SUMMARY OF BOARD DECISIONS

Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final standard.

June 10, 2009 Board Meeting

Revenue recognition. The Board discussed three topics that have not yet been addressed in the proposed revenue recognition model: (1) gross versus net presentation of revenues, (2) the combination, segmentation, and modification of contracts, and (3) nonmonetary exchanges.

Gross versus net presentation of revenues

When other parties are involved in providing goods and services to an entity’s customer, the entity must determine what amounts to recognize as revenue; that is, whether to recognize revenue in the gross amount collected from the customer or the net amount the entity retains after compensating those other parties for their goods and services.

The Board decided that the amount an entity recognizes as revenue depends on the identification of performance obligations. In other words, the entity must determine whether its performance obligation is to provide goods and services itself or to arrange for another party to provide those goods and services. The Board directed the staff to further develop application guidance that would help entities to identify performance obligations consistently.

The Board decided that an entity should disclose separately revenue in the same line of business from (1) providing goods and services itself and (2) arranging for the provision of goods and services. The Board also decided that an entity should disclose the basis for its assessment and any significant judgment in identifying performance obligations when other parties are involved in providing goods and services to the entity’s customer.

The Board also agreed that if an entity transfers a performance obligation to another party so that the entity is no longer obliged to provide the underlying good or service to the customer, the entity should not recognize revenue for that performance obligation.

Combination, segmentation, and modification of contracts

The Boards’ proposed revenue recognition model applies to contracts with customers. In most cases, a single contract gives rise to a single net contract position when applying the proposed model. However, in some cases, an entity’s pattern of revenue (and profit) recognition can vary depending on how an entity combines contracts (or segments of a contract) into net contract positions.

The Board tentatively decided that two or more contracts with the same customer should be accounted for as a single net contract position if the prices of those contracts are interdependent. An entity should consider various indicators and exercise judgment when determining whether prices are interdependent.

The Board tentatively decided that an entity should account for a single contract with a customer as multiple contracts only if each contract segment is priced independently. At future meetings, the Board will further discuss some related issues involving the identification and measurement of performance obligations.

The Board also decided that when an entity modifies an existing contract, the modification should be accounted for as a separate contract if it is priced independently from the original contract. If the prices are interdependent, an entity should account for the original contract and modification as a single net contract position, recognizing the effect of the modification on a cumulative catch-up basis.

Nonmonetary exchanges

The Board decided that an entity should recognize revenue for a nonmonetary exchange transaction only if the transaction has commercial substance. The Board also decided an entity should not recognize revenue from a nonmonetary exchange transaction if the purpose was to facilitate a sale to another party.

The Board decided that an entity should measure the nonmonetary consideration received at its fair value or, if it cannot be estimated reliably, by reference to the selling price of the promised goods and services. If neither of those amounts can be estimated reliably, then the transaction would not generate revenue. The Board also decided that a new revenue recognition standard should not provide additional guidance on specific barter transactions.

Financial instruments with characteristics of equity. The Board discussed measurement requirements for freestanding equity, liability, and asset instruments and equity hybrids instruments (instruments that are separated into an equity component and a liability or asset component ).

The Board made the following decisions:

Transaction costs

1. An entity would expense as incurred all transaction costs or fees arising from the issuance of a financial instrument.
   
   

Initial measurement of a freestanding equity instrument

2. An entity would initially measure a freestanding equity instrument at its transaction price.   The term transaction price does not include transaction costs or fees.
   
   

Initial measurement of the components of a separated equity hybrid instrument

3. An entity would initially measure components of a separated equity hybrid instrument as follows.   The liability or asset component would be measured at fair value as if it were a freestanding liability or asset.  The remainder of the transaction price for the hybrid instrument as a whole would be allocated to the equity component.
   
   

Subsequent measurement of a freestanding equity instrument and an equity hybrid instrument

4. An entity would not remeasure a freestanding equity instrument or equity component of a hybrid instrument that it cannot be required to redeem.
   
   
5. At each reporting date, an entity would remeasure at current redemption value an equity instrument or a separated equity component of a hybrid instrument that has a redemption requirement.   The current redemption value is the amount that would have resulted from applying the redemption formula as if redemption was required at the measurement date.   Changes in current redemption value would be recorded as a transfer between retained earnings and the redeemable equity instrument or component.
   
   
6. An entity would remeasure the liability or asset component of a separated hybrid instrument on the basis of the requirements of U.S. generally accepted accounting principles (GAAP) that would apply if it were a freestanding instrument.
   
   

Measurement of freestanding liabilities and assets

7. An entity would present a physically settled forward repurchase contract on a net basis in the statement of financial position and remeasure that instrument at fair value as of the subsequent reporting date.   Changes in value would be reported in income.
   
   
8. An entity would report convertible debt as a liability in its entirety and subsequently measure that liability at fair value at each reporting date.   Changes in value would be reported in income.
   
   
9. All other freestanding liability and asset instruments would be remeasured as required by existing U.S. GAAP.   For example, all derivatives would be subject to the measurement requirements in Statement 133.
   
   

The Board also discussed and expressed general support for the following broad measurement requirements for liability and asset instruments.   The requirements are intended to be consistent with existing measurement requirements.

1. A freestanding instrument should be initially measured at fair value, unless another initial measurement basis is specified in other U.S. GAAP.
   
   
2. An instrument with a fixed maturity date and a settlement amount that is fixed or that changes only because of variable interest rates should be reported at a accreted (or amortized) cost amount.
   
   
3. An instrument that has a varying or uncertain settlement amount should be remeasured at fair value at each reporting date.
   
   

The Board’s measurement decisions for freestanding liabilities and assets are subject to change as a result of future deliberations in the financial instruments recognition and measurement project.

Conceptual framework—measurement. The Board discussed a draft measurement chapter for the conceptual framework that is based on measurement factors the Board has discussed in earlier meetings. Those factors are:

1. Method of value realization
   
   
2. Cost of preparing and using measures
   
   
3. Relative level of confidence in different measures
   
   
4. Use of consistent measures for similar items and items used together
   
   
5. Separability of changes in measures.
   
   

The Board decided that the measurement factors and the discussion of their relation to the objective of financial reporting and the qualitative characteristics of decision-useful information are an appropriate starting point for developing a Discussion Paper.