International

​This comment letter, which reflects the views of the international BDO network of independent member firms, was sent by BDO IFR Advisory Limited to the International Accounting Standards Board on 22 October 2010.


Dear Sir

IASB Exposure Draft ED/2010/06: Revenue from Contracts with Customers

Question 1

Paragraphs 12-19 propose a principle (price interdependence) to help an entity determine whether:

(a) to combine two or more contracts and account for them as a single contract;

(b) to segment a single contract and account for it as two or more contracts; and

(c) to account for a contract modification as a separate contract or as part of the original contract.

Do you agree with that principle? If not, what principle would you recommend, and why, for determining whether (a) to combine or segment contracts and (b) to account for a contract modification as a separate contract?

While we agree that guidance should be included to determine whether a contracts should be combined or segmented, and for contract modifications, the interaction of the guidance as drafted could be clearer. For example, paragraph 15 specifically includes consideration of discount, which paragraph 13 does not (paragraph 14 covers only future discounts). The proposals appear to suggest that it would be possible for two contracts to be combined in accordance with paragraph 13, but then considered for separation in accordance with the slightly different criteria in paragraph 15 and then be subject to further analysis for the purposes of identifying separate performance obligations.

Combining contracts
We agree with the overall principle.

However, we are not convinced that contracts should be regarded as linked simply because their duration is consecutive. As an example, an entity might supply goods together with a three year maintenance contract. At the end of the three year period, the entity sells a further two year maintenance contract to the customer. Because the contracts run consecutively, the application of paragraph 13 might suggest that the two contracts could be regarded as being interdependent. However, the decision by the customer to take out the first three year and second two year maintenance contracts might often be wholly independent decisions, and be linked to the decision about whether to replace or keep the original good (whether this is a piece of software, plant and equipment or other item). This decision could be based on a range of inputs, such as the reliability of the item purchased, its utility in the context of future anticipated requirements and whether the customer can afford to purchase a new item (for example, a customer might purchase a motor vehicle with the intention of replacing it after three years, but later decide to keep it for a longer period).

Contract segmentation
We do not agree with the proposed guidance for contract segmentation, and are not wholly convinced by the arguments set out in paragraph BC38. We agree that it would be appropriate to analyse a contractual arrangement to determine whether parts of that contract fall within the scope of another accounting standard, in order that these will be accounted for separately. However, for the remaining component(s) of the contract, if there is an appropriate mechanism within the revenue standard to identify separate performance obligations (and to link them in bundles where appropriate), with consideration being allocated to those separate and/or bundled performance obligations as appropriate, it would appear that there is little need for contractual obligations to be segmented further before dealing with the question of performance obligations.

The proposed guidance set out in paragraphs 15 and 16 appears superficially attractive, but we consider that in many cases a contract would be segmented when this would not reflect the economics of the underlying transaction. The wide range of sellers of individual goods and services means that the criterion in paragraph 15(a) would, in our view, be too easy to meet, resulting in contracts artificially being divided into two or more contracts.

As an example, Seller A might sell physical goods and always provide the associated delivery and installation services (this could be the installation of equipment, or the application of a product such as paint to the surface of a building). We do not agree that, simply because another party provides the same delivery and/or installation services, Seller A should always split a single contract for the sale, delivery and installation of equipment or products into two or more contracts.

This might be dealt with by modifying the wording in paragraph 15 such that a degree of judgement could be applied in determining the ultimate approach. We suggest the last sentence before subparagraph (a) and subsequent text is amended to read (original text struck through and new text in bold):

‘......goods or services in the contract. Goods or services are may, but will not always be, priced independently of other goods or services in the same contract only if both of the following conditions are met

(a) the entity, or another entity, regularly sells identical or similar goods or services separately; and
(b) the customer does not receive a significant discount for buying some goods or services together with other goods or services in the same contract.

Whether multiple goods or services in a single contract, that meet the criteria in (a) and (b) above, are required to be segmented into two or more contracts will depend on an analysis of factors which include:

(c) the extent to which goods or services are each essential to the functionality or utility of the combined goods and services that are to be provided to the customer; and
(d) the extent to which the entity’s performance of its separate contractual obligations, that are identified through the application of (a) and (b), result in the transfer of part or all of the combined goods and services that are to be provided to the customer.’

Question 3
Do you think that the proposed guidance in paragraphs 25-31 and related application guidance are sufficient for determining when control of a promised good or service has been transferred to a customer? If not, why? What additional guidance would you propose and why?

While the guidance would appear to be operational for straightforward short term contractual arrangements which involve either the delivery of a specific good or the provision of a service on a continuous basis over a period of time, for other contractual arrangements additional guidance would assist in ensuring consistency of approach.

Certain services result in the delivery of a finished article only at the end of the period during which the related services have been provided. Examples include the design of a new company logo, an advertising campaign and an audit of financial statements. In each case, the guidance as drafted would appear to preclude the recognition of any revenue until the finished article has been delivered. This could result in a pattern of revenue recognition that would not reflect the timing of service provision; in addition, in certain jurisdictions there could be adverse consequences for sellers, as progress payments would need to be held separately in an escrow account and would not be available for use until and to the extent that the arrangement qualified for revenue recognition.

In addition to the contractual arrangements outlined above, the proposals suggest that revenue arising from certain other contracts, currently accounted for using a percentage of completion approach, will not qualify for recognition until the finished item is delivered to the customer. This would appear to be the case for a substantial engineering project being performed to a relatively standard specification (for example, an oil tanker which could take a number of years to complete). This could result in the related financial statements failing to reflect the economic activity being undertaken by the supplier (which the Boards acknowledge at paragraph BC64, while also noting at BC65 that the intention was not to delay revenue recognition to contract completion). There is a risk that the guidance as drafted might also result in the structuring of contractual arrangements in order (technically) to qualify for continuous transfer (for example, through the technical delivery to the customer of individual components used as the construction activity proceeds).

We note the Boards’ reference in paragraph BC66 to IFRIC 15 Agreements for the Construction of Real Estate. While certain aspects of IFRIC 15 are illustrated in examples set out in Appendix B, we suggest that if the Boards do consider those indicators to be appropriate to all contractual arrangements that they are included within the main body of the accounting standard itself. We also consider that it would be appropriate for the Boards to set out clearly their rationale for widening the scope of the interpretative requirements of IFRIC 15 to all contractual arrangements.

Linked to the issue of the sale of real estate, we note that it might be argued that example 13 (Free on board shipping point and risk of loss) appears inconsistent with example 17 (Sale of apartments).

Example 13 notes that although the customer does not have physical possession of the product at the point of shipment, it has legal title and is therefore able to sell the product (or exchange it) with another party. The [selling] entity is also precluded from selling the product to another customer. Consequently the product is viewed as having been sold at the point of shipment. Example 17 sets out a common example of the sale of apartments, and concludes that from an analysis of the facts and circumstances, the customer obtains control of the apartment on physical completion. However, it is common for purchasers of apartments to be able to sell a partially completed (or even yet to be started) apartment to another party, and for the seller to be precluded from selling an apartment which has been reserved by a purchaser to a different third party.

In both example 13 and example 17, the purchaser does not have access to the purchased item (in example 13 because it is on a boat and in example 17 because of a combination of the construction not having been completed and access not being permitted before completion). The analysis in example 13 appears to base its conclusion of the transfer of control on the customer’s ability to sell the product while it is in transit. This might lead some to suggest that the ability to sell a partially completed (or even yet to be commenced) apartment means that in that case control has also been transferred.

We suggest that further analysis is introduced which extends the focus to cover what precisely is being sold. This would enable a distinction to be made between the right to sell a completed product which is in transit, and a right to sell the right to purchase a product, the construction and/or delivery of which will be completed at a future date.


Question 4
The boards propose that if the amount of consideration is variable, an entity should recognise revenue from satisfying a performance obligation only if the transaction price can be reasonably estimated. Paragraph 38 proposes criteria that an entity should meet to be able to reasonably estimate the transaction price.

Do you agree that an entity should recognise revenue on the basis of an estimated transaction price? If so, do you agree with the proposed criteria in paragraph 38? If not, what approach do you suggest for recognising revenue when the transaction price is variable and why?

We agree that an entity should recognise revenue on the basis of an estimated transaction price, and that this should be required to be reasonably estimated, as proposed in paragraph 38. We note that the allocation of consideration to be allocated to different segments of a contract does not contain this requirement (see paragraphs 15 and 16) and suggest that the guidance should be made consistent.

However, the interaction of this guidance with the requirement to allocate transaction prices to separate performance obligations on the basis of stand-alone selling prices could lead to the accounting result failing to reflect the economics of the contractual obligations.

As an example, an entity might provide services evenly over the contract period in return for an annual fee of $120,000. The entity enters into a two year contract to provide these services for $200,000, with the discount being in return for the customer being prepared to commit to a two year period. A payment of $100,000 is due (and has been received) on inception of the arrangement, with a second instalment being due at the start of the second year. If the second instalment is not paid at the start of year 2, the entity can cancel the contract. After an assessment of the credit status of its customer, the entity estimates that there is a 50% chance that the fee for the second year will be collected. Under the proposals, it would appear that (ignoring the effect of discounting), the entity would allocate $150,000 ($100,000 plus 50% x $100,000) to the two year contractual period, meaning that $75,000 would be recognised for services to be provided in year 1. However, this would not reflect that the initial payment of $100,000 (which in fact relates to year 1) has been received and the entity has an option to cancel the contract in the event of non payment at the start of year 2.

While the guidance in paragraph 39 is relevant, we consider that it could be expanded to be dual directional. This is because the opposite of the factors set out in that paragraph could increase the relevance; the text could be redrafted to read:

‘Factors that increase or decrease the relevance of an entity’s experience includes the following:

(a) susceptibility of the consideration to external factors (for example, volatility in the market, judgement of third parties and risk of obsolescence of the promised good or service). The relevance decreases as the susceptibility of the consideration to external factors increases;
(b) the length of time it takes to resolve the uncertainty about the amount of consideration. The relevance decreases as the time period to resolve such uncertainty increases;
(c) the amount of the entity’s experience with similar types of contracts. The less experience the entity has, the less relevant that experience is; and
(d) the number of possible consideration amounts that arise from the contract. The relevance decreases as the number of possible outcomes increases.’
We also note that in certain circumstances, when determining the amount of revenue to be allocated to a performance obligation, an entity would take account of future actions that are outside its control (such as contract renewals, as illustrated in paragraph B88). It is not clear how this links to the control principle on which the proposed guidance is based. The proposed approach appears similar to an expected cash flow analysis that is required to be adopted for the purposes of accounting for financial instruments; if this is the Boards’ intention, we suggest that this is made clear.


Question 5
Paragraph 43 proposes that the transaction price should reflect the customer’s credit risk if its effects on the transaction price can be reasonably estimated. Do you agree that the customer’s credit risk should affect how much revenue an entity recognises when it satisfies a performance obligation rather than whether the entity recognises revenue? If not, why?

We agree with the proposal that the transaction price should reflect the customer’s credit risk, and note that it is consistent with other current projects such as the expected loss model for the impairment of financial assets. We assume that, if taken forward in its current form, the adoption of the new revenue standard would also require the adoption of the new impairment requirements. However, we consider that it may be appropriate for subsequent changes to be recorded within revenue, and not other income or expense.

We note the discussion in the basis for conclusions, in particular the Boards’ rationale for the conclusion that changes in the amount received that arise from a difference between the amount initially recorded for a sale and the ultimate amount received should not be reflected in revenue, even if the amount received increases. While technically this may be appropriate (it would mean that neither increases nor decreases from the initial assessment of the fair value of consideration receivable would not be reflected in revenue), there are some practical difficulties that need to be considered.

The guidance would appear to be operational principally in respect of portfolios of sales transactions, where an expected loss amount can be determined. This would be significantly more difficult for small populations, and it would be helpful for additional guidance to be provided. It is possible that this aspect will also be considered as part of the development of the final standard covering the new impairment model.

We also note that to date there has been no need to assess the creditworthiness of customers when determining the amount of revenue to be recorded. Instead, revenue has been recorded at the invoiced amount, with subsequent changes being dealt with through a charge for impairment. Under the proposals, an entity will need to carry out this assessment, even if the receivable will be settled during a reporting period, with subsequent adjustments being made to other income or expense. This would be avoided if subsequent changes were recorded within revenue.

It is also not clear why the accounting approach, with changes in amounts receivable being recorded outside revenue, should be different from the approach taken for the recording of contingent amounts receivable (for example, amounts which were initially not recorded at all due to the uncertainty of collection), future changes in which would adjust revenue. If that contingency resolution adjusts revenue, a similar approach would appear appropriate and consistent for changes in the amount of consideration receivable as a result of changes in the actual credit worthiness of the customer.


Question 6
Paragraphs 44 and 45 propose that an entity should adjust the amount of promised consideration to reflect the time value of money if the contract includes a material financing component (whether explicit or implicit). Do you agree? If not, why?

We agree with the proposal. However, it is not clear whether the reference to a ‘material financing component’ is to be determined in the context of each individual transaction, the revenue line item and/or the financial statements as a whole. It would be helpful for this to be clarified.


Question 7
Paragraph 50 proposes that an entity should allocate the transaction price to all separate performance obligations in a contract in proportion to the stand-alone selling price (estimated if necessary) of the goods or services underlying each of those performance obligations. Do you agree? If not, when and why would that approach not be appropriate, and how should the transaction price be allocated in such cases?

We disagree with the proposal to allocate the transaction price on the basis of stand-alone selling prices.

We note that, in a range of industry sectors, goods are often sold with a linked maintenance package. In theory at least, the maintenance could be provided by parties other than the original seller but in practice customers almost always purchase the maintenance service from the supplier of the related goods even if (as can be the case) there is no explicit contractual requirement to do so; the customer’s decision can be driven by the pricing and/or practicalities, such as the ease of supply of replacement parts. In practice, many of the goods are sold at little more than cost, with the profit being derived from the subsequent maintenance services; the overall profit from the combined sale and maintenance service is at a full commercial rate. The effect of the proposals, which require the transaction price to be allocated on the basis of the stand-alone selling price of each performance obligation, would be that the first performance obligation (the supply of the goods) might result in a recorded loss, with enhanced profits being recorded for the subsequent performance obligation(s).

We believe that an appropriate approach would be to adjust the amount of revenue for each performance obligation on the basis of each related profit margin. This would result in a larger adjustment being made to those performance obligations with a larger profit margin which, economically, is likely to be the approach taken by a seller.

We also believe that consideration needs to be given to arrangements where two linked performance obligations are provided to a customer, with the first performance obligation being carried out at a loss which is then recovered through profits generated from the second performance obligation. As with the scenarios outlined above, we consider that it would be inappropriate for a loss to be recorded for the first performance obligation, and suggest that, where a loss would otherwise be recorded from the provision of one in a series of linked performance obligations, an asset should be recorded such that the loss making performance obligation is recorded as being sold at breakeven, provided subsequent profits from other linked performance obligations is sufficient to cover the amount of the loss as well as ensuring that the subsequent performance obligations are not recorded at a loss.

We note from paragraph BC125 that, for the purposes of allocating transaction prices, the Boards considered the use of the residual method and rejected this approach. However, that paragraph also indicates that the Boards consider that a residual (or reverse residual) method may be an appropriate method for estimating a stand-alone selling price if a contract contains two performance obligations, with a directly observable price being available for one obligation but not the other. We agree with this approach, and suggest that the discussion in BC125 should be included within the accounting standard or related application guidance, as the basis for conclusions does not form part of the accounting standard.


Question 8
Paragraph 57 proposes that if costs incurred in fulfilling a contract do not give rise to an asset eligible for recognition in accordance with other standards (for example, IAS 2 or ASC Topic 330; IAS 16 or ASC Topic 360; and IAS 38 Intangible Assets or ASC Topic 985 on software), an entity should recognise an asset only if those costs meet specified criteria.

Do you think that the proposed requirements on accounting for the costs of fulfilling a contract are operational and sufficient? If not, why?

We agree with what appears to be the intention of the proposals, which is that expenditure that does not result in an item that meets the definition of an asset should be expensed as incurred.

However, we note that with the elimination of IAS 11, the guidance relating to costs which have previously been capitalised as Work in Progress will no longer exist. We suggest that a consequential amendment might be made to a standard which will remain in existence (this might be IAS 2).

While we acknowledge the guidance in paragraph 59 to selling and marketing costs, we suggest that an explicit reference is made from paragraph 57 to paragraph 59. This would eliminate the potential for, as an example, a property developer in the luxury sector that incurred very specific marketing costs to argue that these met the criteria in paragraph 57.


Question 9
Paragraph 58 proposes the costs that relate directly to a contract for the purposes of (a) recognising an asset for resources that the entity would use to satisfy performance obligations in a contract and (b) any additional liability recognised for an onerous performance obligation.

Do you agree with the costs specified? If not, what costs would you include or exclude and why?

We agree with the types of costs which are included in paragraph 58. However, we would prefer not to have a list of specified items as this creates ‘bright line’ guidance and the ability to structure arrangements to achieve a desired result. We therefore suggest that in the introductory sentence, the reference at the end is to ‘include’ rather than ‘are’.


Question 10
The objective of the boards’ proposed disclosure requirements is to help users of the financial statements understand the amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Do you think the proposed disclosure requirements will meet that objective? If not, why?

We agree that the proposed disclosure requirements would, broadly, meet the Boards’ objectives. However, we note that the proposed disclosure requirements are substantially greater than current disclosure requirements in IFRS. While this is not in itself a reason to object to the proposals, we suggest that careful consideration is given to an analysis of costs and benefits, and the extent to which use might be made of the information that would be provided, before the proposals are finalised.

One aspect which might benefit from additional disclosure is contract assets which do not meet the criteria to be accounted for as receivables. This might be the case where a contract asset results from past performance but will not become an unconditional right to consideration until either future performance obligations are met or certain contingencies are resolved, such as amounts receivable under royalty arrangements. The additional disclosures might be aimed at assisting a reader’s understanding of the nature of those contract assets, the uncertainties arising from them, and the reason(s) why they cannot yet be recorded as receivables.


Question 11
The boards propose that an entity should disclose the amount of its remaining performance obligations and the expected timing of their satisfaction for contracts with an original duration expected to exceed one year.

Do you agree with that proposed disclosure requirement? If not, what, if any, information do you think an entity should disclose about is remaining performance obligations?

We have reservations about the proposed disclosure requirements, due to the uncertainty in many cases of actual outcomes and the potential for the timing of the satisfaction of future performance obligations to be outwith the control of the selling entity. We have particular concerns at the potential for the disclosures, in combination with segmental information, to be capable of being used to derive future trading forecasts which could have the potential to lead to legal and regulatory concerns in certain jurisdictions.


Question 12
Do you agree that an entity should disaggregate revenue into the categories that best depict how the amount, timing and uncertainty of revenue and cash flows are affected by economic factors? If not, why?

We agree that the disclosure of disaggregated revenue may provide useful information to users of financial statements. However, we are not convinced that the proposals would result in consistency of disclosure among different entities in the same industry (or similar industries). We suggest that an illustrative example is added to the application guidance, and that the requirements of paragraph 74 are linked to the requirements of IFRS 8 Operating Segments for the purposes of identifying how the information should be segmented.

We are also not convinced that it is appropriate for entities that are not required to comply with IFRS 8 to be required to provide the disaggregation of revenue that is proposed in paragraph 74. We suggest that the scope of this paragraph is limited to those entities that are required to comply with IFRS 8.


Question 13
Do you agree that an entity should apply the proposed requirements retrospectively (ie as if the entity has always applied the proposed requirements to all contracts in existence during any reporting periods presented)? If not, why?

Is there an alternative transition method that would preserve trend information about revenue but at a lower cost? If so, please explain the alternative and why you think it is better.

While full retrospective application is technically the most appropriate approach, we do not consider that it would be practicable for all entities. Consequently, we believe that a simplified approach should be included, together with an option for full retrospective application if an entity wishes to do so.

We note that the exposure draft of proposals for leases contains simplified transitional arrangements, and suggest that the potential to incorporate similar principles in the revenue standard is explored.


Question 14
The proposed application guidance is intended to assist an entity in applying the principles in the proposed requirements. Do you think that the application guidance is sufficient to make the proposals operational? If not, what additional guidance do you suggest?

As noted elsewhere in our comment letter, we consider certain of the illustrative examples to be overly complex and, in certain cases, inconsistent with the guidance in the proposed accounting standard. We suggest that, where examples include an illustration of more than one part of the proposed guidance, these are split into two (or more) examples in order that the individual principles are separately and clearly illustrated.

We also consider that additional guidance is needed in order to illustrate what ‘continuous transfer’ is and the circumstances in which this attribute would, and would not, be met. This is particularly important if any final standard which is ultimately issued incorporates the requirements of IFRIC 15 for application to all types of contractual arrangements and not only real estate.

While we are not in favour of industry specific guidance, it would be helpful for additional examples to be included on transactions that are commonly found in practice in a range of different industry sectors. These examples could be biased towards those which are at the more extreme end of the scale, as it is these types of transactions that most clearly illustrate a principle and its application.


Question 15
The boards propose that an entity should distinguish between the following types of product warranties:

(a) a warranty that provides a customer with coverage for latent defects in the product. This does not give rise to a performance obligation but requires an evaluation of whether the entity has satisfied its performance obligation to transfer the product specified in the contract.

(b) a warranty that provides a customer with coverage for faults that arise after the product is transferred to the customer. This gives rise to a performance obligation in addition to the performance obligation to transfer the product specified in the contract.

Do you agree with the proposed distinction between the types of product warranties? Do you agree with the proposed accounting for each type of product warranty? If not, how do you think an entity should account for product warranties and why?

While in theory the proposals are appropriate, we are not convinced that they are operational in practice.

We believe that in many cases it will be very difficult to make a distinction between a latent defect and one which arises after a product has been transferred to the customer. Even if a fault only manifests itself some time after a product has been sold, it may still relate to a latent defect. We also note that in some jurisdictions, legislation contains a presumption that faults arising during a specified period after the sale of a good are faults which were in existence at the time of the original sale.

Linked to the legislative requirement referred to in the previous paragraph, it is common for faults on major items to be repaired, rather than the entire good being replaced. However, although this means that the warranty would be more in the nature of a performance obligation, paragraph B18(a) would appear to have the effect of precluding revenue recognition for some or all of the items sold, rather than deferring part of the revenue. In this regard, we note that the warranty period required by law in some jurisdictions can be as long as six years.

We also note that certain products are sold in the knowledge that they contain minor defects, but there is an expectation that few customers will be concerned about these defects meaning that there will be few warranty claims. However, under the proposals it would appear that the seller could be precluded from recognising revenue until the expiry of the warranty period, despite the majority of its customers being satisfied with the operation and utility of the good.

We therefore believe that additional guidance needs to be included which adds consideration of the extent to which latent defects will in fact result in goods being returned (and hence whether control has passed from the seller to its customer). This would result in the application of a ‘failed sale’ approach where there was a genuine risk that the goods would be returned for replacement, with a performance obligation approach being followed in the event that the goods would be returned for repair (or a repair was made available electronically, such as for a new piece of software which needed some patches or bug fixes).


Question 16
The boards propose the following if a licence is not considered to be a sale of intellectual property

(a) if an entity grants a customer an exclusive licence to use its intellectual property, it has a performance obligation to permit the use of its intellectual property and it satisfies that obligation over the term of the license; and

(b) if an entity grants a customer a non-exclusive licence to use its intellectual property, it has a performance obligation to transfer the licence and it satisfies that obligation when the customer is able to use and benefit from the licence.
Do you agree that the pattern of revenue recognition should depend on whether the licence is exclusive? Do you agree with the patterns of revenue recognition proposed by the boards? Why or why not?

We do not agree with the proposals, and are not convinced that the pattern of revenue recognition should be based solely on whether a licence is exclusive. Instead, we consider that the focus should be on whether there is an ongoing performance obligation in respect of the licensed intellectual property.

As an example, an item of intellectual property might be licensed on an exclusive basis, or on a non exclusive basis. In either case, the licensor has no obligation in respect of the intellectual property during the licence period, other than to maintain and defend the rights to the intellectual property. It is difficult to see a clear distinction between the two arrangements (exclusive and non exclusive licences) which should result in deferral of revenue over the licence period in one case, and immediate recognition in the other.

Instead, the question of whether there is a substantive related and linked performance obligation which the licensor is required to carry out as part of an overall contractual arrangement could form the basis for a principle to be applied in determining whether revenue recognition should be deferred. This principle could be whether the licensor will be exposed to significant benefits or risks associated with licensed intellectual property during the licence period as a consequence of the related and linked performance obligation. For example, an entity might licence specialised software for a period of three years period. The contractual arrangement requires the licensor to provide software maintenance and upgrade services throughout that period, and these services are required in order for the software to continue to operate satisfactorily. The services cannot be provided by any party other than the licensor. In this case, regardless of whether the software licence is exclusive or non exclusive, revenue would be deferred and recognised over the three year licence period.

As a variation on the previous paragraph, the maintenance and upgrade services might be capable of being supplied by other third parties. In that case, because the licensee does not have to purchase those services from the licensor, it would be appropriate for the licensor to record revenue for the two separate performance obligations; the granting of the software licence, with revenue being recorded at the point at which the licensee is able to use the software and (if the licensee purchases them) the upgrade and maintenance services with revenue attributable to this performance obligation being recorded over the period in which the services are contractually required to be provided.

We note that the potential approach set out above is consistent with our comments in response to question 2 above.


Question 17
The boards propose that in accounting for the gain or loss on the sale of some non-financial assets (for example, intangible assets and property, plant and equipment), an entity should apply the recognition and measurement principles of the proposed revenue model. Do you agree? If not, why?

We agree. However, the guidance should make it clear that these gains or losses should not be reported as revenue.

ED-2010-6 Revenue from Contracts with Customers.pdf

ED-2010-6 Revenue from Contracts with Customers Basis of Conclusion.pdf