The ASB has been continuing its work on revenue recognition, carefully considering the responses to its Exposure Draft of an Application Note to FRS 5 ‘Reporting the Substance of Transactions’, which was published in February. It is hoped that the final Application Note will be published before the end of the year. The Application Note addresses the question of the amount that should be reported as turnover.
Respondents were generally supportive of the principles set out in the exposure draft and of the guidance on specific cases. However, respondents requested clarification of certain aspects.
The Note is intended as an interim step to emphasise the principles that underlie current good UK practice. It is based on the principle that the seller recognises turnover only when its performance under a contract with its customers gives rise to either:
- an increase in the seller’s assets (such as a debtor); or
- a decrease in its liabilities (usually the release from an obligation arising from payment received in advance).
The Application Note requires that reported revenue should be measured at the fair value of the right to consideration. It also provides guidance on the application of the principles to:
- long term contractual performance;
- separation and linkage of contractual arrangements;
- bill and hold arrangements;
- sales with rights of return; and
- principal and agent.
The Board signalled in the Exposure Draft that the guidance would take effect as soon as possible. It remains of the view that early application is desirable.
The ASB has also continued to monitor the joint project of the International Accounting Standards Board and the US Financial Accounting Standards Board. This will develop a new standard to replace IAS 18, ‘Revenue’, although it seems likely that this will take some time.
The ASB contributed a paper which was discussed by the IASB at its September meeting. This addressed the recognition of revenue under contracts where the customer pays in advance of the seller’s performance. It contrasted two approaches: the ‘wholesale’ and the ‘retail’ approaches. Under both approaches the seller recognises a liability. Under the wholesale approach this is quantified by reference to the amount the seller could pay another party to assume its obligation to the customer, which will often be less than the amount received; the balance is recognised as revenue on inception. Under the retail approach, which is supported by the ASB and is consistent with the draft UK Application Note, the liability is initially recorded at the amount received and no revenue is recognised until the seller performs.
