On November 14, 2011, the IASB and FASB published a revised exposure draft (ED) for revenue from contracts with customers. This revised draft follows the original June 2010 ED, which received nearly 1000 comment letters, approximately one-third of which were from the construction industry. The core principle of the revised proposed standard is the same as that of the 2010 exposure draft: that an entity would recognize revenue from contracts with customers when it transfers promised goods or services to the customer. The amount of revenue recognized would be the amount of consideration promised by the customer in exchange for the transferred goods or services.
In response to the substantial feedback the IASB and FASB received from the public, the revised proposal:
- Added guidance on how to determine when a good or service is transferred over time
- Simplified the proposals on warranties
- Simplified how an entity would determine a transaction price (including collectability, time value of money and variable consideration)
- Modified the scope of the onerous test to apply to long-term services only
- Added a practical expedient that permits an entity to recognize as an expense costs of obtaining a contract (if one year or less), and
- Provided exemption from some disclosures for non-public entities that apply US GAAP
Key to the construction industry within those revisions were considerations as to when percentage of completion (POC) could be utilized as opposed to completed contract. POC can be utilized if at least one of the following is met:
- The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced
- The entity’s performance does not create an asset with an alternative use to the entity and at least one of the following is met:
- The customer immediately benefits from the entity’s performance
- Another entity would not need to re-perform work completed to date
- The entity has a right to payment for performance to date, and it expects to fulfill the contract as promised.
Additionally, the proposal clarified when a component would be accounted for as a separate performance obligation, which would be if it was determined to be distinct. A promised good or service is distinct if:
- The entity regularly sells the good or service separately, or
- The customer can benefit from the good or service either on its own or together with other resources that are readily available.
This revised exposure draft is open for comment until March 13, 2012, and the proposed guidance would likely be issued final during the second quarter of 2012. Anticipated effective date would be 2015 for public companies with an incremental delay for non-public entities.
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