13 March 2012
Hans Hoogervorst
International Accounting Standards Board
30 Cannon StreetLondon EC4M 6XH
United Kingdom
Dear Mr. Hoogervorst:
re: Comments on Exposure Draft“Revenue from Contracts with Customers”
The Corporate Accounting Committee (CAC) of the Securities Analysts Association ofJapan (SAAJ) is pleased to comment on Exposure Draft “Revenue from Contracts withCustomers” put out by the International Accounting Standards Board (IASB). The SAAJ isa not-for-profit organization providing investment education and examination programs forsecurities analysts. Its certified members number 25,000. The CAC is a standing committeeof the SAAJ composed of 14 members, most of whom are users including equity and creditanalysts, and portfolio managers, while a few others are academicians and publicaccountants. The CAC writes comment letters to global standard setters, including theIASB and Accounting Standards Board of Japan (ASBJ), and exchanges opinions withorganizations including the ASBJ and Financial Services Agency.
Before drafting this comment letter, the SAAJ sponsored a study session on thediscussion paper, inviting an ASBJ staff member as a lecturer. Some 83 of our certifiedmembers participated. A questionnaire was subsequently sent to each and 51 responded,making for a 61% response rate. This comment letter fully takes into account the views
expressed in the questionnaire replies as well as discussion among CAC members. The
survey results are attached as an Appendix.
General Comments (Survey Question 1)
The CAC highly regards the exposure draft as a practical improvement to the previous
draft issued in June 2010. In our survey, 51% of the respondents answered ‘Yes’ to thequestion “Do you think the exposure draft as a whole will improve revenue recognitionstandards?”. The SAAJ conducted a similar survey in October 2010 regarding the previous1exposure draft. One of the questions then was “The exposure draft presents the ‘control
approach’ as the single principle of revenue recognition in contracts with customers. Do
you think this approach offers more useful information compared to the current realizationand earnings model?”, to which 64% answered ‘Cannot judge at this moment’ while only
18% answered ‘Yes’. The significant increase in support for the new exposure draft is a
result of the IASB’s efforts to listen to investors and improve the draft to reflect economicreality. However, the CAC has identified several points that could be improved and urges
the IASB to further respond to stakeholders’ opinions and requests.
Percentage of completion method (IASB Question 1, Survey Question 2)
In the comment letter to the IASB dated October 2010, the CAC made the following
comments, “In its June 2009 comment letter regarding the revenue recognition discussion
paper, the CAC pointed out that introduction of the percentage of completion method had
contributed to improvement in the management of many Japanese corporations. From thisviewpoint the CAC thinks the method should be made available more broadly, and, to thisend, believes an additional indicator is necessary for paragraphs 30 (a) to (d)”.
The CAC regards paragraphs 35 and 36 of the latest exposure draft as reflecting theserequests from constituents. However, it thinks there is a room for further improvement. The
survey asked “Do you think this revision provides sufficient guidance regarding
application of the percentage of completion method?” to which only 24% answered ‘Yes’
while 50% said ‘Cannot judge at this moment’. The CAC is particularly concerned that
stipulations in paragraph 35 (b) (i)~(iii) are too abstract to appropriately apply thepercentage of completion method to some industries such as construction and softwaredevelopment. Further, “Measuring progress towards satisfaction of a performanceobligation” as stipulated in paragraphs 38 to 46 would cause serious difficulty for practicalapplication as the output method is not used in Japan.
The CAC puts forward the following three proposals to enhance practical applicabilityof paragraphs 35 and 36. First, reorganize the standards into goods and services withspecific guidance. Second, secure systematic and quick response by the IFRS InterpretaionCommittee when problems are identified in various jurisdictions. Third, conduct animplementation review at an appropriate time and promptly revise the standards according
to the findings. As revenue recognition is an important and widely applied standard,procedures for continuing improvement should be clearly established from the very start.

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Revenue and a customer’s credit risk (IASB Question 2, Survey Question 3)
In the comment letter dated October 2010, the CAC made the following comments:“The CAC opposes the exposure draft’s proposal that transaction price should reflect
customer credit risk if its effect on transaction price can be reasonably estimated. The saleof a good or service and associated customer credit risk are neither united nor inseparable.
In other words, upon sale of a good or service, an entity makes an independent decision as
to what extent it is willing to shoulder customer credit risk. The current practice ofshowing gross revenue and separately recognizing credit-related expenses depicts anentity’s decision-making process more faithfully. Two items of information, gross revenue
and credit expense, better facilitate the financial analysis of an entity and inter-company
comparison than just net revenue after deduction of expected credit loss”.
The CAC praises paragraphs 68 and 69 of the exposure draft, which stipulate showing
gross revenue rather than net, as a change that responds to our opinion. However, oursurvey showed mixed opinion with respect to: “The new exposure draft proposes showing
gross revenue followed by associated credit risks. The amount excludes financial cost butincludes the adjustment of ordinary credit risks in past years. Do you agree with theproposal?” Some 39% of the respondents answered ‘Yes’ while 30% replied ‘No. Credit
risk should be included in SG&A expenses’. The majority of CAC members hold the latterview to include credit risk amount in SG&A with reconciliation in the note when necessary
as this would depict decision making by corporations more faithfully. The CAC
respectfully asks the IASB to reconsider paragraphs 68 and 69 with regard to where topresent customer credit risks.
Variable consideration (IASB Question 3, Survey Question 6)
The survey also showed mixed results regarding the variable consideration as proposedin paragraphs 81 and 82. To the question “The exposure draft proposes that the cumulative
revenue an entity recognizes to date for a variable consideration should not exceed theamount to which the entity is reasonably assured to be entitled. Do you think the proposal
will enable you to adequately understand the amount of consideration?”, 45% answered‘Yes’ and 35% said ‘Cannot judge at this moment’.
The CAC thinks the proposal would make more accurate recording of consideration
possible, although sub paragraphs 87 (a) and (b) are abstract possibly causing confusion inapplication. Some opined that paragraphs 49 and 81 might prevent excess recognition ofrevenue but might not be effective in preventing inadequate revenue recognition.

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Onerous contracts (IASB Question 4, Survey Question 7)
Most of the survey respondents (90%) supported the exposure draft’s proposal on
onerous contracts. Those who wrote comments in support of the proposal mentioned that
stipulation in paragraph 87 is effectively the same as current provisioning and that bylimiting contracts only to long-term ones, preparer costs will not be significant.
A few CAC members raised a concern, however, that this limit to long-term contracts
might induce corporations to shorten contract terms, resulting in reduced comparability.
Annual disclosure (Survey Question 4)
The survey respondents showed continuing support for the annual disclosure proposal
as helpful for corporate analysis. In the October 2010 survey, 77% indicated support,followed by 68% support in the current survey.
The CAC highly evaluates improved quantitative disclosure proposed in the exposure
draft which will provide useful information for users. For example, ‘disaggregation ofrevenue’ (paragraphs 114-115) will provide detailed sources of revenue, ‘reconciliation ofcontract balances’ (117) will show the dynamics of outstanding orders, and ‘performanceobligations’ (118-121) will give details of existing orders. Qualitative disclosure will help
users understand different revenue recognition criteria used by corporations.
The CAC is aware that some preparers feel the proposed disclosure requirements are
too burdensome. However, it thinks these disclosures are so important for corporations
with significant outstanding long-term contract amounts that it is rather strange suchinformation has not been provided so far.
A few members, however, opined that under current contract and trade conventions inJapan, it is costly to gather information on some items, and that disclosure of quantitative
items should be limited to long-term contracts because of materiality. The CAC thinks that
useful information is different according to industry and business model. It also thinks therisk of important information being buried in boilerplate numbers and the risk of imposing
too much cost on preparers should be avoided. Hence, the CAC respectfully asks the IASB
to prepare clear guidance of materiality in regard to revenue recognition disclosure
requirements.
Interim disclosure (IASB Question 5, Survey Question 5)
In the survey, 35% mentioned that all five disclosures referred to in the exposure draft’s
question 5 should be required for interim reporting. Some 65%, however, said some items
could be omitted in interim statements. The CAC agrees with the majority of respondents
and thinks some items can be left out in interim reporting because some numbers will not4

make big differences in the short run and that preparer costs should be taken into
consideration.
Many survey respondents commented “Some information can be omitted in 1st and 3rdquarter reporting but should be included in the 2nd quarter”. Historical background to thisopinion is that Japan switched from half-year interim reporting to quarterly reporting only
a few years ago. Considering user benefits and preparer costs, it is reasonable todifferentiate disclosure requirements by having more information be disclosed in the 2ndquarter compared to 1st and 3rd quarters.
For those who replied that some information could be omitted in interim reports, thesurvey further asked what information could be left out. Some 66% said ‘reconciliation ofbalance of contract assets and liabilities’ (paragraph 117) and ‘reconciliation of the assets
recognized from the costs to obtain or fulfill a contract’ (128) can be omitted. And, 59%
said ‘analysis of the remaining performance obligations’ (119-121) was not necessary. On
the other hand, less than a majority replied ‘onerous contracts’ (122-123) and ‘thedisaggregation of revenue’ (114-115) could be omitted, 45% and 38%, respectively. Thisshows financial statement users need information that is directly relevant to profit and loss
analysis. The Board should fully take this into consideration in deciding which tables are tobe omitted in interim reporting.
In summary, the CAC thinks only material information need be disclosed in interimreports. To secure this, it should be clearly stipulated that such a criterion (significantchanges from annual reports) be applied to interim reporting. In other words, even if
outstanding contract amount were huge, it would not be shown in an interim report if thechange from the prior annual report was not significant. This clarification would mitigate
the feeling of burden shared by many preparers.
Other (Survey Question 8)
Some survey respondents said that they could not agree that revenue from multi-year
licensing be recognized when the customer obtained control of the rights as specified inparagraphs B33 to B38. These respondents thought licensing was similar to providing
services and therefore should be treated similarly.

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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

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APPENDIX

Results of SAAJ Survey on“Revenue from Contracts with Customers”
Background and methodology
The Securities Analysts Association of Japan (SAAJ) sponsored a study session on IASB’s
exposure draft “Revenue from contracts with customers”, inviting a lecturer from theAccounting Standards Board of Japan (ASBJ). Some 83 of our certified members
participated in the session held on 20 January. A questionnaire was subsequently sent toeach participant and 51 responded, making for a 61.4% response rate. The respondents
were also invited to make comments. The survey, although small in size, focused on acohort with the same background (certified members of the SAAJ) and same knowledge
level (participation in the study session). This focus and very high response rate gives
credibility to the reliability of the survey.
Survey questions and answers
Q1: General remarks
Do you think the exposure draft as a whole will improve revenue recognition standards?
A1(a) Yes.

51.0%(b) No.

15.7%(c) Cannot judge at this moment.

33.3%

Total

100.0%

Q2: Transferring control of a good or service over time (Question 1)
The original exposure draft of the IASB and FASB was criticized from the viewpoint that
guidance regarding practical application of the percent of completion method wasinadequate. Paragraphs 35 to 37 of the new exposure draft are intended to clarify suchapplication. Do you think this revision provides sufficient guidance regarding applicationof the percent of completion method?

7A2(a) Yes.

24.0%(b) No.

26.0%(c) Cannot judge at this moment.

50.0%

Total

100.0%

Q3: Revenue and credit risk (Question 2)
The original exposure draft proposed showing net revenue after deducting credit risks. We
disagreed with the proposal on the ground that selling goods and services and assuming
credit risks are two separate management decisions. The new exposure draft proposes
showing gross revenue followed by associated credit risks. The amount excludes financial
cost but includes the adjustment of ordinary credit risks in past years. Do you agree withthe proposal?
A3(a) Yes.

39.2%(b) No. (Credit risk should be included in SG&A expenses.)

29.5%(c) No. (Credit risks associated with current year sales should
be presented below the revenue line, while past year
adjustments should be included in SG&A expenses.)

19.6%(d) No. (Other reasons.)

3.9%(e) Cannot judge at this moment.

7.8%
Total

100.0%

Q4: Annual disclosure
The exposure draft requires disclosure of both quantitative and qualitative information forannual reports. Quantitative disclosure includes (1) the disaggregation of revenue, (2) areconciliation of contract assets and liabilities, (3) an analysis of remaining performanceobligations, (4) information regarding onerous performance obligations and liabilities, and(5) a reconciliation of assets recognized from the costs to obtain a contract. Qualitative
information includes an entity’s policy and procedures in recognizing performanceobligations. Do you think the disclosure requirements are useful for corporate analysis?

8A4(a) Yes.

68.0%(b) No.

14.0%(c) Cannot judge at this moment.

18.0%

Total

100.0%

Q5: Interim disclosure (Question 5)
For interim reporting, the same quantitative information requirements are applied whenmaterial. From the perspective of costs and benefits, is there any information that could beomitted in interim reporting?
A5(a) All information needed.

34.7%(b) Some information that could possibly be omitted.

65.3%

・The disaggregation of revenue.

37.5%

・A tabular reconciliation of movements in the aggregatebalance of contract assets and contract liabilities for thecurrent reporting period.

65.6%

Could
possibly
beomitted*

・An analysis of the entity’s remaining performanceobligations.
・ Information regarding onerous performanceobligations and tabular reconciliation of movements inthe corresponding onerous liabilities for the current
reporting period.
・A tabular reconciliation of the movement of assets
recognized from the costs to obtain or fulfill a contract
with a customer.
Total

59.4%
46.9%

65.6%
100.0%*Percentage figures indicate support from those answering (b).
Q6: Variable consideration (Question 3)
The exposure draft proposes that the cumulative revenue an entity recognizes to date for avariable consideration should not exceed the amount to which the entity is reasonably
assured to be entitled. Do you think the proposal will enable you to adequately understandthe amount of consideration?

9A6(a) Yes.

45.1%(b) No.

19.6%(c) Cannot judge at this moment.

35.3%

Total

100.0%

Q7: Onerous contracts (Question 4)
The exposure draft requires that an entity recognize liabilities and corresponding expenses
at the inception of an onerous contract to be satisfied over a period of greater than one year.
Do you agree with the proposal?
A7(a) Yes.

90.2%(b) No.

0.0%(c) Cannot judge at this moment.

9.8%

Total

100.0%

Q8: Others
If you have any opinions on the issues that are not covered in Questions 1 to 7 above,please write down your comments below.
A8
Available upon request.

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