Accounting

International Standards Board Approves Clarifications to Revenue Recognition Model

By David R. JonesThe International Accounting Standards Board approved two measures on May 19 to amend its application guidance for its revenue recognition standard—International Financial Reporting Standard 15: Revenue from Contracts with Customers.All told, the board considered four proposals at its meeting in London that aimed to clarify the definitions and roles of principals and agents in revenue recognition.Principals vs. Agents When an outside party is involved in providing goods or services to a customer, IFRS 15 requires an entity to determine whether it's a principal or an agent, a staff paper prepared for the meeting noted.A transaction with a principal involves recognizing as revenue the transaction price allocated to the entity's performance obligation of providing the specified goods or services to a customer.If a transaction involves an agent, on the other hand, it requires recognizing as revenue the fee or commission involved in arranging for the other party to provide goods or services to a customer.Joint Panel Concerns The staff paper looked at “whether any clarifications to the application guidance or illustrative examples on principal versus agent considerations could help address the issues raised” during discussions of the Transition Resource Group (TRG).The IASB and the Financial Accounting Standards Board established the TRG as a joint panel to address concerns that arise in implementing the largely converged IFRS 15.During their joint meeting in March, IASB and FASB discussed several topics that had emerged during TRG discussions in March 2014 about how to determine principals and agents.  Difficulties in Applying Guidance “The extent of the discussion at the TRG meeting on this issue and subsequent feedback that we received has highlighted that, at present, stakeholders are having difficulties in applying the guidance,” the staff paper said.Though many of the difficult-to-classify transactions to which the guidance applies occur in the U.S., the staff said, clarifications could prove useful for other jurisdictions as well.Clarifying Guidance In a 12-1 vote, IASB decided May 19 to amend several examples included in IFRS 15 and to list additional examples to make clear how to apply the principle versus agent guidance.The clarifications will center on determining whether an entity is a principal or an agent based on the so-called control principle.Control Principle Under the control...

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