The IASB and FASB met March 21 to 23, 2011 to further discuss joint projects that they are undertaking. The primarily focus of the meeting was to discuss revenue recognition, leases, insurance contracts and impairment of financial assets.
The boards have decided, at least tentatively, that a company should not take into consideration a customer’s credit risk when determining how much revenue to recognize. This is a significant change from the previous exposure draft. As you may recall, the boards initially decided that the transaction price, and therefore revenue recognized, should be adjusted to reflect a customer’s credit risk.
An entity will need to adjust the revenue it recognizes for the time value of money. The boards determined that if the contact has a significant financing component, then entities will be required to adjust the amount of revenue recognized. The following are items that an entity should consider in determining if a financing component exists:
- Would the amount of consideration differ significantly if the customer paid cash at the time of sale;
- Is there a significant amount of time between the sales transaction and receipt of payment; and
- Is an interest rate implicit or explicit.
It should be noted that these considerations only apply if the period between the sales transaction and payment is greater than one year.
The boards did not reach a conclusion on how an entity would determine price and revenue to be recognized when the amount of consideration to be received is uncertain. The boards will further discuss this topic at the April 2011 meetings.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.