12 March 2012

ICGN's comment letter to FASB/IASB on revenue recognition

In general, the ICGN agrees that the core principle of the proposed standard is that an entity should recognise revenue from contracts with customers when it transfers goods or services to the customer in the amount of consideration the entity receives, or expects to receive, from the customer.  Moreover, the ICGN supports the FASB/IASB goal to create single revenue recognition standard to improve both IFRSs and US GAAP by:

• removing inconsistencies in existing requirements;
• providing a more robust framework for addressing revenue recognition issues;
• improving comparability across companies, industries and capital markets;
• requiring enhanced disclosure; and
• clarifying accounting for contract costs.

As stated in ICGN's earlier submission, a customer's credit risk should not be reflected in revenue. Credit provisions should be reported on a separate line in the income statement, as otherwise this reduces the comparability of revenues. Presenting any difference between revenue and value of receivable as a line item adjacent to the revenue line item is a good solution.

ICGN agrees that the fact that consideration must be estimated should not preclude recognition of revenue.

ICGN does agree with the proposed constraint on the amount of cumulative revenue be limited to the amount of the transaction price to which the entity is reasonably assured to be entitled.

ICGN supports recognition of liability/expense for onerous performance obligations. ICGN does not support the scope restriction. Recognition of liability/expense should be required for all performance obligations subject to materiality - not only for those which the entity expects to satisfy over a period of time greater than one year since inception of the contract.

ICGN agrees that disclosures should meet user needs. This principles based approach to disclosure is appreciated. Reporting entities should be sensitive to user needs and listen to user requests. This should be explicitly stated in the standard or the basis for conclusions. The ICGN also emphasises that users require comparable disclosure to understand the amount, timing and uncertainty of revenue and cash flows, and that harmonisation of disclosures in IFRS with US GAAP is important.

ICGN agrees that disaggregated information about revenues is useful. An entity should be able to classify its contracts both by service type, maturity and geographically in a similar way to segmental information. It would be useful for investors to see more than one cut of the business if it is in different geographies and lines of business. The classification, albeit aggregated into portfolios with different characteristics, should reconcile with the consolidated statement of income.

Full paper

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