Customer Consideration Model

Transcription

1 Financial Accounting Standards Board International Accounting Standards Board Customer Consideration Model April Pitman AAA-FASB Issues Conference Nov. 30, 2007

2 Contract assets and liabilities From an enforceable contract with customer Promises made convey rights and impose obligations Combination of rights and obligations give rise to a contract asset or a contract liability Changes in this asset or liability gives rise to revenue

3 Rights and obligations involved Rights are to the customer s performance under the contract Customer s payment constitutes performance Obligations are the promises an entity makes to provide goods and services to the customer, under the contract The satisfaction of these performance obligations gives rise to revenue.

4 Identification of performance obligations Disaggregate based on goods and services being transferred Potentially separate obligations if could be sold separately Worth separating only if transferred at different time

5 Restrict performance obligations All performance obligations attract revenue Restricted to those in contract or imposed by contract Excludes some inducements to future transactions Excludes return rights

6 Measurement of rights and obligations Rights measured at amount of customer consideration Exchange transaction items exchanged are of equal value At inception rights = obligations What about excluded d obligations?

7 Measurement of individual performance obligations Performance obligations in total are measured at the customer consideration amount Where more than one performance obligation, need to estimate sales price of each underlying good or service In rare cases no need to estimate eg commodities at market For others use most reliable information to determine how much of the consideration attaches to each performance obligation

8 Determining standalone sales price Use the following hierarchy: Entity s own sales price in an active market Entity s own price in an inactive market Competitor s sales price in an active market Entity s internal estimate of sales price Note change compared with EITF After the standalone sales price is established any residual is allocated pro-rata based on the sales price

9 Allocation of customer consideration Take an example of a florist who provides permanent planted displays to offices. Normally each planted display is sold for $2000 each. They will also maintain the displays for $10 per month. As a spring offer, they are selling each display plus one year s maintenance for $2000. Standalone price Residual Allocated consideration Plants 2,000 (113) 1,887 Maintenance 120 (7) 113 Total 2,120 (120) 2,000

10 At contract inception No unallocated residual so total obligations = customer consideration No asset or liability recognized at inception so no revenue arises at inception Performance obligations are measured at inception at the allocated customer consideration amount Not subsequently re-measured

11 After contract inception As the customer performs (pays) the right decreases. Right becomes a receivable and then cash; no revenue arises As the entity transfers promised economic resources, performance obligations are satisfied As each obligation is satisfied the contract asset increases (or liability decreases) by the amount of consideration attributed to that obligation at inception

12 Satisfaction of each performance obligation Obligations are satisfied by transferring economic resources to the customer Performance obligation satisfied as each good or service specified by the contract is transferred to the customer Goods transfer generally on delivery; services as they are rendered

13 Satisfaction of each performance obligation Transfer may not be easy to identify Often indicated by asset de-recognition Some obligations satisfied continuously Consider the balance of rights to assess whether entity has transferred a resource to the customer An analysis of the changes in rights and obligations will be unnecessary for many transactions

14 How does revenue arise in this model? Revenue arises from an increase in a contract asset or a decrease in a contract liability that results from the satisfaction of performance obligations to provide goods or services to a customer.