Revenue recognition

Work is continuing on the Board’s project on revenue recognition, which addresses the question of when sales (or ‘turnover’) is recognised and at what amount it should be stated. This builds on the Discussion Paper issued in 2001 and the comments received in response to it. A primary focus is linking revenue recognition to the recognition of assets and liabilities that are created through contractual arrangements between a seller and its customer in the course of the seller’s business activities.

It is hoped that this work will provide a useful contribution to the IASB and FASB joint project on the subject, although that is unlikely to result in a standard for some time. In the meantime, questions concerning revenue recognition continue to arise. The UITF has issued a draft Abstract ‘Contracts for sales of capacity’ which addresses one issue related to revenue recognition (see back page). The Board is considering whether it should issue more general guidance as an interim measure.

Performance Reporting

The joint ASB/IASB project on reporting financial performance continues to progress. As previously reported, the main focus of this project is the development of a single statement of comprehensive income, which would report total recognised gains and losses for the period.

The proposed format for this statement would allocate items into one of four categories in a matrix format defined by two main distinctions. The first of these is a ‘business/financing’ distinction, which would create a ‘financing’ section reporting the return to providers of finance (ie interest and the unwinding of discounts). The ‘business’ section would then provide a measure of financial performance that is independent of the way the entity finances its operations.

The second distinction would require gains and losses that result from the re-measurement of assets and liabilities to be presented separately. This section would include items such as fixed asset revaluations and actuarial gains and losses on defined benefit pension schemes.

Comments on a paper summarising the tentative decisions reached to date have been received from liaison standard-setters. These comments are being used to prepare a document for the boards’ further discussions and for high-level external field-testing. An exposure draft is scheduled for publication in mid-2003.

Measurement

The ASB is taking an active part in two separate groups that are developing proposals relating to measurement for the IASB.

Standard-setters and IASB members from those countries that currently permit revaluation of fixed assets (Australia, New Zealand, South Africa and the UK) are represented on the ‘Revaluation Group’. This Group has been considering a convergence model to provide a consistent basis of revaluation internationally. The Group presented its recommendations to IASB at a public meeting in October, when it was asked to develop the text of a possible amendment to IAS 16.

A separate group led by the Canadian standard-setter has been asked by IASB to consider the conceptual foundation that should underpin the measurement of assets. Its work is initially focusing on the basis that should be used when assets are first recognised. The first meeting of the Group was held in London in October.

Leases and service concessions - Rights of use

The ASB has been continuing its work on leases. More recently, it has been asked by the IASB to lead an international research team looking at the accounting treatment of service concessions. Although both projects raise a range of important issues, there is one key issue that underpins them both: how does one differentiate between the provision of a service and the right to use an asset?

The ASB’s work on leases is seeking to develop an approach that would eliminate the distinction in existing accounting standards between operating leases and finance leases. In the ASB’s view, both types of lease convey a right to use a property item, and that right meets the definition of an asset and should therefore be recognised as an asset. However, removing the significance for accounting purposes of the distinction between operating and finance leases would mean increasing the significance of distinguishing transactions that involve a lease from those that do not.

This is precisely the issue that is at the heart of the debate about PFI contracts, public/private partnership arrangements and other service concessions. When the owner of a property item (Entity A) contracts for another party (Entity B) to refurbish, maintain and operate that item of property for the next twenty years, is Entity B simply providing a service to Entity A or has a right to use some part of the property item been transferred to it? And, if Entity B is required to operate the property item exclusively for the purposes of Entity A, what is the position then?