By AJ Joshi / Tom Gillespie
In May 2019, the Accounting Standards Board (“AcSB”) released an exposure draft (“ED”) which proposes to amend Section 3400 Revenue in Part II of the CPA Canada Handbook – Accounting – Accounting Standards for Private Enterprises (“ASPE”).
Based on the AcSB surveys, respondents noted the limited guidance in accounting for revenue recognition under ASPE. As a result, significant diversity in practice was observed among practitioners. The AcSB proposed amendments are aimed to reduce the diversity of practice and avoid undue effort in the implementation.
The AcSB specifically highlighted the following sections for amendments:
- bill-and-hold arrangements;
- multiple-element arrangements;
- percentage of completion method;
- reporting revenue gross or net;
- upfront non-refundable fees/payments; and
- additional disclosure requirements.
A majority of the proposed amendments clarified existing provisions and provided direction in the form application guidance and illustrative examples for the above noted sections.
Summary of key exposure draft proposals
Bill-and-hold arrangements
The current standard recommends that enterprises consider bill and hold arrangements when assessing revenue recognition. The ED proposes that enterprises consider specific criteria to assess bill and hold arrangements. Some of the criteria include the following:
- The ordered goods are segregated from the sellers inventory;
- The customer must have a fixed commitment to purchase the goods;
- The buyer, not the seller, has requested that the transaction be on a bill and hold basis and has substantial business purpose for ordering this basis;
- There must be a schedule for delivery in place which is reasonable and consistent with the buyers business purpose;
Multiple-element arrangements
The current standard advises to consider whether a single transaction involves delivery or performance of multiple products or services, but provide limited guidance on
The ED proposes that an enterprise should evaluate contract deliverables to assess which deliverables should be accounted for as a separate unit of account and how to allocate revenue to each respective unit.
Percentage of completion method
The current standard stipulate that an enterprise should use the percentage of completion method when performance of a long-term contract consists of more than one act. Revenue recognition under this method, should be determined on a rational and consistent basis.
The ED provides proposes additional guidance on:
- segmenting or combining service and long-term contracts;
- determining percentage of completion based on input and output measures
- allocation of contract costs; and
- treatment of expected losses.
Reporting revenue gross versus net
One of the most common issues identified by the AcSB was the reporting of revenue gross versus net.
The ED proposes to add indicators including detailed examples of when gross, and net reporting is appropriate.
Selected indicators include the following:
- The enterprise is the primary obligor in the arrangement;
- The enterprise has inventory risk;
- The enterprise has a reasonable ability to establish price; and
- The enterprise has credit risk on the amounts billed.
Upfront non-refundable fees
The current standard only lists upfront non-refundable fees as a consideration for revenue recognition.
The proposed amendments specify that unless an upfront fee is in exchange for products delivered or services performed that have utility to the buyer separate and independent from of the enterprises performance of other elements of arrangement, revenue should be deferred. Recognition of this revenue would be deferred and recognized as integrated package as the products are delivered or services are provided over the term of the arrangement. Recognition of revenue is not impacted if the fees are non-refundable.
Disclosure requirements
The only change to the disclosure requirements in the standards relates to the application of the percentage of completion method.
The AcSB proposes that an enterprise shall disclose the following in connection with the percentage of completion method:
- Method or methods of measuring degree of completion;
- The aggregate amount of costs incurred and recognized profits (less losses) to date;
- The aggregate amount of advances received and holdbacks withheld; and
- Uncertainties affecting the degree of completion.
Timeline and transitional provisions
The comment period for the ED ends on July 31, 2019 and a final standard is expected to be released in late 2019. The effective date is expected to be no earlier than fiscal years beginning on or after January 1, 2021.
The amendments to Section 3400 would be applied retrospectively. Given the significant effect of these amendments, the AcSB proposes to provide enterprises with the following transitional relief provision:
- retrospective adjustments are not required for long-term contracts accounted for using the percentage of completion method that are completed during the fiscal year in which the amendments are first applied or during the immediately preceding year;
- retrospective adjustments are not required for multiple-element arrangements when all deliverables have been delivered during the fiscal year in which the amendments are first applied or during the immediately preceding year;
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