19 June 2009
Sir David Tweedie
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Dear Sir David:

re: Comments on Discussion Paper“Preliminary Views on Revenue Recognition in Contracts with Customers”
The Corporate Accounting Committee (CAC) of the Securities Analysts Association ofJapan (SAAJ) is pleased to comment on the joint discussion paper by the International
Accounting Standards Board (IASB) and the Financial Accounting Standards Board(FASB), (collectively called ‘the Boards’), “Preliminary Views on Revenue Recognition inContracts with Customers”. The SAAJ is a not-for-profit organization providing
investment education and examination programs for securities analysts. Its certified
members exceed 23,000. The CAC is a standing committee of the SAAJ composed of 13
members, most of whom are users including equity and credit analysts, and portfolio
managers, while a few others are academicians and public accountants. Before drafting
this comment letter, the SAAJ sponsored a study session on the discussion paper,
inviting two ASBJ (the Accounting Standards Board of Japan) staff as lecturers. Some
146 certified members of the SAAJ participated in the session. A questionnaire wassubsequently sent to session participants and 84 responded, making for a 58% response
ratio. This comment letter takes full consideration of the views expressed in thequestionnaire replies as well as discussion among CAC members. The survey results,
quoted from time to time in the following comments, are attached as an Appendix to thisletter.

Revenue Recognition Principle Based on Contract Asset/Liability

Question 1: Do you agree with the Boards’ proposal to base a single revenue recognition
principle on changes in an entity’s contract asset or contract liability? Why or why not?
The discussion paper is an ambitious attempt by the Boards to substantially simplify
current standards where a number of revenue recognition models coexist. The
discussion paper proposes a revenue recognition principle motivated by the Boards’
desire to integrate existing models theoretically. The CAC, however, cannot conclude1that the practical advantages of adopting the proposed principle would clearly outweighthe problems caused by such adoption. In our opinion poll mentioned above, we asked“Do you agree to the basic principle in the discussion paper?” (See Appendix for exact
wording.) The possible responses, “Agree”, “Disagree”, or “Cannot judge at this moment”,
each received about 1/3 support:
A1:*
Agree.

29

34.5%

Disagree.

24

28.6%

Cannot judge at this moment.

31

36.9%

*To facilitate reference, this is the answer number in the Appendix. Same hereafter.
One reason for the varying opinions is that there are so many practical problems thatcannot be answered from a reading of the discussion paper because the proposed
principle is totally different from the realization-earnings model currently used.
The first problem many members pointed out is that the examples in the discussion
paper are rather simple and they are not sure whether all complicated contracts could
be clearly classified into separate performance obligations and wonder how revenue
would be recognized under the asset liability model.
The second problem is how the value of performance obligations such as a warranty
could be estimated in advance. Past experience could be used for an estimate, but itwould be difficult to determine possible punitive damages as a reasonable estimate for aliability in advance.
The third problem is that the proposal would make the recording of transactions
complex. For example, when a warranty and a product delivery obligation arerecognized in different periods as separate obligations, then, for example, value-added
taxes would have to be calculated each time. It is not clear that this increased burden
would provide commensurate value for company analysis.
Indeed, as below, only 17% answered “Yes” to our survey question, “Compared tocurrent revenue recognition based on the earnings process approach, do you think
revenue recognition based on the asset liability model proposed in the discussion paper
would provide more useful information for company analysis?”
A7:
Yes, I think so.

14

16.7%

No, I don’t think so.

21

25.0%

Cannot judge at this moment.

49

58.3%

Unless these problems are resolved, the CAC is not convinced that the revenue
recognition principle proposed in the discussion paper would provide transparent and2objective revenue recognition that would eliminate the arbitrary interpretation which
was one of the sources of various accounting malpractices in the past. The CAC
respectfully asks the Boards to provide as many examples of complicated transactions
as possible and to show how they are treated under the proposed model.

Measurement of Performance Obligations

Question 10 (a): Do you agree that performance obligations should be measured initiallyat the transaction price? Why or why not?
The CAC thinks the original transaction cost approach is appropriate for measuringperformance obligations and appreciates the Boards’ decision in adopting such approach.
In our survey, about 50% of the respondents supported the original transaction priceapproach.
A2:
Support the original transaction price approach.

42

50.0%

Support the current exit price approach.

20

23.8%

Cannot judge at this moment.

20

26.2%

The discussion paper points out (a) pattern of revenue recognition, (b) complexity, and(c) risk of error, as the reasons that the Boards did not adopt the current exit priceapproach. The CAC shares the Boards’ concern and thinks application of the approach
would be problematic. The original transaction price approach, on the other hand, ismore adaptable to business practices and it is easier to obtain objective prices using it.
Thus, this approach would fit the Boards’ objective in having clear and consistent
standards.
However, it should be quickly added that not a few members pointed out that since (a)the current exit price approach, which is theoretically more suited to the asset liability
approach, cannot be adopted because of difficulty of measurement etc., and (b) theoriginal transaction price approach is proposed instead, there is little need to introduce
the asset liability approach into revenue recognition in IFRS.

Remeasurement of Performance Obligations

Question 10 (b): Do you agree that a performance obligation should be deemed onerous
and remeasured to the entity’s expected cost of satisfying the performance obligation ifthat cost exceeds the carrying amount of the performance obligation? Why or why not?
From the standpoint of timely disclosure, the CAC agrees to remeasurement when acontract becomes onerous. In order to maintain and enhance the reliability of financial
statements, timely remeasurement and disclosure are indispensable. In our survey,
some 63% agreed to the proposed remeasurement.

3

A6:
Agree.

53

63.1%

Disagree.

8

9.5%

Cannot judge at this moment.

23

27.4%

A performance obligation measured at the original transaction price can become
inappropriate due to significant onerous changes in the situation. Hence, the need for
remeasurement. Frequent remeasurements are surely costly and might confuse thedepiction in financial statements, especially when the criteria for remeasurement are
not clear. On the other hand, if cost considerations prevent remeasurement, thereliability of financial statements is destined to diminish. The CAC is thus opposed tousing cost as an excuse for not remeasuring.
Some members opined that the recognition of provisions and impairments in current
accounting standards provides equivalent information to that which can be provided by
the proposed remeasurement under the asset liability approach. Thus, they question
the necessity of the latter.

Satisfaction of Performance Obligations

Question 9: The boards propose that an entity should recognize revenue only when aperformance obligation is satisfied. Are there contracts for which that proposal would
not provide decision-useful information? If so, please provide examples.
Based upon the notion of transfer of control, the discussion paper distinguishes
between a contract to provide a construction service (revenue is recognized as theservice is provided) and a contract to deliver a completed property (revenue isrecognized upon delivery). The CAC opposes this distinction as it would significantly
limit application of the percentage of completion method and regards this as one of themost serious problems in the paper. In our survey we asked “Do you think the

distinction in the discussion paper will provide useful information for company
analysis?” ––more than half of the respondents echoed the view of the CAC.
A4:
Yes, I think so.

24

28.6%

No, I don’t think so.

44

52.4%

Cannot judge at this moment.

16

19.0%

Further, to those who chose “No, I don’t think so” and “Cannot judge at this moment”
above, we asked “How can we obtain useful information for company analysis?” to which
about two-thirds requested use of the percent of completion method in industries suchas construction and software development.

4

A5:
Relax the stipulations in the discussion paper to allow

10

16.7%

39

65.0%

11

18.3%

wider use of the percent of completion method.
Regardless of the transfer of control, the percent ofcompletion method should be allowed for long-term
contracts,

such

as

construction

andsoftwaredevelopment, which satisfy certain criteria.
Cannot judge at this moment.

The CAC asks for expanded use of the percentage of completion method as it is better
suited for company analysis and as it has contributed to better corporate governance as
described below.

Company Analysis
The CAC thinks the advantage of the percentage of completion method, when applied
to a long-term contract, is that it enables periodic allocation of economic benefits which
will flow into the company with high probability. In other words, flow income thus
allocated will better contribute to estimating future cash flow. If revenue from along-term contract is recognized only upon delivery, the information usefulness offinancial statements during the construction period would be substantially impaired.

Improved Corporate Governance ––A History
In the past, the completion basis was the principle in Japanese standards, but
application of the percentage of completion method has gradually expanded in view ofconvergence to global standards, and today the percentage basis is the principle. Whenthe completion method was used, process control during construction was so loose thathuge losses that even management hadn’t noticed had, in many cases, to be recognized
upon delivery. As the percentage of completion method has become more widely used,companies manage the construction process more rigorously and make huge efforts toaccurately estimate and monitor the profitability of a contract. If use of the percentage
of completion method is prohibited, it would be regarded as the denial of history byturning back the clock, and thus carry the risk of a sudden loss of credibility in IFRS.

Propositions to Improve the Discussion Paper
The CAC thinks the percentage of completion method should be the principle forlong-term contracts in the construction, plant engineering, software development,
advertising, and other industries. If this is hard to accept for the Boards due to wanting
to pursue consistency of standards and other considerations, then the Boards should list
and describe many more cases where the percentage of completion method could be5

used. It is said that the percentage of completion method will be used for construction
on land owned by a customer, and in jurisdictions where title is transferred to thecustomer as construction progresses. However, accounting standards that demanddifferent recognition in different jurisdictions would hardly be considered a single set ofhigh quality global standards. If the Boards do not adhere overly strictly to the control
concept, they would find many cases where the percentage of completion method wasmore reasonable, including a construction contract where the customer makes multiple
payments upon inspection and a long-term software development contract which is
tailor-made for a customer.

Accounting Standards Should Depict Economic Reality
The discussion paper proposes a revenue recognition model based on the asset liability
approach and therefore emphasizes the concept of control, which results in different
accounting recognition under different legal systems as mentioned above. The CAC
thinks corporate accounting should depict economic reality, not legal relationships.
Transactions carrying the same economic reality should be treated in the same way,
regardless of the legal relationship. This point is particularly important for IFRS which
are aimed at being adopted in countries with widely different jurisdictions. The CAC is
not in a position to conceptually deny the asset liability approach, but is afraid thatmechanical application of it, particularly of the control concept*, might end up withirrational accounting standard propositions. The CAC respectfully asks the Boards toprudently consider this matter bearing in mind the future development of IFRS.
*According to one member, a proposition in the “Derecognition” exposure draft which
recognizes repos and stock lendings as sales, is another example of the mechanicalapplication of the control concept.

Concluding Remarks
The CAC highly evaluates the praiseworthy objective of the Boards in wanting toestablish better IFRS by aiming to have a single revenue recognition model which
eliminates arbitrariness. However, each recognition model that exists today has been
historically developed as a rational standard to depict the economic reality of a company
which belongs to a particular industry. The CAC believes that the Boards will not makethe mistake of denying rational accounting conventions that are widely used in practiceby overly emphasizing theoretical consistency. Over-simplification involves the risk ofmaking things worse than they are today.
Many issues should be discussed further for the establishment of better IFRS. The
CAC is committed to digesting the discussions of the Boards and to expressing its
opinions at every opportunity in such a way as to cooperate with the Boards to realize
6the objectives.
If you have any questions or need further elaboration, please do not hesitate to contact
Sei-Ichi Kaneko, Executive Vice President, SAAJ (s-kaneko@saa.or.jp).
Sincerely yours,

Keiko Kitamura
Chair
Corporate Accounting Committee

7

APPENDIX
Results of SAAJ Survey on‘Revenue Recognition on Contracts with Customers’

Background and methodology
The Securities Analysts Association of Japan (SAAJ) sponsored a study session on
IASB/FASB’s discussion paper Preliminary Views on Revenue Recognition in Contracts

with Customers, inviting two staff from the Accounting Standards Board of Japan(ASBJ) as lecturers. Some 146 certified members of the SAAJ participated in thesession held on 20 April. A questionnaire was subsequently sent to session participantsand 84 responded, making for a 58% response ratio. The respondents could also add
comments. The survey, although small in size, focused on a cohort with the samebackground (certified members of the SAAJ) and same knowledge level (participation in
the study session). This focus and very high response rate gives credibility to thereliability of the survey.

Survey questions and answers
Q1: The discussion paper Preliminary Views on Revenue Recognition in Contracts with

Customers, introduces the asset liability approach and proposes a model that, based ona contract with a customer, measures rights and obligations to record the net amount as
contractual assets or liabilities. Changes in contractual assets/liabilities are regarded as
performance (revenue) for the period. For the measurement of performance obligations,the discussion paper proposes using “asset value to satisfy the obligations” which is thepresent value of expected costs including margins.

Do you agree or disagree with this

view?
A1:
Agree.

29

34.5%

Disagree.

24

28.6%

Cannot judge at this moment.

31

36.9%

Q2: In measuring performance obligations, the discussion paper proposes the originaltransaction price approach which measures a performance obligation by the8consideration the customer promises in exchange for the promised goods and services.
The obligation will not be updated unless it is deemed onerous. The revenue recognizedunder the proposed approach is similar to that recognized under the earnings process
approach. The discussion paper also introduces the current exit price approach whichmeasures performance obligations by the price that the company would be required to
pay to transfer those obligations to an independent third party on the financial
statement date. The discussion paper suggests considering the use of such an approachfor remeasurement of certain contracts. What do you think of the two approaches?
A2:
Support the original transaction price approach.

42

50.0%

Support the current exit price approach.

20

23.8%

Cannot judge at this moment.

20

26.2%

Q3: The discussion paper defines performance obligation as “a promise in a contract
with a customer to transfer an asset (such as a good or a service) to that customer” andasks for revenue to be recognized when the obligation is satisfied. For example, if acompany sold goods with a right of return and a warranty, each will be recognized as anindependent obligation. A portion of the customer consideration will be allocated tothese obligations and revenue recognized when the obligation is satisfied. Do you think,
as a consequence of this proposal, companies can systematically recognize various
revenues associated with contracts that provide multiple goods and services?
A3:
Yes, I think so.

24

28.6%

No, I don’t think so.

30

35.7%

Cannot judge at this moment.

30

35.7%

Q4: The discussion paper says “an entity satisfies a performance obligation and, hence,
recognizes revenue when it transfers a promised asset (such as a good or a service) tothe customer.” Based upon this, the percent of completion method, which is widely usedin the construction industry, is said to be significantly affected. According to thediscussion paper, if the contract is to provide construction services, then revenue will berecognized as the service is provided, and if the contract is to provide a fully built
property, revenue will be recognized upon completion. If the customer controls theproperty during construction, the contract will be deemed to be providing services. An

9example in the discussion paper stipulates that if the customer owns the land, then hewill be deemed to have control. Do you think the distinction in the discussion paper will
provide useful information for company analysis?
A4:Yes, I think so. (Go to Q6)

24

28.6%

No, I don’t think so. (Go to Q5)

44

52.4%

Cannot judge at this moment. (Go to Q5)

16

19.0%

Q5: How can we obtain useful information for company analysis?
(Answer only if you said ‘No’ or ‘Cannot judge at this moment.’ to Q4.
A5:
Relax the stipulations in the discussion paper to allow

10

16.7%

39

65.0%

11

18.3%

wider use of the percent of completion method.
Regardless of the transfer of control, the percent ofcompletion method should be allowed for long-term
contracts,

such

as

construction

andsoftwaredevelopment, which satisfy certain criteria.
Cannot judge at this moment.

Q6: The discussion paper proposes measuring performance obligation by the originaltransaction price except in onerous situations where the expected cost exceeds bookvalue of the obligation. In this case, performance obligation should be remeasured and aloss recognized. Do you agree with this exceptional remeasurement

and lossrecognition?
A6:
Agree.

53

63.1%

Disagree.

8

9.5%

Cannot judge at this moment.

23

27.4%

Q7: Compared to current revenue recognition based on the earning process approach, do
you think revenue recognition based on the asset liability model proposed in thediscussion paper would provide more useful information for company analysis?

10

A7:
Yes, I think so.

14

16.7%

No, I don’t think so.

21

25.0%

Cannot judge at this moment.

49

58.3%

11