1. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 REVENUE RECOGNITION ADVISORY FORUM Stig Enevoldsen 18 October 2006

2. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue recognition IAS 18 problems Very little specific guidance Inconsistent guidance Somewhat based on matching Examples not always consistent with the standard Little guidance on multiple-element contracts

3. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue recognition IAS 11 and 18 problems The two standards are inconsistent Somewhat based on matching Little guidance on more complex transactions Little guidance on new sophisticated transactions such as multiple-element contracts related to construction

4. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue recognition USA has a big number of rules The rules are in many different pronouncements Specific guidance to specific transactions SEC has issued SAB 104 somewhat based on an earnings principle US GAAP also urgently needed improvement

5. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 US GAAP IAS/IFRS GAAP JOINT PROJECT CONVERGENCE Revenue recognition

6. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 IASB/FASB could have chosen Amendments to the present standards and rules Ad hoc changes to facilitate new types of transactions IASB/FASB decided to undertake a comprehensive project with fundamental rethink IASB/FASB joint project

7. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Proactive Accounting Activities in Europe PAAinE!

8. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 OBJECTIVES: Partnership with National standard setters High quality proactive input to IASB(+FASB) More consistent messages to IASB Create debates in Europe Involvement in the convergence work Monitor work of IASB & FASB Thought leadership EFRAG – PAAinE

9. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue Recognition Framework Pensions Equity/ liability split Performance Reporting PAAinE - projects

10. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Top-line figure – Turnover – Revenue Revenue is a gross number Revenue is a measure of activity pursuant to a contract with a customer (reflects the activity of supplying goods and services to customers) Based on the asset liability approach – like the Framework PAAinE project Revenue Recognition Is it strange to start Revenue based on assets and liabilities?

11. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Examples The Chair A customer buys an already-made chair from the supplier, and takes it home in his car. The Washing Machine A customer with a washing machine enters into a contract with a separate supplier (the plumber) that requires the supplier to connect the washing machine, to the customers existing plumbing and do all that is necessary to make the washing machine work.

12. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Examples The Cleaner A customer enters into a contract that requires the supplier (the cleaner) to visit his office every work day evening for a year and carry out on each of those visits an identical set of cleaning tasks. Bridge A customer enters into a contract with the supplier (a construction company) that requires the supplier to build a bridge to the customers design and specification. The contract envisages that the bridge will take three years to complete.

13. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 The Computer A customer orders from the supplier a particular specification of computer along with a specified package of off-the-shelf software. The supplier is required to supply and deliver the computer with the software already loaded, connect up all the wires and make sure everything works, and provide the customer with ten hours of tuition on how best to use the computer and its software. Examples

14. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 THE DRAFT DISCUSSION PAPER DISCUSSES FOUR DIFFERENT APPROACHES TO RECOGNITION Revenue recognition

15. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 COMPLETED CONTRACT COMPLETED PART CONTRACTS PART-OUTPUT HAS VALUE TO CUSTOMER FOUR APPROACHES CONTINUOUS APPROACH Revenue recognition

16. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue arises when the supplier fulfils the performance obligations arising under a contract with a customer. A Completed contract The supplier gets a right to consideration when it has met its performance obligation. The consideration constitutes a new asset either cash or receivable

17. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue arises when the entity fulfils all the performance obligations arising under a part- contract with a customer. (A part-contract comprises one or more of the performance obligations required by the whole contract that, when fulfilled, will result in a right to consideration arising). B Completed part contract The contractual terms allows the supplier to get right to consideration before full completion.

18. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue arises when the entity fulfils all the performance obligations arising under a part- contract with a customer. Each part-contract comprises the work necessary to produce an item of output that the customer can either use for its intended purpose or can be sold at an amount that reflects its worth when used for that intended purpose. C Part-output has value to customer

19. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue arises when the entity has produced comprises the work necessary to produce an item of output that the customer can either use for its intended purpose or can be sold at an amount that reflects its worth when used for that intended purpose. C Part-output/value to customer Necessary to establish criteria forintended purpose and can be sold (as outlined in C60) Seems suitable for multiple elements contracts

20. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue should be recognised when activity undertaken pursuant to a contract with a customer gives rise to an asset that reflects performance towards completion. D Continuous approach The supplier must expect the contract to be fully completed Disaggregating also important here because of potential different margins of the elements

21. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 A COMPLETED CONTRACT B COMPLETED PART CONTRACTS C PART-OUTPUT HAS VALUE TO CUSTOMER Chair D CONTINUOUS APPROACH Revenue recognition Washing machine Cleaner Bridge Computer

22. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Critical events approach Whos perspective – Supplier versus customer Customer acceptance Contingent customer acceptance Exchange Matters considered

23. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Service concessions? Customer loyalty programmes? Other examples

24. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Revenue recognition Measurement might influence conclusions!!!

25. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 Critical event Performance obligation Right to consideration Asset Liability Revenue recognition

26. ©2006 EFRAG BRUSSELS 18. OCTOBER 2006 THE EUROPEAN VOICE WWW.EFRAG. ORG