Back-up October 2006 Deutsches Rechnungslegungs Standards German Accounting Standards Committee e. V. ® Re-thinking Revenue Recognition Liesel Knorr, DRSC e.V. Brussels, 18 October 2006

Back-up October 2006 Deutsches Rechnungslegungs Standards German Accounting Standards Committee e. V. ® IFRSs on Revenue Recognition IAS 18 Revenue IAS 11 Construction Contracts IAS 17 Leases IAS 39 Financial Instruments: Recognition and Measurement IAS 41 Agriculture + recourse to US GAAP

Back-up October 2006 Deutsches Rechnungslegungs Standards German Accounting Standards Committee e. V. ® IAS 18 Revenue – Underlying Principle Definition Gross inflow of economic benefits during the period arising in the course of the ordinary activities (IAS 18.7) Recognition -Probable that economic benefits will flow to the entity -Amount of revenue can be measured reliably Measurement Fair value of the consideration received or receivable (IAS 18.9)

Back-up October 2006 Deutsches Rechnungslegungs Standards German Accounting Standards Committee e. V. ® IAS 18 Revenue – Underlying Principles (cont.) Critical Events for the Recognition of Revenue Sale of goods -Transfer of the significant risks and rewards to the buyer -Entity retains neither continuing managerial involvement nor effective control -Costs incurred can be measured reliably Rendering of services -Stage of completion can be measured reliably -Costs incurred can be measured reliably

Back-up October 2006 Deutsches Rechnungslegungs Standards German Accounting Standards Committee e. V. ® General Problems arising -From a conceptual perspective -Recourse to the realization principle in IAS 18 is said to be contradictory to the definition of revenues in the framework (income = measurable changes of assets and liabilities) -Application of IAS 18 can lead to recognition of deferred assets and deferred liabilities which do not meet the definition of assets and liabilities -From a practical perspective -Content of the realization principle often unclear (as evidenced by the need for extensive additional explanations in the appendix of IAS 18) -How to account for multiple element arrangements?

Back-up October 2006 Deutsches Rechnungslegungs Standards German Accounting Standards Committee e. V. ® Current Developments Joint Project IASB and FASB (since 2002) Purpose: IASB: (Conceptual) Revision of IAS 18 & IAS 11 FASB: Development of one single Statement on Revenue Recognition together: Convergence! Discussion Paper end of 2007 (?)

Back-up October 2006 Deutsches Rechnungslegungs Standards German Accounting Standards Committee e. V. ® -IASB addresses the issue of revenue recognition starting from the Framework definition of income -That is: “Income is measurable changes in assets and liabilities” (= Assets and Liabilities Approach) -This approach shall not be overridden by notions of realization and completion of the earnings process. -New approach will also cover issues currently addressed by IAS 11

- 8 - Dr. Mareike Kühne – Deutsches Rechnungslegungs Standards German Accounting Standards Committee Zimmerstr Berlin Tel Fax Deutsches Rechnungslegungs Standards Accounting Standards Committee e.V. Committee of Germany ®