DRAFT DISCUSSION PAPER DISCUSSES FOUR DIFFERENT APPROACHES TO RECOGNITION

15. Revenue recognition FOUR APPROACHES COMPLETED CONTRACT COMPLETED PART CONTRACTS PART-OUTPUT HAS VALUE TO CUSTOMER CONTINUOUS APPROACH

16. A Completed contract Revenue arises when the supplier fulfils the performance obligations arising under a contract with a customer. The supplier gets a right to consideration when it has met its performance obligation. The consideration constitutes a new asset either cash or receivable

17. B Completed part contract Revenue arises when the entity fulfils all the performance obligations arising under a part-contract with a customer. (A part-contract comprises one or more of the performance obligations required by the whole contract that, when fulfilled, will result in a right to consideration arising). The contractual terms allows the supplier to get right to consideration before full completion.

18. C Part-output has value to customer Revenue arises when the entity fulfils all the performance obligations arising under a part-contract with a customer. Each part-contract comprises the work necessary to produce an item of output that the customer can either use for its intended purpose or can be sold at an amount that reflects its worth when used for that intended purpose.

19. C Part-output/value to customer Revenue arises when the entity has produced comprises the work necessary to produce an item of output that the customer can either use for its intended purpose or can be sold at an amount that reflects its worth when used for that intended purpose. Necessary to establish criteria for “intended purpose” and “can be sold” (as outlined in C60) Seems suitable for multiple elements contracts

20. D 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. The supplier must expect the contract to be fully completed Disaggregating also important here because of potential different margins of the elements

21. Revenue recognition Chair A COMPLETED CONTRACT Washing machine B COMPLETED PART CONTRACTS Cleaner C PART-OUTPUT HAS VALUE TO CUSTOMER Bridge D CONTINUOUS APPROACH Computer

22. Matters considered • Critical events approach • Who’s perspective – Supplier versus customer • Customer acceptance • Contingent customer acceptance • Exchange

23. Other examples • Service concessions? • Customer loyalty programmes?

24. Revenue recognition Measurement might influence conclusions!!!

25. Revenue recognition Critical event Performance obligation Right to consideration Asset Liability

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