25 July 2012

EFRAG: Feedback statement on Revenue from Contracts with Customers

In 2011, the IASB and FASB concluded their redeliberations of the revenue recognition project and in November 2011 they published a revised Exposure Draft for comments. In January 2012, EFRAG issued its draft comment letter with a comment period of 49 days and received a total of 21 comment letters. The comment letters received came from national standard-setters, European companies, business associations, professional organisations, international organisations and EU authorities.

EFRAG received a number of comment letters generally supportive of the IASB’s proposals for a new revenue recognition standard, disagreeing only on some specific issues.

A few respondents specifically noted that it is desirable to achieve international convergence and have a revenue standard based on robust principles.

However, EFRAG received as well a number of comment letters not supporting the approach of developing a new standard on revenue recognition.

The respondents opposing a new revenue recognition standard had several different arguments, namely it was considered that there were no major flaws in the current IAS 18 and IAS 11; the proposals did not represent a meaningful improvement to the existing requirements; there should be more alignment between the revenue model and the business model; a conceptual debate of what revenue should represent was not complete; and the concept of control had not been fully considered and debated in the framework project.

Some suggested that the current existing issues could be fixed through the development of well-targeted guidance.

In addition, EFRAG received many comment letters from constituents that were concerned that the current proposals could be difficult to apply consistently across industries and that the final outcome might not always represent faithfully the economic substance of the phenomena it purports to represent. More specifically, EFRAG received a few comment letters from national standard-setters expressing concerns about applying the current proposals across all industries and a number of comment letters from European telecommunication companies concerned about the process and outcome when applying the current proposals to their industry. These national standard-setters emphasised that when applying the current proposals the final outcome will not always appropriately reflect the underlying economic activity and performance of the entity, providing the example of the telecommunication companies; and the proposed model will be complex and costly to apply to mass-market industries, encouraging the IASB to develop a practical expedient for contracts with multiple performance obligations in mass-market industries. The majority of the respondents within the telecom industry expressed concerns on whether the current proposals will in fact provide useful financial information to the users, and consequently doubt whether the proposals ultimately improve the quality of information provided in financial statements of telecom operators.

In addition, respondents who commented that there was a need to clarify the criteria to determine when a good or service is transferred over time referred to the use of unclear wording or absence of guidance to assist an entity in applying the principles, a view shared by field-test’s participants, particularly when dealing with the proposals in paragraph 35 (e.g. definition and application of the “alternative use” concept; and determining the existence of a “right to payment”). Furthermore, some respondents believed that it was not clear under the new requirements how the calculation should be performed for time value of money when there is a transfer over time. One respondent considered it complex to apply the model when a performance obligation was satisfied over time and there were frequent adjustments between the work performance to date and the cash received. Another respondent believed that the calculations should be based on cash flows and a simplified estimate of interest. Finally, European respondents from the telecommunications industry expressed the view that the proposed model would be very difficult and costly to apply. The arguments supporting this view were ‘the tremendous volume of transactions’; the existence of a large number of contracts that are individually small and with a broad range of pricing plans and options; the application of a portfolio approach was not assessed to be useful; and complexity of the accounting model that was difficult to implement technologically.

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