The Committee of European Banking Supervisors (CEBS) has written to the International Accounting Standards Board (IASB) with comments in relation to the IASB's Discussion Paper on Preliminary Views on Revenue Recognition in Contracts with Customers which was published last December (the DP).

CEBS welcomes the efforts of the IASB and the Financial Accounting Standards Board (FASB) on the revenue recognition project to develop a model intended to improve financial reporting by providing clearer guidance on when an entity should recognise revenue, and by reducing the number of standards to which entities have to refer.

The comments in CEBS's letter do not answer each of the specific questions in the DP. Rather, they focus on issues that CEBS considers important for supervision and financial reporting in the banking industry.

As to the question raised in the DP of whether the proposed model should exclude financial instruments, the CEBS believes that financial instruments pursuant to IAS 32 and IAS 39 should be excluded. These are economically different to contracts with customers in that they concern the creation of a financial asset, with the corresponding creation of a financial liability or equity instrument - on the one hand, rather than the promise of the transfer of an asset in return for consideration - on the other.

Nevertheless, it is recognised that some financial instruments contain one or more embedded service elements. An example given is when after securitization the originator provides some kind of financial service. CEBS believes that the IASB should liaise with financial institutions to explore the revenue implications of such embedded service elements in financial instruments.

CEBS also feels that the IASB should deliberate further on its current insurance and leasing projects.

CEBS comments also cover a number of cross-references between IAS 18 and IAS 39. These cover interest and three types of fees for financial services: those integrated into the interest rate of a financial instrument; those earned as services are provided; and those earned on execution of a significant act. CEBS suggests that the IASB should keep the rules of measurement that apply to these situations as they are, but solve the reference issues. In relation to the recognition of dividends, which according to IAS 18 occurs when the shareholder's right to payment is established; CEBS has concerns in the light of the treatment of rights and performance obligations proposed in the DP. CEBS suggests that the principles for the recognition of dividends should remain unchanged.

CEBS also points out that while the DP explains that an entity satisfies a performance obligation and recognises revenue when it has transferred control of an asset, it does not adequately explain the meaning of "control". This becomes important when comparing situations in which control is passed over during the period of time when financial services are provided with situations in which control passes when all services are completely transferred to the customer. CEBS seeks clarification and a positive definition.

Another issue on which CEBS asks the IASB for further deliberation is that of measuring rights. The DP focuses on revenue recognition in respect of the transfer of an asset but is silent in regard to the right to receive consideration. CEBS does, however, acknowledge that there has been some discussion of issues related to the measurement of rights. These include consideration of the time value of money, the effects of uncertain consideration and payment in a form other than cash.

Finally, CEBS comments on services which include upfront costs, for example mortgage brokers’ commissions. The DP appears not to discuss this and CEBS believes that this issue merits further consideration.

View Discussion Paper Preliminary Views on Revenue Recognition in Contracts with Customers, 17 June 2009