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Revenue Recognition*. 6. Construction contracts. 1. IAS 11. Dividends, royalties. Sale of goods. IAS 18, 28, 39. IAS 18. 5. IAS 18, 39. 2. IAS 18. SIC 31. IAS 18. Interest. Rendering of services. 4. 3. Multiple elements. Revenue Recognition. Session outline.

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Presentation Transcript
slide2

6

Construction contracts

1

IAS 11

Dividends, royalties

Sale of goods

IAS 18,

28, 39

IAS 18

5

IAS 18,

39

2

IAS 18

SIC 31

IAS 18

Interest

Rendering of services

4

3

Multiple elements

Revenue Recognition

Session outline

Session outline:

  • Introduction
  • Objective
  • Scope
  • Identification of transactions
  • Timing of recognition
  • Measurement of Revenue
  • Sale of goods
  • Rendering of services
  • Interests, royalties and dividends
  • Disclosures
slide3

Revenue Recognition

What is revenue?

Revenue is

  • the gross inflow of economic benefits during the period
  • arising in the course of the ordinary activities of an entity
  • when those inflows result in increases in equity,
  • other than increases relating to contributions from equity participants.
slide4

Revenue Recognition

Exceptions

does NOT apply to

  • leases agreements ;
  • dividends from investments accounted for under the equity method ( IAS 28 Investments in Associates);
  • insurance contracts within the scope of IFRS 4 Insurance Contracts;
  • changes in the fair value of financial assets and financial liabilities or their disposal (IAS 39 Financial Instruments: Recognition and Measurement);
  • changes in the value of other current assets;
  • initial recognition and from changes in the fair value of biological assets related to agricultural activity ( IAS 41 Agriculture);
  • initial recognition of agricultural produce ( IAS 41); and
  • the extraction of mineral ores
  • construction contracts (IAS 11)
slide5

Revenue Recognition

Key issues in Revenue Recogniton

  • Identification of the Transaction
  • Timing of Recognition
  • Measurement of Revenue
  • Other issues-Gross vs Net
slide6

Revenue Recognition

Key issues in Revenue Recogniton

Identification of the Transaction

Timing of Recognition

Measurement of Revenue

Other issues-Gross vs Net

slide7

Revenue Recognition

Identification of the transaction

The recognition criteria are usually applied separately to each transaction however in certain circumstances it is necessary to

Apply the recognition criteria to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole.

Apply the recognition criteria to the separately identifiable components of a single transaction in to reflect the substance of the transaction.

slide8

Revenue Recognition

Key issues in Revenue Recogniton

Identification of the Transaction

Timing of Recognition

Measurement of Revenue

Other issues-Gross vs Net

slide9

Construction contracts

6

1

Risks/rewards

transfer

Royalties, dividends

Sale of goods

No continuing

involvement

Measurable

revenue

Probable

benefits inflow

5

Measurable costs incurred

Measurable costs

to complete

2

Interest

Rendering of services

4

3

Multiple elements

Revenue Recognition

Timing of Recognition Sale of goods

SALE OF GOODS:

  • Risks/rewards transfer
  • No continuing managerial involvement
  • Probable inflow of benefits
  • Revenue measurable reliably
  • Costs measurable reliably
slide10

1

2

6

3

5

4

Revenue Recognition

Timing of recognition Services

Sale of goods

SERVICES:

  • Percentage of completion
  • Probable inflow of benefits
  • The following is measurable reliably:
    • Stage of completion
    • Revenue
    • Costs incurred
    • Costs to complete

Construction contracts

Rendering of services

Measurable

revenue

Probable

benefits inflow

Measurable costs incurred

Measurable costs

to complete

Measurable

stage of completion

Dividends, royalties

Multiple elements

Interest

slide11

2

3

1

4

6

5

Revenue Recognition

Timing of recognition Multiple elements

Rendering of services

Multiple elements

IAS 18 para 13:

In certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction to reflect substance.

  • Identifying components of a
  • transaction to reflect substance
  • Combining if commercial effect
  • cannot otherwise be understood
  • (linked transactions)

Sale of goods

Multiple elements

Substance

Construction contracts

Interest

Dividends, royalties

slide12

To assess the transaction's substance, view from customers’ perspective

customer perceives there to be a number of elements to the transaction,.

customer views the purchase as one product

Customer’s Perspective

Apply recognition criteria to transaction as whole

Apply recognition

criteria to each element separately.

Revenue Recognition

Multiple Elements transactions

1. Separation of Elements

  • A transaction may contain separately identifiable components that should be accounted for separately.
  • Apply the revenue recognition criteria to each separately identifiable component of a single transaction to reflect the transaction's substance.
slide13

Revenue Recognition

Multiple Elements transactions

2. Allocation of Consideration

  • Revenue in respect of each separable component of a transaction = its fair value.
  • Fair value = price that is regularly charged for an item when sold separately

Total revenue > the sum of the fair value of the separable elements

Total revenue < the sum of the fair value of the separable elements

additional revenue attributable to the activity of managing the two elements of the contract

Difference = discount

discount allocated between the separable components using:1. relative fair values 2. cost plus a reasonable margin

additional revenue recognised when full contract substantially complete

If overall loss on contract recognise immediately

slide14

2

3

1

4

6

5

Revenue Recognition

Timing of recognition Multiple elements

Rendering of services

The company sells computers. Fair values of components are:

CPU € 700

Monitor € 300

Keyboard € 100

€ 1,100

The price of PC

as a whole € 1,000

The company sold the whole PC but delivered only the CPU by year-end.

Sale of goods

Multiple elements

Substance

Construction contracts

Interest

Dividends, royalties

slide15

Revenue Recognition

Multiple elements

Analysis:

The company’s receivable (total price) € 1,000

If monitor and keyboard remains undelivered,

the customer does not have to pay € 300 + € 100 = (€ 400)

Amount receivable for the delivered CPU: € 600

Portion of the total price of the PC normally allocable

to the CPU is € 1,000 x € 700 / € 1,100 = € 636

Conclusion: Recognise revenue of € 600 on delivery of the CPU.

slide16

Revenue Recognition

Multiple elements Classification in the P&L

Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities …..

Multiple element transactions:

Dr: Cash 100

Cr: Revenue 95

Cr: Liabilities 5

Free gifts, marketing costs etc.

Dr: Cash 100

Cr: Revenue 100

Dr: Cost of sales 5

Cr: Liabilities 5

slide17

Revenue Recognition

Exercise Multiple elements

Practical examples:

  • ABC TVs – sale of big screen TVs and subsequent installation
  • Southern telecom – free DVD player
  • Retail vouchers
slide18

3

4

2

5

1

6

Revenue Recognition

Timing of recognition Interests

INTEREST:

  • Effective interest method
  • Origination fees
  • Commitment fees

Multiple elements

Rendering of services

Interest

IAS 39 effective interest method

Right to payment

established

Sale of goods

Royalties,

dividends

Construction contracts

slide19

4

5

3

6

2

1

Revenue Recognition

Timing of recognition Royalties

ROYALTIES:

  • On accruals basis based on substance of the agreement
  • Licencing – upfront or defer?
  • Contingencies

DIVIDENDS:

  • When the right to receive payment is established
  • Revenue or adjust the cost of the investment

Interest

Multiple elements

Dividends, royalties

Substance

Right to payment

established

Rendering of services

Construction contracts

Sale of goods

slide20

Revenue Recognition

Timing of Recognition - Other issues

1. Risks/Rewards Transfer

  • Mostly, the transfer of the risks and rewards of ownership coincides with the transfer of the legal title or the passing of possession to the buyer.
  • In other cases, the transfer of risks and rewards of ownership occurs at a different time from the transfer of legal title or the passing of possession
slide21

Revenue Recognition

Timing of Recognition – Other issues

C. If the entity retains significant risks of ownership, the transaction is NOT a sale and revenue is not recognised.

  • Examples of situations in which the entity may retain the significant risks and rewards of ownership are
  • the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions; 
  • the receipt of the revenue from a particular sale is contingent on the derivation of revenue by the buyer from its sale of the goods; 
  • the goods are shipped subject to installation and the installation is a significant part of the contract which has not yet been completed by the entity; and  
  • the buyer has the right to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return.

Transaction Not a Sale;

Revenue Not Recognised

slide22

Revenue Recognition

Timing of Recognition – Other issues

D. If an entity retains only an insignificant risk of ownership, the transaction is a sale and revenue is recognised.

For e.g, a seller may retain the legal title to the goods solely to protect the collectibility of the amount due. In such a case, if the entity has transferred the significant risks and rewards of ownership, the transaction is a sale and revenue is recognised.

slide23

Revenue Recognition

Timing of Recognition

2. No Continuing Managerial involvement

Indicators of continuing managerial involvement or retention of effective control might include:

  • Control over future price of the item. 
  • Responsible for the management of the goods subsequent to the sale.
  • Transaction allows the buyer to compel the seller, or give an option to the seller, to repurchase the item. 
  • Guarantees the return of the buyer’s investment or a return on that investment for a limited or extended period.

Continuing Managerial Involvement Exists!

No Sale!

No Revenue!

slide24

Revenue Recognition

Timing of Recognition

2. No Continuing Managerial involvement

Example:

Entity A sells a racehorse to entity B. As part of the arrangement entity A continues to house and train the horse, determine which races the horse will enter and set stud fees for the horse. Should entity A recognise revenue on the sale of the horse to entity B?

Ans:

  If a proper training agreement is in place that provides a market fee for the services that entity A provides and any winnings or fees achieved by the horse going to the buyer, it may be appropriate to recognise revenue on the sale. However, it would also be necessary to consider whether entity A had given any guarantees or incurred other obligations that may indicate it had not disposed of the significant risks and rewards of ownership of the horse

slide25

Revenue Recognition

Timing of Recognition – Other issues

3. Revenue measurable reliably

An entity can make reliable estimates after it has agreed with the other parties to the transaction on the following: 

  • each party's enforceable rights regarding the service to be provided and received by the parties; 
  • the consideration to be exchanged; and
  • the manner and terms of settlement.
  • The entity reviews and, when necessary, revises the estimates of revenue as the service is performed. The need for such revisions does not necessarily indicate that the outcome of the transaction cannot be estimated reliably

The entity reviews and, when necessary, revises the estimates of revenue as the service is performed. The need for such revisions does not necessarily indicate that the outcome of the transaction cannot be estimated reliably

slide26

Revenue Recognition

Timing of Recognition – Other issues

4. Costs measurable reliably

Goods manufactured for sale

All manufacturing costs

IAS 2 Inventories

Goods purchased for resale

All purchase costs

Pre-production cost segregated

from manufacturing cost

New entity/ product

IAS 11 Construction Contracts

Contracts for services

Price paid or production cost

slide27

Revenue Recognition

Timing of Recognition – Other issues

Matching Concept

Revenue and expenses that relate to the same transaction or other event are recognised simultaneously; this process is commonly referred to as the matching of revenues and expenses.

E,.g Expenses, including warranties and other costs to be incurred after the sale can normally be measured reliably when the other conditions for the recognition of revenue have been satisfied. Hence cost should be provided for at the time the sale is recognised

If expense not measurable reliably - revenue not recognised

any consideration already received - recognised as a liability.

slide28

Revenue Recognition

Timing of Recognition – Other issues

5. Probable inflow of benefits

  • Revenue recognised only when it is probable that the economic benefits associated with the transaction will flow to the entity.
  • This may not be probable until the consideration is received or an uncertainty is removed.

For e.g. it may be uncertain that a foreign governmental authority will grant permission to remit the consideration from a sale in a foreign country. When the permission is granted, the uncertainty is removed and revenue is recognised.

  • When an uncertainty arises -the uncollectible amount included in revenue
    • recognised as an expense,
    • not an adjustment of revenue already recognised.
slide29

Revenue Recognition

Key issues in Revenue Recogniton

Identification of the Transaction

Timing of Recognition

Measurement of Revenue

Other issues-Gross vs Net

slide30

Revenue Recognition

Measurement of revenue

Revenue shall be measured at the fair value* of the consideration received or

receivable.

  • determined by agreement between the entity and the buyer or user of the asset;
  • after any trade discounts and volume rebates;

*Fair Value is defined as

  • the amount for which an assets could be exchanged or a liability settled
  • between knowledgeable willing parties,
  • in an arm’s length transaction.
slide31

Revenue Recognition

Measurement of revenue-I

Consideration in the form of cash or cash equivalents

amount of cash or cash equivalents received or receivable.

Revenue =

Other issues:

  • Whether a principal/agency relationship exists.

If an entity is acting as an agent in a relationship, revenue should only be recognised to the extent that it represents payment for acting as an agent  

  • The existence of trade discounts, volume rebates and other incentives,which should be taken into account in measuring the fair value of the consideration received. 
  •  Whether the transaction forms part of a multiple element transaction. Where this is the case, the total consideration should be allocated to each element of the transaction
slide32

Revenue Recognition

Measurement of revenue-II

Consideration is deferred

Revenue =

Both a sale and financing transaction.

Discounted fair value of consideration*

* The discount rate is the more clearly determinable of the following:

  • the prevailing rate for a similar instrument of an issuer with a similar credit rating; or 
  • a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services. (refer exercise 1)

The difference between the fair value and the nominal amount of the consideration is recognised as interest revenue (as per IAS 39)

slide33

Revenue Recognition

Key issues in Revenue Recogniton

Identification of the Transaction

Timing of Recognition

Measurement of Revenue

Other issues-Gross vs Net

slide34

Revenue Recognition

Agency Arrangements

  • Principal or Agent ?
  • expectation by the customer that the entity is acting as the primary obligor in the arrangement.  
  • freedom to set the selling price with the customer.
  • assumes inventory risk
  • performs part of the services provided or modifies the goods supplied. 
  • assumes the credit risk
  • discretion in selecting suppliers

Principal!

Gross Reporting!

If these conditions not satisfied – NET REPORTING !

Refer exercise 2

slide35

Revenue Recognition

Agency Arrangements

  • Concession agreements
  • Only the commission or rent receivable from the concessionaire constitutes a source of revenue for the store and would be recognised as revenue.
  • Shipping and handling charges
  • where there is no profit element in the insurance and freight charged to the customer
  • i.e. these charges are merely the reimbursement of expenses
  • any consideration attributable to these elements should be netted off against carriage costs
  • Sales taxes
  • sales taxes that are collected on behalf of a government body
  • excluded from the revenue recognised.
  • but analyse if tax is production tax
  • Advertising agency commissions
  • recognised when the service is completed.
  • media commissions when the advertisement appears before the public
  • production commissions according to the stage of completion of the roject.
slide36

Revenue Recognition

Agency Arrangements

  • Insurance agency commissions
  • No further service required during the life of the policy
  • Recognised on the effective date of commencement or renewal of the related policies
  • Further services required
    • the commission or part thereof is deferred and recognised as revenue over the period during which the policy is in force.
    • part or all of the commission is deferred depending on whether separate fair values can be ascertained for the initial and ongoing services
  • Consideration given by a vendor to a customer
  • Cash consideration given by a vendor to a customer is a reduction of the revenue earned from the customer
  • (refer exercise 3)
slide37

Revenue Recognition

Sale of Goods-Some specific issues.

slide38

Revenue Recognition

Bill and Hold Sales

Revenue recognised when

  • all performance conditions satisfied, including delivery of the goods to the customer.
  • when there is substantive performance under the contract.
  • not recognised when there is only an intention to acquire or manufacture the goods in time for delayed delivery. .

Refer exercise 4

slide39

Revenue Recognition

Goods shipped subject to conditions

  • Installation and inspection. 

recognised when the buyer accepts delivery, and installation and inspection are complete.

  • On approval when the buyer has negotiated a limited right of return-

If there is uncertainty about the possibility of return, revenue is recognised when the shipment has been formally accepted by the buyer or the goods have been delivered and the time period for rejection has elapsed. 

  • Consignment sales-
  • recognised by the shipper when the goods are sold by the recipient to a third party.  
  • Cash on delivery sales.

recognised when delivery is made and cash is received by the seller or its agent

slide40

Revenue Recognition

Warranties

Initial warranty

  • recognise the full consideration if warranty
    • not a separate element and
    • represents an insignificant part of the transaction,
    • the seller has completed substantially all the required performance
  • expected future cost relating to the warranty
    • not a reduction of revenue
    • but a cost of sale,
  • costs of warranties determined at the time of the sale-make a provision for warranty costs
  • costs cannot be measured reliably - revenue recognised when the warranty period expires

cost can be measured reliably

  • Case study A manufacturer of televisions sells them to retailers for C300 with a 1 year warranty. The manufacturer does not sell the televisions without this warranty, nor does any other manufacturer. Claims are made on one in every 100 televisions sold, avg. repairs cost C100. 
    • Warranty not separable from the sale of the television.
    • Recognition criteria are applied to the transaction as a whole.
    • Completed substantially all the required performance,
    • Retains insignificant inventory risk

Revenue = C300

Provision against cost of sales = C1 (being C100 for 1 in 100 sales)

slide41

Revenue Recognition

Warranties

Extended warranty

  • The revenue from the sale of the extended warranty should be deferred and recognised over the period covered by the warranty,
  • No costs should be accrued at the inception of the extended warranty agreement

Case study

Entity A sells electrical goods with 12 month warranty. Customers have option to purchase extended warranty to cover years 2 to 5.The sales price of the extended warranty is C100 and entity A typically receives valid warranty claims from 4% of customers during the extended warranty period. The average cost of repairing or replacing the goods under the warranty is C600 per valid claim.

Ans: extended warranty hence,

  • defer the revenue
  • recognise it on a straight-line basis over years 2 to 5,
  • costs charged to cost of sales as incurred
  • no a provision for the expected costs
  • expected future cost should not exceed unamortised deferred revenue.
  • provision = future warranty costs - unamortised warranty revenue
slide42

Revenue Recognition

Sale of Property

Following factors are to be considered

  • Recognised when legal title passes to the buyer.
  • Recognise revenue immediately if
    • Transfer of risks and rewards
    • no further substantial acts
  • If significant acts after the transfer of the equitable and/or legal title,
  • Revenue recognised as the acts are performed.
  • If there is a degree of continuing involvement
  • the nature and extent of continuing involvement determines accounting.
  • the means of payment and buyer's commitment to complete payment.

For example, when the aggregate of the payments received, including the buyer's initial down payment, or

continuing payments by the buyer, provide insufficient evidence of the buyer's commitment to complete

payment, revenue is recognised only to the extent cash is received.

(Refer exercise 5)

slide43

Revenue Recognition

Sale of Software

Following points have to be considered

  • physical delivery of the software - less indicative of when a sale should be recognised
  • recognition delayed till acceptance by buyer
  • depends on type of software

Recognise revenue on delivery

Standard off the shelf

Customised software

Percentage of completion method

  • subject to installation

upon the buyer's acceptance of delivery

recognition after >installation >Inspection >customer acceptance

Installation process is simple

Process is substantial, Risk of non-acceptance

slide44

Revenue Recognition

Sale of Software

Following points have to be considered

  • physical delivery of the software - less indicative of when a sale should be recognised
  • recognition delayed till acceptance by buyer
  • depends on type of software
slide45

Revenue Recognition

Rendering of Services-Some specific issues.

slide46

Revenue Recognition

Rendering of services

Outcome of a transaction estimated reliably

Stage of completion method

  • Outcome be estimated reliably if:
  • revenue measured reliably;
  • probable that economic benefits flow to the entity;
  • the stage of completion measured reliably;
  • and 
  • the costs incurred for the transaction and the costs to complete the transaction can be measured reliably
slide47

Revenue Recognition

Rendering of services

Outcome cannot be estimated reliably

revenue recognised = recoverable expenses .

During the early stages of a transaction, it is often the case that the outcome of the transaction cannot be estimated reliably.

Is it probable that the entity will recover the transaction costs incurred?

NO

YES

  • Revenue is recognised only to the extent of costs incurred that are expected to be recoverable.
  • No profit is recognised.
  • Revenue is not recognised
  • The costs incurred are recognised as an expense.

When the uncertainties that prevented reliable estimation no longer exist, revenue is recognised

slide48

Revenue Recognition

Rendering of services

  • Measurement of Revenue
  • - by “Percentage of Completion method” depending on nature of transaction ,methods may include
  • surveys of work performed;  
  • services performed to date as a percentage of total services to be performed; or  
  • the proportion that costs incurred to date bear to the estimated total costs of the transaction. Only costs that reflect services performed to date are included in costs incurred to date. Only costs that reflect services performed or to be performed are included in the estimated total costs of the transaction. 
  • Progress payments and advances received from customers often do not reflect the services performed.
slide49

Revenue Recognition

Rendering of services

  • Treatment of certain specific services
  • Performance over Time
    • services are performed by an indeterminate number of acts
    • over a specified period of time,
  • Revenue is recognised on a straight-line basis unless a better method represents the stage of completion.
  • Contracts containing significant acts
  • recognised when significant act is executed.
  • Refer exercise 7
slide50

Revenue Recognition

Rendering of services

  • Contracts with milestone payments-
  • payment of cash upon the achievement of certain ‘milestones’ identified in the contract.
  • Accounting is generally very complex. Following points need to be considered
    • The reasonableness of the payments compared to the effort, time and cost to achieve the milestones.. 
    • The nature of royalty or licence agreements relating to the product being developed..
      • The existence of any cancellation clauses..
    • The risks associated with achievement of milestones.
    • Any obligations that must be completed to receive payment under the contract or the existence of penalties for failure to deliver.
  • Refer example 8
slide51

Revenue Recognition

Rendering of services

  • Inception/membership fees
  • Covers membership, or joining only or if there is a separate annual subscription, recognised when there is no significant uncertainty as to its collectibility.
  • If the joining or membership fee entitles the member to services or products during the membership period, or to purchase goods or services at lower prices - recognised on a basis that reflects the timing, nature and value of the benefits provided
  • Subscriptions
  • Recognised on a straight-line basis over the period when the items are despatched,
  • Admission fees
  • Admission fees for special events are recognised when the event takes place.
  • Tution fees
  • Recognised as revenue over the period of instruction.
slide52

Revenue Recognition

Interests, Royalties and Dividends-Some specific issues.

slide53

Revenue Recognition

Interests, royalties and dividends

Revenue arising form use by others of entity’s asset yielding interests royalties and dividends shall be recognised

when

on the following basis:

it is probable that the economic benefits associated with the transaction will flow to the entity.

the amount of the revenue can be measured reliably.

AND

Interests

using the effective interest method as set out in IAS 39.

on an accrual basis in accordance with the substance of the relevant agreement.

Royalties

when the shareholder's right to receive payment is established

Dividends

slide54

Revenue Recognition

Licensing fees and Royalties

  • Fees and royalties paid for the use of an entity's assets are normally recognised in accordance with the substance of the agreement. This may be on a straight-line basis over the life of the agreement.
  • e.g., when a licensee has the right to use certain technology for a specified period of time. 
  • An assignment of rights for a fixed fee or non-refundable guarantee under a non cancellable contract which permits the licensee to exploit those rights freely and the licensor has no remaining obligations to perform is, in substance, a sale.- Revenue is recognised at the time of sale.
  • e.g. a licensing agreement for the use of software when the licensor has no obligations subsequent to delivery.
  • whether or not a license fee or royalty will be received is contingent on the occurrence of a future event. Revenue is recognised only when it is probable that the fee or royalty will be received, which is normally when the event has occurred
slide55

Revenue Recognition

Franchisee Fees

  • Recognised on a basis that reflects the purpose for which they were charged
  • Revenue from the supply of assets- recognised when the items are delivered or title passes.
  • If charged for the use of continuing rights recognised as the service is provided or the rights are used.
  • Agreement to supply equipment, inventory or other assets at a price lower price - part of the initial franchise fee should be deferred
  • deferred franchise fee = estimated costs - price charged to the franchisee - reasonable profit .
  • deferred fees recognised over the period the goods are to be provided.
  • The balance of the initial fee should be recognised when performance of the initial services and other obligations has been substantially accomplished.
slide56

Revenue Recognition

Franchisee Fees

  • If there is no separate fee for the supply of continuing services after the initial fee or if the separate fee is not sufficient to cover the cost of providing any subsequent services together with a reasonable profit, then part of the initial fee should also be deferred and recognised as the subsequent services are provided.
  • if the initial fee is collectable over an extended period and there is significant uncertainty as to whether it will be collected in full, revenue should be recognised as collection of the fee is made
slide57

Revenue Recognition

Franchisee Fees

  • Treatment of financial services depends upon type of fees:
  • Fees that are an integral part of the effective interest rate
  • Fees earned as services are provided
  • Fees earned upon the execution of a significant act
  • The substance of transactions with the legal form of a lease
slide58

Revenue Recognition

Capacity Transaction

  • Network-based industries, such as telecommunications and electricity,
  • sell or purchase network capacity for consideration.
  • For example, a telecommunications entity may sell excess capacity on its trans-Atlantic cables. The entity would probably retain ownership of the network assets, but would convey an indefeasible right of use (usually referred to as an IRU) to the buyer for an agreed period of time
  • sell capacity to another party in exchange for receiving capacity on that other party’s network
  • If no valid commercial purpose, they are ‘hollow swaps’  or ‘round-tripping’.
  • SIC 31 applied as follows
  • Example Entity A has network capacity on a route from London to Frankfurt, but it needs to increase its capacity between London and New York. Entity B, on the other hand, has capacity between London and New York, but needs to increase its capacity between London and Frankfurt. Entity A agrees to grant a 20-year IRU to entity B over the route from London to Frankfurt in consideration for a one-off payment of C10m. In addition, entity B agrees to grant to entity A an IRU of equivalent term over the route from London to New York, also for a one-off payment of C10m. Entity A and entity B should not record revenue or costs in respect of the capacity exchanged. The operators have exchanged services that are similar in nature, duration and amount. The fair value of the services exchanged is similar. No revenue has been generated from this exchange.
slide59

Revenue Recognition

Measurement of revenue- Barter transactions

Goods or services are exchanged or swapped for goods or services which are of a similar nature and value?

YES

NO

NOT a transaction which generates revenue.

a transaction which generates revenue.

Can fair value of goods and services received be measured reliably?

NO

YES

the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.

revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred.

slide60

Revenue Recognition

Barter transaction for advertising – SIC 31

  • SIC 31 then states that the seller can only reliably measure the fair value of advertising services it provides in the exchange by reference to non-barter transactions. For such evidence to be sufficient for reliable measurement the non-barter transactions must:
  • Involve advertising similar to the advertising in the barter transaction.  
  • Occur frequently.  
  • Represent a predominant number of transactions and amount when compared to all transactions to provide advertising that is similar to the advertising in the barter transaction. 
  • Involve cash and/or another form of consideration (for example, marketable securities, non-monetary assets and other services) that has a fair value that is reliably measurable. 
  • Not involve the same third party as in the barter transaction.
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Revenue Recognition

Customer Loyalty Programmes- IFRIC 13

  • Customer loyalty programmes’, which, deals with ‘point schemes’ or‘ award credits'.
  • Such as
  • points earned through the purchase of goods or services can only be redeemed for goods and services provided by the issuing entity.
  • points earned through the purchase of goods or services cannot be redeemed for goods or services sold by the issuing entity.
  • points earned through the purchase of goods or services can be redeemed either at the issuing entity or at other entities that participate in the loyalty programme.
  • Examples are airlines that offer 'free' air miles and supermarkets that offer loyalty cards that accumulate points that can then be used to reduce the cost of future purchases or may sometimes be redeemable for cash
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Revenue Recognition

Customer Loyalty Programmes-IFRIC 13

Historically

IFRIC 13

Adjustment to Revenue

Marketing expense

The fair value of the consideration received or receivable in respect of the initial sale is allocated between the award credits and the other components of the sale.. The fair value of an individual award credit may be estimated using the discount that the customer would obtain when redeeming the incentive for goods or services. Some customers will not redeem some or all of their award credits. The interpretation requires the fair value of a population of award credits also to take into consideration the proportion of incentives expected to be redeemed.

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Revenue Recognition

Customer Loyalty Programmes

  • The fair value of a voucher issued as a part of sales transacton is
  • determined based on the fair value to the holder, not the cost of redemption to the issuer.
  • estimated by reference to the discount* that the customer would obtain when redeeming the voucher for goods or services.
  • The nominal value of this discount would be reduced to take into account:
  • discount the customer obtains when redeeming the voucher compared to the discount that could be obtained by customers who do not redeem vouchers.  
  • proportion of vouchers expected to be redeemed
  • Refer to example 9
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Revenue Recognition

Disclosures

An entity shall disclose:

the accounting policies adopted for recognition of revenue.

methods adopted to determine the stage of completion of transactions in rendering of services.

the amount of revenue arising from exchange of goods or services in each significant category.

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Revenue Recognition

Disclosures

  • the amount of each significant category of revenue recognised during the period, including revenue arising from:

sale of goods

rendering of services

interests

dividends

royalties

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Revenue Recognition

Key Differences Between Indian GAAP and IFRS

  • Additional conditions for revenue recognition needs to be met under IFRS
  • Bill and hold transactions
  • Gross Consideration v/s Fair Value of Consideration
  • Multiple Deliverables