Transportation & logistics Transportation & logistics

New guidance on recognition of revenue a big issue

for the transportation & logistics industry
Application date: An exposure draft was issued in June 2010; a standard is expected in 2011. The
effective date is anticipated to be no earlier than 2014 with full retrospective application required.

What is the issue?
The International Accounting Standards Board (IASB)
and US Financial Accounting Standards Board (FASB)
have released an exposure draft on accounting for
revenue recognition in contracts with customers. The
proposals aim to make entities recognise revenue from
customers more consistently regardless of the industry
they operate in.
Why is this issue significant for the
transportation & logistics industry?
Many entities in the transportation & logistics industry
enter into multi-element arrangements with customers to
provide one-stop solutions with bundled transportation
and logistics services. The accounting for these multi-
element arrangements will be significantly different
under the proposals with revenue from each element of
the sale (known as performance obligations under the
proposals) accounted for separately (based on their
relative fair value).
Furthermore, the percentage-of-completion method
would no longer exist as a separate and distinct revenue
recognition model. Under the proposals, an entity may
only recognise revenue for its activities (consistent with
the current percentage-of-completion method) when
those activities concurrently satisfy performance
obligations through the transfer of control of assets
(good or service) to the customer. For example, when
the customer controls the product or where there is a
continuous transfer of assets to the customer. The
proposals could have a considerable impact on the
amount and timing of revenue recognition if control of an
asset (service) is transferred at a time that is different to
the transfer of risks and rewards or stage of completion
of the service.
Entities should analyse the potential effects of the
proposed model on their current business activities,
including those processes associated with contract
negotiations, budgeting/forecasting, systems changes,
taxes, and other related revenue recognition processes.
Are most transportation & logistics
entities impacted?
It depends. Transportation & logistics entities that
currently take a percentage-of-completion approach to
the recognition of revenue or that enter into contracts
which contain multiple elements will be significantly
affected. The degree of the impact will depend upon the
extent to which the entity enters into service arrange-
ments and the time given to complete the service.
What are the overarching proposals?
Entities recognise revenue upon the satisfaction of
performance obligations within contracts. This occurs
when control of an asset (a good or service) transfers
to the customer. Entities will need to identify all
performance obligations, including those embodied in
the terms and conditions of the arrangement and any
constructive and statutory obligations.
Entities that enter into contracts with multiple
elements (eg, where goods and services are sold
together but delivered at different times) will need to
ascribe revenue to each element and recognise that
revenue when performance is complete.
The transaction price in a contract reflects the
consideration the customer promises to pay in
exchange for goods and services. The transaction
price is allocated at the inception of the contract
based on the stand-alone selling price of the
associated goods and services. The price includes
variable consideration to the extent that it can be
measured reliably.

What issues in practice might arise
when applying the proposals?
Revenue could be recognised as each
performance obligation is completed and control
is transferred to the customer. The proposals align
the accounting with the obligations under the contract
rather than the estimation of revenue based on the
costs incurred or other means. For example, under a
voyage charter arrangement the proposals are
unclear about whether control can be continuously
passed to customers (over the course of the voyage)
or only at the completion of the contract (upon
discharge of the cargo). If control can be continuously
passed to customers, this may bring forward the
recognition of revenue. If it cant be, this will typically
result in more deferral of revenue recognition. Either
way, changes to systems may be required to reflect
the contractual obligations and capture the relevant
data for revenue recognition, particularly for entities
that provide container shipping which have
performance obligations to various customers in
each voyage.
More disaggregation of contracts and increased
use of estimates to allocate the transaction price
to separate elements in an arrangement.
Estimates will be necessary for those obligations that
are not usually sold separately. This may be an issue
for logistics entities that provide bundled and tailored
services to customers, which are provided at different
times throughout the contract. For example, the
provision of project logistics services typically
involves not only the product transportation, but also
warehousing, safety control, technical service and
later maintenance, etc. For these entities, allocating
the selling price is challenging for continuous-delivery
contracts and inappropriate because the performance
obligations are typically interdependent and
unavailable for separate pricing.
Less opportunity to capitalise costs. Under the
proposals, costs to acquire contracts (including sales
costs) are specifically prohibited from being
capitalised. The IASB proposals reiterate that
contract costs should be expensed as incurred
unless they meet the definition of an asset in another
standard such as inventory, fixed assets or intangible
assets. This may present a challenge for some
entities that may have capitalised or deferred certain
costs to acquire contracts or customers (e.g. sales
commissions, shipping operating costs, etc) that may
not necessarily meet the definition of an asset. We
encourage transportation & logistics entities to watch
this space as there will be a potential impact on
existing treatment for capitalisation of contract costs.
How the business community
responded to the initial proposals
(issued via a discussion paper)
Common themes
Broad support for the Boards objectives to develop a
single, converged revenue recognition standard.
Concern that developing one model for all contracts
in all industries may not be possible.
General support for the principles suggested, but
many believe:
A significant amount of clarification is needed
especially around control transfer and
identification of performance obligations.
A more complete model is required before
ultimate conclusions can be reached.
Specific concerns of the transportation &
logistics industry
There are significant concerns around the application
of control transfer in practice. In particular:
Is it intended to be overly legalistic? For example,
will there be inconsistency in terms of the revenue
recognition practices associated with
simultaneous delivery of two identical services in
two different jurisdictions made at two different
occasions only because of different local rules
concerning the transfer of ownership or accepted
delivery terms?
How is control determined for shipped goods (e.g.
cargo) which is transferred to the customer? Is it
precluding percentage-of-completion accounting
and does it result in the recognition of revenue
only upon completion of those service contracts?
How is that linked with, or differentiated from, the
transfer of risks and rewards?
Those entities that currently apply the percentage-of-
completion method are keen to ensure the guidance
included in the final standard is clear. For example,
it is currently difficult to determine how obligations
in long term service contracts would be identified
consistently because there are many ways the
contract could be divided into separate performance
obligations.
There is strong support for the current guidance on
pre-contract costs to be maintained.


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