The development of new revenue recognition and leasing standards was discussed in the previous edition of Financial reporting.
Since then the IASB has been considering how to respond to comments received. It appears clear that the core principle of each new standard will remain – revenue recognised when the goods or services are transferred to the customer and all leases will be on balance sheet. However, there are also a number of key areas where it is probable that there will be significant change before any final standard is issued.
Revenue recognition
While no significant changes are anticipated in relation to revenue recognition from sale of goods, the provision of services and long-term contracts has been more challenging. Among the areas being addressed by the IASB are:
- defining when, in the context of services, a transfer is deemed to be continuous and how it should be recognised in the accounts
- clarifying what is meant by 'distinct' in terms of identifying separate performance obligations within a contract following concerns that the proposed definition could result in an overly large number of separate performance obligations being identified
- modifying the method by which revenue is recognised in circumstances where there is uncertain consideration. The IASB appears to have accepted that the originally proposed probabilityweighted method was unlikely to be useful or relevant except for portfoliotype transactions. It is now suggested that the 'best estimate' should be used for most such transactions.
Leasing
In considering the responses to the exposure draft, the IASB is particularly focusing on changes regarding initial recognition and subsequent measurement. Some of the key changes highlighted to date are summarised below.
- A lessor and a lessee will recognise and initially measure lease assets and lease liabilities at the date of the commencement of the lease.
- The method used in terms of recognising the present value of lease payments when extending or terminating a lease will be modified. A lessee will be required to determine the present value of lease payments payable during the lease term on the basis of expected outcome, not probability weighted as previously proposed.
- On subsequent measurement, the IASB has tentatively decided that a lessee and a lessor should reassess the lease term only when there is a significant change in relevant factors such that the lessee would then either have, or no longer have, a significant economic incentive to exercise any options to extend or terminate the lease.
The IASB has stated that it intends to re-expose both the revenue recognition and leasing standards later in 2011.
Smith & Williamson commentary
Both revenue recognition and leasing are very important subjects for a large number of entities. It is not therefore surprising that the IASB has received so much comment in response to its proposals. It would also appear that many of the concerns of respondents may be addressed and we will return to these topics when the new exposure drafts and standards are issued.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.