EITF ABSTRACTS
Issue No. 00-24
Title: Revenue Recognition: Sales Arrangements That Include Specified-Price Trade-in
Rights
Date Discussed:
References:
September 20–21, 2000
FASB Statement No. 5, Accounting for Contingencies
FASB Statement No. 48, Revenue Recognition When Right of Return
Exists
FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of
FASB Statement No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities
FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities
FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
FASB Concepts Statement No. 5, Recognition and Measurement in
Financial Statements of Business Enterprises
FASB Concepts Statement No. 6, Elements of Financial Statements
AICPA Statement of Position 97-2, Software Revenue Recognition
AICPA Statement of Position 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions
AICPA Technical Practice Aids, Section 5100.01, "Equipment Sales Net
of Trade-Ins"
SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements
ISSUE
1.
Certain vendors offer specified-price trade-in arrangements on equipment for sale
that give customers the right to trade in that equipment toward the purchase of new
equipment at some point in the future. These programs are common in the aircraft and
heavy equipment markets. The trade-in right may be exercisable by the customer at a
specified point in time or during a specified period of time.
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2.
The trade-in rights may be offered at a specified price or the price may be indexed
to an industry standard. The scope of this Issue includes only trade-in rights with a price
that is specified at the time of delivery as a fixed amount at a specified point in time or as
a specified percentage of the original equipment sales price during a specified period of
time. Trade-in rights that provide the customer with the right to trade in equipment in the
future at the equipment's then-current fair value are not the focus of this Issue. Currently,
views are diverse about how to account for specified-price trade-in rights.
3.
The issue is how a vendor should account for a specified-price trade-in right in
connection with the sale of the underlying equipment, including its effect on revenue
recognition, from the date the equipment is sold to the date the trade-in right is exercised
or expires.
EITF DISCUSSION
4.
The Task Force discussed the types of transactions described in paragraph 1 of this
Issue and the various methods of accounting for them. A majority of the Task Force
members agreed with the view that if (a) the amount of credit that will be received upon
exercise of a specified-price trade-in right is equal to or less than the estimated fair value
of the equipment at the trade-in date (determined on the date of the sale of the equipment
subject to the specified-price trade-in right) and (b) the buyer is required to pay a
significant incremental amount in addition to the trade-in credit for the new equipment at
the trade-in date, then no revenue from the sale of the equipment should be allocated to
the trade-in right and no liability should be recognized for the trade-in right at the time of
the sale.
[Note:
The majority view has been nullified by Interpretation 45.
See
STATUS section.] However, if the seller subsequently determines that it is probable that
a loss will be incurred upon the buyer's exercise of the specified-price trade-in right, the
seller should record a liability pursuant to Statement 5. The Task Force requested that
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the FASB staff, together with the Working Group established to address Issue No. 00-21,
"Accounting for Multiple-Element Revenue Arrangements," further explore the nature of
and accounting for those transactions. [Note: See STATUS section.] Also, the Task
Force stated that the final accounting model must be reconciled with the requirements of
Statement 48. The Task Force was not asked to reach a consensus.
STATUS
5.
At the November 21, 2002 meeting, the Task Force agreed to discontinue further
discussion of this Issue, which relates to revenue recognition. This Issue was placed on
the EITF agenda prior to the Board agreeing to add to its agenda a major project on the
recognition of revenues and liabilities in financial statements. That project is intended to
result in a comprehensive revenue recognition standard with the objectives of (a)
eliminating the inconsistencies in the existing authoritative literature and accepted
practices, (b) filling the voids that have emerged in revenue recognition guidance, and (c)
providing guidance for addressing issues that arise in the future.
6.
Interpretation 45, which was issued in November 2002, requires a guarantor to
recognize, at inception of the guarantee, a liability for the obligation undertaken in
issuing the guarantee. The Interpretation also elaborates on the disclosures to be made by
a guarantor.
7.
The scope of the Interpretation includes “contracts that contingently require the
guarantor to make payments (either in cash or in other assets, services, shares of its stock,
or financial instruments) to the guaranteed party based on changes in an underlying that
is related to an asset or liability of the guaranteed party.” If the buyer exercised its tradein right (functionally an option written by the vendor), the vendor would make a payment
of nonfinancial assets in exchange for the original asset. The customer would typically
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only exercise that trade-in right if the fair market value of the asset decreased below the
price specified in the trade-in right. Thus, the vendor can be seen as a guarantor that will
have to contingently issue credits based on changes in the underlying, which is the fair
market value of the original asset.
8.
Since the specified-price trade-in right qualifies as a guarantee under the
Interpretation, it should be initially recognized and initially measured at fair value. The
majority view would not require recognition of a liability if the two conditions listed
above are met and is, therefore, inconsistent with the fair value measurement objective of
the Interpretation. As a result, the majority view is nullified by Interpretation 45.
9.
If the vendor does not recognize revenue in the arrangement because of the
existence of the trade-in right (that is, the guarantee), then the guarantee would qualify
for the scope exception in paragraph 6(f) of Interpretation 45.
10.
No further EITF discussion is planned.
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