As we covered here, the IASB recently called for stakeholder feedback to inform its review of the accounting standard for revenue from contracts with customers, IFRS 15.

This is part of the regular post-implementation review process “to assess whether the effects of applying the new requirements on users of financial statements, preparers, auditors and regulators are those the IASB intended when it developed the requirements.” We already looked at some feedback relating to the areas of “principal vs. agent” and “negative revenue.” When the IASB developed the standard in collaboration with the FASB, they decided it should apply only to a subset of revenue as defined in the conceptual framework (revenue from contracts with customers) and that other forms of revenue would be outside its scope. On the definition of a customer, the board decided “it would not be feasible to develop application guidance that would apply uniformly to various industries because the nature of the relationship (i.e. supplier- versus collaboration or partnership) would depend on specific terms and conditions in those contracts (and that) an entity would need to consider all relevant facts and circumstances, such as the purpose of the activities undertaken by the counterparty, to determine whether the counterparty is a customer.” It cited collaborative research and development efforts and oil and gas industry arrangements as instances where such assessments may be required. Against that backdrop, this is from the Accounting Standards Board of Canada:

• While we think IFRS 15 is working well for the contracts within its scope, we also think the standard’s scope creates challenges for arrangements within existing and emerging industries where a contractual arrangement is not with a customer as defined in paragraph 6 of IFRS 15.

• For example, entities in the pharmaceutical industry often enter into risk-sharing arrangements (in particular, early-stage pharmaceutical risk-sharing arrangements), where the core business activity of one entity in the arrangement is the development of a specific drug to bring to market. While these arrangements can take many different forms, we think the issue with the standard’s scope is that income core to an entity’s operations under these risk-sharing arrangements is presented outside of revenue as other income. This is because the contractual arrangement is not with a customer as defined in IFRS 15 and never will be. We recommend that the IASB consider whether IFRS 15, when written, intended to scope out such arrangements….

EY was among others flagging the issue:

• Collaborations are common in the pharmaceutical, biotechnology, oil and gas, and health care industries, but their use is increasing in other industries, for instance, to enter new markets. While collaborations involving joint control are addressed in IFRS 11 Joint Arrangements, other collaboration arrangements are not addressed in IFRS accounting standards. IFRS 15.6 is clear that IFRS 15 excludes from its scope transactions in which the parties are acting as collaboration partners. However, depending on the facts and circumstances, these arrangements might also contain a vendor–customer relationship component. Such contracts could still be within the scope of IFRS 15, at least partially, if the collaborator or partner meets the definition of a customer for some, or all, aspects of the arrangement. We have observed diversity in understanding regarding how to analyze such arrangements…

EY recommended a “flow chart or educational material explaining the process to follow and factors to consider.” Grant Thornton also raised the issue, citing FASB guidance that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account.

As indicated above, the IASB already acknowledged this issue in developing the standard, as one where an entity must consider all facts and circumstances in identifying how, if at all, it applies to a particular arrangement. So let’s take a nostalgic angle on this one! Recall that in its earlier days, IFRS was often described as a “principle-based” set of standards, in contrast to its more “rule-based” alternatives; the description still stands of course, but given the current heft of the bound volumes, one could be forgiven for sometimes forgetting. In a 2008 speech, then-IASB Chair David Tweedie asked rhetorically: “Can we deal with the main issues related to a particular type of transaction (what is known as an 80% standard) leaving the other problems to be dealt with by reference to the standard’s main principles and the use of professional judgement?” He argued that “we” can, but also set out some factors that would make a rules-based system inevitable, including “attacks (on) reasonable judgements which have turned out to be, with hindsight, incorrect,” and a profession that “keeps asking for voluminous interpretations or additional guidance.”

In line with that, the AcSB’s Armand Capisciolto said in a recent installment of his very useful “Inside Standard Setting” series: “if we want principle-based standards there will be the need to apply professional judgement and those judgements may lead to different conclusions. I do not see this as a problem. However, my concern arises if the different outcomes lead to different decisions by financial statement users – this indicates the need for the standard setter to take some action.” Fair enough, but in terms of the original Tweedie vision, this might still sound like a profession that “keeps asking for voluminous interpretations or additional guidance;” that (in the absence of, say, severe confusion or crisis) needs to be more philosophically accepting of a certain level of difference in outcomes and decision-making. Even if the IASB acknowledges the above issue’s general validity and glimpses a way in which it could provide guidance, should its best move be to do nothing?

The opinions expressed are solely those of the author.