This exposure draft was issued in July 2010 by the IASB and is anticipated that it will replace AASB 118 Revenue and AASB 111 Construction Contracts. The main principle of the ED requires an entity to recognise revenue as the goods or services provided are transferred to the customer at an amount reflecting the consideration received or receivable.

The ED also proposes that separate performance obligations of a contract must be identified, the transaction price be allocated to each such obligation, and revenue be recognised when the performance obligation is satisfied.

Where there is more than one distinct good or service provided, each component represents a separate performance obligation unless there are interdependencies between components. Distinct goods or services are deemed to exist where identical or similar goods or services are available from the market, or the good or service has a distinct function and profit margin such that the entity could sell it separately.

The transaction price is allocated to all separate performance obligations in proportion to the stand-alone selling price of each component of the contract. The allocation would be updated to reflect changes in circumstances over the contract. Only when the good or service is transferred to the customer would revenue be recognised. Indicators exist in the proposals to determine when the customer has obtained the benefit of the good or service.

For contacts such as retail sales, the proposals are likely to have little effect. However, changes to revenue recognition may be substantial where differences from current practice may occur in the following situations:
  • Percentage of completion method of revenue recognition would only be allowable where it reflects a continuous transfer of the good or service over the life of the contract. This may not be possible for certain construction or development contracts – e.g software development, repair contracts, certain building construction
  • Compartmentalisation of contracts for delivery of distinct goods and services may differ from current practice
  • Allowances for customer credit risk will affect the amount of revenue recognised
  • Revenue from the exclusive licensing of intellectual property to a customer would be recognised over the term of the licence
At its September 2010 meeting, the AASB raised the following concerns with the ED:-
  • the notion of transfer of control is too focused on the physical delivery of goods and services;
  • the measurement basis for a liability is different from the measurement bases for liabilities specified in other Standards; and
  • the inclusion of credit risk in the measurement of revenue.

The Board will consider constituent input on ED 198 in finalising its submission to the IASB. A final standard is scheduled for the second quarter of next year.


Contact

Rob Mackay
T +61 3 8635 1800
rmackay@moorestephens.com.au

www.moorestephens.com.au