The G100 agrees with the proposal that there should be a single revenue recognition principle. However, the approach in the ED based on changes in an entity’s contract asset or contract liability in respect of contracts within the scope of the ED is not comprehensive. The G100 considers that the principle should be expressed in terms of recognizing the changes in value arising from performing obligations under the contract which give rise to claims on the other party. A principle based on such an approach can be applied more generally than to contracts.
 

Yes. The application of the proposals on long-term and construction type contracts does not enable the economic substance of performance and the changes in value arising from that performance to be shown. The principle should reflect the pattern of economic activity under the contract which would be decision-useful information for users.
 

Yes. The G100 considers that if this definition is adopted it should be applied across all Standards so there is no ambiguity arising from the use of different wording.
 

The definition of a performance obligation is supported in concept. However, further guidance will be needed if it is to be applied in practice. For example, in a construction contract the performance obligation may be interpreted as occurring at different stages of the contract. Performance may be determined on the basis of the whole contract or as parts of a contract. In these circumstances the allocation of the contract price to the respective performance obligations would present difficulties in interpretation and potentially impair comparability.
 

Yes. The G100 considers that a performance obligation can be performed/completed without the passing of legal title to the other party. For example, this would most frequently occur in long-term construction contracts where stages of completion are specified and when satisfied value transfers occur, even though legal title has not changed.
 

The G100 considers that the return by a customer evidences a failed sale. The return of goods is not expected in the normal course of events. Except in rare cases (product recalls etc) returns are not a significant item for companies and should be accounted for if and when they occur.
 

This issue is, in part, addressed in IFRIC 13 ‘Customer Loyalty Programmes’. However, we consider that discounts on a future sale do create a performance obligation which the entity must honour should the customer exercise the right. The concern here is the reliability of measurement of the obligation.
 

The G100 generally agrees with this approach as consistent with the Framework definition of an asset. The transfer of resources to another entity evidences the completion of the performance obligation and signals the recognition of revenue. However, the reliance on the control concept is likely to present difficulties in interpretation and application because the notion of control is used in different contexts in Accounting Standards and depends on the facts and circumstances in each case. For example, it is not clear from the Discussion Paper how the notion of control would be applied in respect of long-term construction contracts.
 

This will depend on how the performance obligations under a contract are interpreted. If the performance obligation is interpreted as delivery of control of the asset to the purchaser upon completion the proposed approach would not provide decision-useful information in respect of long-term construction type contracts and service agreements. In these cases the economic substance is that value accrues as performance occurs during a contract.
 

The G100 considers that the stand-alone price could be an appropriate basis of allocation where such prices are readily available for the separate performance obligations in a contract. We believe that this is likely to be the case in many circumstances and believe that the judgment whether to use a stand-alone price, management’s estimate of such a price or a costs incurred basis is best left to management’s assessment of the circumstances and the economic substance of the transaction.

However, there are significant practical issues associated with applying the proposed principles on the allocation of revenue to the various performance obligations that will make it difficult for companies to implement. This is particularly the case for high turnover items whose value or selling price changes regularly (eg mobile phones). Developing allocation models outside of the billing system to appropriately account for these items will be difficult and costly to implement because of the need to change those models due to constantly changing prices.

For example, Appendix A (examples 2 and 4) demonstrate that services revenue must be allocated to each period of service (generally each year) based on the costs to provide that service as estimated at the inception of the contract. This approach has the effect that the revenue is not recognized on a straight line basis, but rather is based on the expected cost profile. This may differ from actual experience. For example, in a contract to provide maintenance services for 3 years, revenue is allocated to each year based on expected costs, even though the customer is billed evenly over the 3 year period. This could result in revenue being deferred until year 3 if greater costs are expected in year 3. Disaggregating service contracts in this way would be extremely onerous for companies to implement, particular large scale outsourcing arrangements where equipment may also be provided.
 

This is particularly evident in respect of its effect on accounting for long-term construction type contracts where revenue and profit emerges as economic activity is undertaken and not as a single amount at the completion of a contract.