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The financial reporting workshop 6 th FEBRUARY 2015 LAICO REGENCY, Nairobi REVENUE RECOGNITION (IAS 18). Content. Introduction Revenue Sources Measurement Revenue recognition Disclosures IFRS 15. 1. Introduction. Definition of revenue :
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The financial reporting workshop 6th FEBRUARY 2015 LAICO REGENCY, Nairobi REVENUE RECOGNITION (IAS 18)
Content • Introduction • Revenue Sources • Measurement • Revenue recognition • Disclosures • IFRS 15
1. Introduction Definition of revenue: Revenue is the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an enterprise.
2. Revenue Sources Three main Sources: • Sale of goods, • Provision or rendering of services, • Letting out the firms assets and earning interest, royalties, and dividends Revenue does not comprise gains on the sale of property plant and equipment (PPE) – unless the PPE items were leased out under an operating lease
3. Revenue Measurement 1. Revenue is measured at the fair value of the consideration received or receivable
3. Revenue Measurement 2. If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate
3. Revenue Recognition -Goods Revenue arising from the sale of goods is recognized when all of the following criteria have been satisfied: 1. The significant risks and rewards of ownership are transferred
3. Revenue Recognition -Goods 2.Seller does not have continuing managerial involvementto the degree usually associated with ownership nor effective control over the goods sold
3. Revenue Recognition -Goods 3. The amount of revenue can be measured reliably. 4. It is probable that the economic benefits associated with the transaction will flow to the seller
3. Revenue Recognition -Goods 5.The costs incurred or to be incurred in respect of the transaction can be measured reliably.
3. Revenue Recognition -Services When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognized by reference to the stage of completion of the transaction at the end of the reporting period.
3. Revenue Recognition -Services The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: • (a) the amount of revenue can be measured reliably;
3. Revenue Recognition -Services (b) it is probable that the economic benefits associated with the transaction will flow to the entity;
3. Revenue Recognition -Services (c) the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
3. Revenue Recognition -Services (d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably
3. Revenue Recognition –Div,Int & R For interest, royalties and dividends, if it is probable that the economic benefits will flow to the enterprise and the amount of revenue can be measured reliably, revenue should be recognisedas follows:
3. Revenue Recognition –Div,Int & R Interest: on a time-proportionate basis that takes into account the effective yield
3. Revenue Recognition –Div,Int & R Royalties: on an accruals basis in accordance with the substance of the relevant agreement
3. Revenue Recognition –Div,Int & Roy Dividends: when the shareholder's right to receive payment is established.
4. Disclosures 1. The accounting policy adopted for recognizing each type of revenue 2. For each of the categories, disclose the amount of revenue from exchanges of goods or services
4. Disclosures 3. The amount of each significant category of revenue, including: - Sale of goods - Rendering of services - Interest - Royalties - Dividends.
5. IFRS 15 IFRS 15 – Revenue from contracts with customers.
4. IFRS 15 IFRS 15 is effective from year 2017, is an improvement of IAS 18. The standard replaces the following:
5. IFRS 15 • IAS 11, Construction Contracts. • IAS 18, Revenue • IFRIC 13, Customer Loyalty Programs • IFRC 15, Agreements for the Construction of Real Estate • IFRC 18, Transfer of Assets from Customers • SIC 31, Revenue-Barter Transactions Involving Advertising Services
4. IFRS 15 Applies to all contracts with customers, except: • Lease contracts (refer to IAS 17) • Insurance contracts (refer to IFRS 4) • Financial instruments and other contractual rights or obligations (refer to IFRS 9/IAS 39, IFRS 10, IFRS 11, IAS 27, and IAS 28) • Certain non-monetary exchanges.
4. IFRS 15 Vs IAS 18 Definition of revenue: According to IAS 18 revenue mainly arises from, the sale of goods; the rendering of services; and the use by others of entity assets yielding interest, royalties and dividends. IFRS 15 uses a different approach, which simply explains that revenue arises from contracts with customers.
4. IFRS 15 Vs IAS 18 Revenue measurement: The two standards are substantially in agreement only that IFRS 15 talks of contract price.
4. IFRS 15 Vs IAS 18 Revenue Recognition: Here, the two standards differ remarkably. For IAS 18 we have discussed previously. For IFRS 15, it talks about a FIVE step model to be followed:
4. IFRS 15 Vs IAS 18 1. The identification of the contract with the customer. 2. The identification of the separate performance obligations in the contract.
4. IFRS 15 Vs IAS 18 3. The entity to determine the transaction price, which is the amount of consideration that an entity expects to be entitled to in exchange for the promised goods or services.
4. IFRS 15 Vs IAS 18 4. The allocation of the transaction price to the separate performance obligations. 5.Revenue to be recognized as each performance obligation is satisfied
4. IFRS 15 Vs IAS 18 IFRS 15 has a separate section for presentation, which is not expressed in IAS 18.
4. IFRS 15 Vs IAS 18 Statement of financial position 1. Contract assets and contract liabilities from customers are presented separately 2. Unconditional rights to consideration are presented separately as a receivable.
4. IFRS 15 Vs IAS 18 Statement of profit or loss and other comprehensive income 1. Line items (revenue and impairment) are presented separately in accordance with the requirements of 2. IAS 1 Presentation of Financial Statements.
4. IFRS 15 Vs IAS 18 Disclosures in IFRS 15 are improved 1. Contracts with customers (information regarding): • Disaggregation of revenue • Contract assets and contract liabilities • Performance obligations (incl. remaining).
4. IFRS 15 Vs IAS 18 2. Significant judgments: • Performance obligation satisfaction • Transaction price (incl. allocation) • Determining contract costs capitalized.
4. IFRS 15 Vs IAS 18 3. Use of practical expedients (related to): • Significant financing component (12 month) • Contract costs (12 month amortization).
4. IFRS 15 Vs IAS 18 4. Contract costs capitalized: • Method of amortization • Closing balances by asset type • Amortization and impairment.
4. IFRS 15 Vs IAS 18 IFRS 15 also has an application guidance, like the appendix to IAS 18. The guidance considers the following:
4. IFRS 15 Vs IAS 18 • Contract costs • Sale with a right of return • Warranties • Principal versus agent considerations • Customer options for additional goods or services • Customers’ unexercised rights
4. IFRS 15 Vs IAS 18 • Non-refundable upfront fees (and some related costs) • Licensing • Repurchase agreements • Consignment arrangements • Bill-and-hold arrangements • Customer acceptance.
