What’s Changed from the 2010
Quite a bit. Let’s look at some of the more
Bundles of Goods or Services
The proposal clarifies that to identify separate
performance obligations, an entity must consider
the attributes of an individual good or service
and must consider how that good or service
is bundled with other goods or services in a
particular contract. An entity would account for a
bundle of goods and services as one performance
obligation if the goods and services are highly
interrelated and transferring them to the
customer requires significant integration and if
the bundle of goods or services is significantly
modified or customized to fulfill the contract.
Performance Obligations Satisfied over Time
The proposal adds guidance on how to determine
when a good or service is transferred at a point
in time or continuously over time. A performance
obligation is satisfied continuously if at contract
inception either of the following conditions
•;The entity’s performance creates or enhances an
asset that the customer controls as the asset is
being created or enhanced.
•;The entity’s performance does not create an
asset with alternative use to the entity and at
least one of the following criteria are met:
< The customer simultaneously receives
and consumes the benefits of the entity’s
performance as the entity performs it.
< Another entity would not need to substantially
reperform the work the entity has completed
to date if that other entity were to fulfill the
remaining obligation to the customer.
< The entity has a right to payment for
performance completed to date, and it expects
to fulfill the contract as promised.
For each separate performance obligation,
an entity would recognize revenue over time
by measuring the progress toward complete
satisfaction of that performance obligation.
If none of the conditions noted above is met,
revenue is recognized based on the guidance for
transferring the good or service at a point
Some warranties provide a customer with
assurance that the related product complies with
agreed-upon specifications. Other warranties
provide the customer with a service in addition
to the assurance that the product complies
with agreed-upon specifications. The boards
simplified the guidance so that a separate
performance obligation would be created if the
customer can purchase the warranty separately
or if the warranty provides the customer with
a service in addition to the assurance that
the product complies with the agreed-upon
specifications. Assurance-type warranties would
be accounted for under a cost accrual method,
which is consistent with current practice.
Collectibility refers to a customer’s credit risk—
that is, the risk that an entity will be unable
to collect from the customer the amount of
consideration to which the entity is entitled
based on the contract. The 2010 exposure draft
required the initial measurement of revenue
to include an adjustment for collectibility. The
revised proposal would require the provision
for uncollectible accounts to be presented as a
separate line item adjacent to revenue. Changes
in subsequent measurements of the provision for
uncollectible accounts would also be presented
in a line item adjacent to revenue.
The proposed accounting is consistent with
current practice. However, the change in
presentation and classification would lower
gross margins for many entities.
The consideration in a contract can vary because
of discounts, rebates, refunds, credits, incentives,
price concessions, and other similar items.
The 2010 exposure draft required variable
consideration to be estimated, allocated, and
recognized based solely on a probability-weighted method that didn’t align well in
situations where the variable consideration was
all or nothing.
The new proposal requires an entity to estimate
the amount of the consideration by using either
a probability-weighted amount or the most