Förslag till ny standard om intäktsredovisning

www.pwc.com/se

IFRS Symposium

Revenue from Contracts
with Customers
27 September 2011

Sigvard Heurlin

Agenda

Why have the IASB and the FASB taken on this project?
What is the principal approach taken? And what has been achieved
during the last year?
Where do the IASB and the FASB stand now in this project?
What happens next?

Revenue Recognition September 2011
PwC Slide 2

Why need for a new standard?

A critical project for both the IASB and the FASB

- For the IASB: Existing standards on revenue recognition, IAS 11
and IAS 18, are based on two different principles
- Insufficient guidance in some cases. E.g. multiple elements
arrangements. Reliance on US GAAP for specific guidance

- For the FASB: US GAAP has a wide range of very detailed industry
specific requirements (about 200), but no single standard

- A need for consistent principles for use across industries.

PwC Slide 3

What is the principal approach taken?

Employs an assets and liabilities approach - the cornerstone of the IASB
and the FASB Framework
Current revenue guidance in IFRS and US GAAP focuses on an
´earnings process´
However, difficulties often arise in determining when an entity earns
revenue.
The earnings process is therefore not referred to in the proposal.

PwC Slide 4

Where do the IASB and the FASB stand in the
project?

 ED, Revenue from contracts with customers, published in June 2010
 Nearly 1.000 comment letters received
 Redeliberations of the proposal in the ED started in January 2011
 A new ED to be published in Q3 with a 120-day comment period, will
probably be delayed until October
 Goal: to issue a final standard in 2012.

The following slides present the revenue model that the
Boards have developed after recent decisions.
The decisions are tentative and subject to change.
PwC Slide 5

Significant feedback on the 2010 ED

Overall views:
• Support for a converged revenue recognition model
• However, a need for further clarification of the operations of the
proposed principles:
- the concept of control to service contracts and contracts for
continuous transfer of control,
- distinct goods or services for identifying separate performance
obligations,
- estimating the transaction price on a probability-weighted basis
and including credit risk and time value of money calc.,
- cost-benefit considerations.
• Re-expose for further public comments.
PwC Slide 6

The scope

Does not seem to imply any changes to the scope. Thus the proposed
scope would refer to all contracts with customers, except:

 Lease contracts,
 Insurance contracts,
 Certain contractual rights and obligations within the scope of
other standards, including financial instruments.

PwC Slide 7

The basic model is unchanged from the 2010 ED

Thus the application of the revenue recognition model includes the
following steps:

1. Identify the contracts with the customer(s)
2. Identify the separate performance obligations
( ´prestationsförpliktelser´)
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when a performance obligation is satisfied.

PwC Slide 8

Summary of the Revenue recognition model: Step
1: Identify the contract(s) with the customer

Proposal in the ED Revised model
Definition of a contract:
An agreement between two or No change.
more parties that creates No change to the criteria for the
enforceable rights and obligations existence of a contract (e.g. should
have commercial substance,
approval by the parties,
identification by the entity of the
enforcable rights and manner of
payment).

PwC Slide 9

Summary of the Revenue recognition model: Step
1: Identify the contract(s) with the customer

Combining contracts:
Account for contracts together if Combine contracts with the same
the contract prices are customer if entered into at or near
interdependant. the same time.
Indicators to be applied. Criteria to be applied:
• Negotiated as a package
• Consideration in one contract
depends on the the other
contract
• Interrelated in terms of design,
technology or function.
PwC Slide 10

Summary of the Revenue recognition model. Step
1: Identify the contrac(s)

Segmenting a contract:
Account for a single contract as (This step is eliminated. However,
two or more if goods or services price independence used when
are priced independently. allocating the transaction price.)

PwC Slide 11

2: Identify the separate performance obligations

Definition of a performance
obligation:
An enforceable promise No material change. Includes
(´tvingande löfte´) to transfer a promises that are implied by:
good or service.
• business practices
• published policies
• specific statements if
valid expectations (´välgrundade
förväntningar´) to perform are
created.

PwC Slide 12

Summary of the Revenue recognition model:
Identify the separate performance obligation

The separate performance
obligation identified
Accounted for separately only if In some cases the risks to the
distinct (´tydligt urskiljbar´): entity of providing goods/services
• if sold separately by the entity or are inseparable: single
another entity; or performance obligation.
• if a distinct function and a In all other cases a separate
distinct profit margin. performance obligation if
• a good/service is distinct; and
• the pattern of transfer is
different from other transfers.
PwC Slide 13

Summary of the Revenue recognition model:
Identify the separate performance obligation

Warranties
(1) If for latent effects: not a (1) If an option to purchase a
separate performance warranty separately: a
obligation. A provision is separate performance
recognised. obligation and allocation of
(2) If for faults that arise after the revenue to the service.
products are transferred to the (2) If not such option: (a) a cost
customer: a separate accrual, unless (b) the
performance obligation. warranty provides a service to
In both cases thus deferral of the customer (under
revenue. circumstances specified in the
revised model).
PwC Slide 14

Example: Revenue allocation

Case 1. A telecom coy sells a mobile phone and unlimited calls and texts
to Cust. A. The phone is free if the customer signs up for a year; the
network service is CU40 pm.
Case 2. The coy also sells the same phone to Cust. B for CU300, with the
same service provided for at CU15 pm.
At present: Case 1. Probably no revenue on the phone and revenue of
CU40 pm. Case 2. Revenue on the phone CU300 and revenue of CU15
pm. Thus revenue attributed to main deliverables.
Under the proposal: Revenue would be recognised at similar
amounts for each phone and service based on (estimated) selling prices,
see Step 4 below. Thus revenue depicts transfer to customers and is
allocated to all performance obligations, not just main deliverables.

PwC Slide 15

Summary of Revenue recognition model. Step 3:
Determining the transaction price

Definition of the transaction price
The amount of consideration an No significant change.
entity receives, or expects to
receive, in exchange for
transferring goods or services.

PwC Slide 16

Summary of the Revenue recognition model.
Determining the transaction price.

Uncertain consideration
The transaction price should What is most predictive:
reflect the probability-weighted • the probability weighted amount
amont of the consideration.
• the most likely amount.
Only if the transaction price can be
reasonbly expected. Allocate price to a satisfied
performance obligation ´unless the
Conditions to be met (e.g similar entity is not reasonably assured
types of contracts). (´saknar rimliga garantier´) to be
entitled (´ha rätt ´) to that
amount´.
Circumstances specified.
PwC Slide 17

Determining the transaction price.

Other
Reduce the amount to reflect the Do not reflect the effects of a
customer´s credit risk. customer´s credit risk. Recognise
an allowance for any expected
impairment loss.
Adjust the promised amount to
reflect the time value of money Adjust the promised amount to
reflect the time value of of money,
if the financing component is
significant.
Various factors to be considered.

PwC Slide 18

4: Allocate the transaction price to the perf. oblig.

An entity should allocate the No material change.
transaction price to the separate If the standalone selling price is
performance obligations in highly variable, a residual
proportion to the standalone technique may be used (reference
selling price (estimated if to the total transaction price less
necessary). the less the standalone selling
prices of other goods or services).
Conditions to be met when the
transaction price is allocated to
one or more performance
obligations.

PwC Slide 19

5: Recognise revenue when a perf. obl. is satisfied
Recognise revenue when the No change to core principle.
customer obtains control of the Indicators on when the customer has
promised goods or service (when obtained control of a good (e.g.
the customer has the ability to physical poss., risks and rewards).
direct the use of/receive the benefit
from the good or service). Criteria on when a performance
Indicators on when control has obligation for services is satisfied
been obtained. over time, at least one of:
(No specific guidance for • The entity´s performance creates
determining when a performance or enhances an asset,
obligation is satisfied over time). • If not, a benefit received, (a few
alternative criteria to be met).
PwC Slide 20

Summary of Revenue recognition model: Contract
costs

Cost of obtaining a contract
As an expense when incurred. Recognise an asset for the
incremental costs of obtaining a
contract that the entity expects to
recover.

PwC Slide 21

Summary of Revenue recognition model.
Recognise revenue when a perf. obl. Is satisfied.

Measuring progress
A performance obligation satisfied No change.
continuosly: select one method and Recognise revenue only if the
apply it consistently.. entity can reasonably measure its
progress toward successful
completion.

PwC Slide 22

A short summary

• No change for many transactions
• Principles-based standard to give robust application
- Reduces need for interpretations
- Prevent gaps being filled by local or imported ´rules´
• A single, global revenue recognition framwork across all industries
and all markets
• Revenue attributed to all performance obligations, not just main
deliverables
• Use of estimates when separating obligations better reflects transfer
of different deliverables.

PwC Slide 23

What happens next?

• As noted a new ED to be published in October 2011 (Q3 was
intended)
• Focus is on drafting as well as re-exposure of a selected number of
change in the 2010 ED
• Will be out for comments for 120 days
• Effective date?

PwC Slide 24

Comments?

Questions?

© 2011 All rights reserved. Not for further distribution without the permission of PwC.
"PwC" refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms
of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any
services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional
judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise
of another member firm's professional judgment or bind another member firm or PwCIL in any way.

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