35
IAS 18 Revenue Recognition 1 Revenue Recognition Scope General principles Timing of recognition Multiple element arrangements Links to other standards

Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

  • Upload
    hakhanh

  • View
    235

  • Download
    2

Embed Size (px)

Citation preview

Page 1: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

IAS 18

Revenue Recognition

1

Revenue Recognition

Scope

General principles

Timing of recognition

Multiple element arrangements

Links to other standards

Page 2: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Revenue – definition (IAS 18.7)

• Revenue is the gross inflow of economic benefits

during the period arising in the course of the

ordinary activities of an enterprise when those

2

ordinary activities of an enterprise when those

inflows result in increases in equity, other than

increases relating to contributions from equity

participants.

• Revenue is referred to by a variety of different

names including sales, fees, interest, dividends

and royalties

Page 3: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

IAS 18 – Scope (IAS 18.1 – 6)

� Sale of goods

� Rendering of services

�Use by others of an entity’s assets, yielding

interest, royalties and dividends

3

X Lease income (IAS 17)

� interest, royalties and dividends

X Dividends from associates accounted using equity method (IAS 28)

X Changes in fair value/disposal of financial instruments (IAS 39)

X Changes in value of other assets (including agricultural and

biological assets – IAS 41)

X Insurance contracts (IFRS 4)

Page 4: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

General Principles - Recognition

Recognise revenue

when:

1. Measure reliably

2. Flow of

economic

benefits probable

Goods

(IAS 18.14)

Services

(IAS 18.20-28)

• Performance of

obligations

4

benefits probable

3. Costs measured

reliably

• Transfer of

risks &

rewards

• Management

involvement

• Substance of

the

transaction

obligations

• Use percentage of

completion method

(IAS 18.21) (see IAS 11

construction contracts for

percentage of completion

methodology)

• If a specific act is

much more significant

than others, postpone

revenue recognition

until executed

(IAS 18.25)

Others (IAS 18.30)

Interest – time apportion

Royalties – accruals basis

Dividends – when right to receive

established

Page 5: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Multiple-element transactions

Matching revenue and costs – IAS 18.13 vs 18.19

• The aim of IAS 18 is to recognise revenue when, and to the extent that, goods have been delivered to a customer or services have been performed

• Apply recognition criteria to:

5

• Apply recognition criteria to:

– separately identifiable components of a single transaction

– 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 (IAS 18.13)

– see also IAS 11.7-10 for guidance on segmenting or combining contracts

• Revenue and expenses that relate to the same transaction are recognised simultaneously; matching of revenues and expenses (IAS 18.19)

Page 6: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Multiple-element transactions (continued)

BUT

– IAS 18 not explicit on when components are separately

identifiable or not

– IFRIC suggests that IAS 18.19 applies only if the entity

6

– IFRIC suggests that IAS 18.19 applies only if the entity

has to incur further costs directly related to items

already delivered, e.g. to install goods or meet warranty

claims (see IFRIC 13 Customer Loyalty Programmes) –

otherwise IAS 18.13 applies

Page 7: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Multiple-element transactions

Example

• In accordance with local consumer legislation, a manufacturer, entity M, gives warranties at the time of sale to purchasers of its product. Under the terms of the sale contract the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within one year from the date of sale. The goods cannot be

7

apparent within one year from the date of sale. The goods cannot be sold without this standard warranty.

• Customers can, at the same time as purchasing the product, purchase an optional extended warranty from the manufacturer to cover defects arising in the two years after the basic warranty period – effectively providing a 3-year warranty period from the date of sale.

• The extended warranty can only be purchased at the time of the initial sale, it cannot be purchased separately at a later date.

How should entity M recognise revenue from the warranties?

Page 8: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Multiple-element transactions

Example solution

• The sale can be analysed into three components

– product supply

– standard 1-year warranty service

– extended warranty service

• The product and the standard 1-year warranty are not capable of being sold separately and so they are combined for the purpose of revenue

8

• The product and the standard 1-year warranty are not capable of being sold separately and so they are combined for the purpose of revenue recognition – IAS 18.19 applies:

– entity M recognises revenue based on the fair value of the product and standard warranty, making provision for the estimated costs of providing the standard warranty service

• Although M only sells the extended warranty together with the product sale, the customer can take the product without the extended warranty so the components have stand-alone value – IAS 18.13 applies:

– entity M defers recognition of the revenue for the extended warranty, recognising it over the 2-year period during which this warranty service is provided

Page 9: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

IFRIC 13 Customer Loyalty Programmes

• Effective for annual periods beginning on or after 1 July 2008

• Scope – loyalty award credits issued as part of a sales transaction that customers can redeem in future for free/discounted goods and services

9

free/discounted goods and services

• Apply IAS 18.13 to allocate FV to award credits as separate component of revenue (IFRIC 13.5)

• If the unavoidable costs of meeting the obligations to supply the awards are expected to exceed the consideration received and receivable for them, recognise a liability for onerous contracts in accordance with IAS 37 (IFRIC 13.9)

Page 10: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

IFRIC 13 Customer Loyalty Programmes

• If the entity supplies the awards itself, recognise

revenue when:

– award credits are redeemed and

10

– the entity fulfils its obligations to supply awards

(IFRIC 13.7)

• The amount of revenue recognised shall be based

on the number of award credits that have been

redeemed in exchange for awards, relative to the

total number expected to be redeemed

(IFRIC 13.7)

Page 11: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Customer Loyalty Programmes

Example - Awards supplied by the entity

• Retailer grants programme members loyalty points when

they spend a specified amount in store

• Programme members can redeem the points for further

goods

11

goods

• Points do not expire

• In 20X8, retailer grants 10,000 points

• Management expects 8,000 of these points to be redeemed

• Management estimates the fair value of each loyalty point

to be one currency unit (CU1)

• Retailer initially defers revenue of CU10,000

Page 12: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Customer Loyalty Programmes

Example - Awards supplied by the entity (cont)

• At end of 20X8,

– 4,000 points have been redeemed in exchange

for goods, ie half of expected redemptions

12

• Retailer recognised revenue of CU5,000

– (4,000 points / 8,000*) x CU10,000

• *number of points expected to be redeemed

Page 13: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Customer Loyalty Programmes

Example - Awards supplied by the entity (cont)

• At end of 20X9, another 4,100 points are

redeemed, so total points redeemed is now 8,100

– management revises its expectations. It now

13

expects 9,000 points to be redeemed altogether

• cumulative revenue recognised is CU9,000

– (8,100 points / 9,000 points) × CU10,000

• Retailer recognised revenue of CU5,000 in the

20X8, so it recognises CU4,000 in 20X9

Page 14: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Customer Loyalty Programmes

Example - Awards supplied by the entity (cont)

• At end of 20Y0, another 900 points are redeemed,

so total points redeemed is now 9,000

– management still expects 9,000 points to be

14

redeemed altogether

• cumulative revenue recognised is CU10,000

– (9,000 points / 9,000 points) × CU10,000

• Retailer recognised revenue of CU5,000 in 20X9

and CU4,000 in 20X8, so it recognises CU1,000 in

20Y0

Page 15: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Recognition of revenue when a 3rd Party supplies the

awards (IFRIC 13.8)

• If a third party supplies the awards, assess whether consideration allocated to the award credits is collected as the principal or as an agent

• (a) If collecting the consideration on behalf of the third party:

– (i) measure its revenue as the net amount retained on its own account; and

15

account; and

– (ii) recognise this net amount as revenue when the third party becomes obliged to supply the awards and entitled to receive consideration for doing so

– If the customer can choose to claim awards from either the entity or a third party, recognition may occur only when the customer chooses to claim awards from the third party

• (b) If the entity is collecting the consideration on its own account, it shall measure its revenue as the gross consideration allocated to the award credits and recognise the revenue when it fulfils its obligations in respect of the awards

Page 16: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Revenue - Measurement

Fair value of consideration received or receivable (IAS 18.9)

16

If consideration is receivable in the future, use

present value and recognise interest income as

discount unwinds (IAS 18.11)

Page 17: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Exchange of goods/services (IAS 18.12)(see also SIC 31 Revenue – Barter transactions involving advertising

services)

• Goods or services exchanged or swapped for goods or services of a similar nature and value is not a revenue-generating transaction– eg when suppliers of commodities like oil exchange or swap

17

– eg when suppliers of commodities like oil exchange or swap inventories in various locations to fulfil demand on a timely basis in a particular location

• Goods or services exchanged or swapped for goods or services of a dissimilar nature and value is a revenue-generating transaction– revenue is measured fair value of the goods or services received,

adjusted by the amount of any cash or cash equivalents transferred

– if fair value of the goods or services received cannot be measured reliably, fair value of the goods or services given up is used instead

Page 18: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Revenue Barter Transactions Involving Advertising

Services - SIC 31

• Seller that provides advertising services in the course of its

ordinary activities recognises revenue from a barter

transaction involving advertising when (SIC 31.3)

– the services exchanged are dissimilar (IAS 18.12)

18

– the services exchanged are dissimilar (IAS 18.12)

– the amount of revenue can be measured reliably

(IAS 18.20(a))

Issue:

• under what circumstances can a seller reliably measure

revenue at the fair value of advertising services received or

provided in a barter transaction.

Page 19: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Revenue Barter Transactions Involving Advertising

Services - SIC 31

• Revenue cannot be measured reliably at FV of advertising services received

• Seller can reliably measure revenue at FV of advertising services provided only by reference to non-barter transactions that:

– (a) involve advertising similar to the advertising in the barter

19

– (a) involve advertising similar to the advertising in the barter transaction;

– (b) occur frequently;

– (c) 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;

– (d) involve cash and/or another form of consideration (eg marketable securities, non-monetary assets, and other services) that has a reliably measurable fair value; and

– (e) do not involve the same counterparty as in the barter transaction.

Page 20: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Disclosures IAS 18.35

1. Accounting policies adopted including methods

to determine stage of completion of services

2. Amount of each significant category of revenue

20

2. Amount of each significant category of revenue

recognised during the period including revenue

arising from goods, services, interest, royalties

and dividends

3. Amount of revenue arising from exchanges of

goods and services included in each significant

category of revenue

Page 21: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Agreements for the Construction of Real Estate

(IFRIC 15) - Issue

• Many contracts for the construction of real estate involve

the construction of an asset to meet customer

specifications

• Diversity has developed in practice as to the treatment of

21

• Diversity has developed in practice as to the treatment of

'off-plan' sales, ie sales of real estate units before

construction is completed

• Issue:

– Under which standard should such pre-completion

contracts be accounted for (IAS 11 or 18)?

– Which method of revenue recognition should be

applied?

Page 22: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

IAS 11 or IAS 18?

• IAS 11 should be applied in accounting for construction contracts in the financial statements of contractors

– A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets (IFRIC 15.11 and IAS 11.3)

22

and IAS 11.3)

– such negotiation requires the buyer to be able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether it exercises that ability or not)

• Some contracts for the rendering of services are directly related to construction contracts.

– revenue arising from these contracts is not dealt with in IAS 18 but is dealt with in accordance with the requirements for construction contracts as specified in IAS 11.5a (IFRIC 15.11 and IAS 18.4)

Page 23: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

IAS 11 or IAS 18? (continued)

• An agreement for the construction of real estate in which

– construction could take place independently of the

agreement

23

– buyers have only limited ability to influence the design of

the real estate, eg to select a design from a range of

options specified by the entity, or to specify only minor

variations to the basic design

• is an agreement for the sale of goods within the scope of

IAS 18 (IFRIC 15.12)

Page 24: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Accounting for revenue from the construction of real

estate

• construction contract – apply IAS 11 percentage of completion method

• agreement for the rendering of services (generally where the entity is not required to acquire and supply construction materials: IFRIC 15.15)

– apply recognition criteria in IAS 18.20, which also applies the percentage of completion method described in IAS 11 (IAS 18.21)

24

percentage of completion method described in IAS 11 (IAS 18.21)

• agreement for the sale of goods (generally where the entity is required to supply both services and construction materials: IFRIC 15.16)

– apply recognition criteria in IAS 18.14:

• if criteria are met continuously as construction progresses, use percentage of completion method

• if entity transfers control and significant risks/rewards at a single point in time (eg at completion or on delivery), recognise revenue when all criteria of IAS 18.14 are met

Page 25: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Accounting for revenue from the construction of real

estate

Example

• Entity D is developing 40 residential units on an owned plot of land

• During construction, D enters into sale agreements with buyers of individual units:

– buyer has right to acquire specified unit when ready for occupation

25

– buyer pays deposit, refundable only if D fails to deliver the completed unit - balance of payment due in two further instalments

• one on completion of main structural elements

• the remainder on contractual completion of the unit

– buyers cannot alter the main structural elements of the design but can select fixtures and fittings design specifications from a range of offerings

– if buyer fails to make specified payments, entity D retains the right to complete the unit and find an alternative buyer

Page 26: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Accounting for revenue from the construction of real

estate

Example solution

• Agreement is not a construction contract

• Agreement is a forward contract that gives the buyer

– an asset in the form of a right to acquire, use and sell the completed

real estate at a later date and

26

real estate at a later date and

– an obligation to pay the purchase price in accordance with its terms.

• Entity D retains control and the significant risks and rewards of

ownership of the work in progress in its current state until the completed

real estate is transferred

• Therefore, revenue should be recognised only when all the criteria in

IAS 18.14 are met - at contractual completion

Page 27: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Accounting for revenue from the construction of real

estate

Example 2

• Assume same facts as previous example except:

– In the jurisdiction, the law requires the entity to transfer immediately to the buyer ownership of the real estate in its current state of completion and that any additional construction becomes the property of the buyer as construction progresses.

27

property of the buyer as construction progresses.

– The sale agreement confirms that if the agreement is terminated before construction is complete, the buyer retains the work in progress and entity D has the right to be paid for the work performed

– The contract can be terminated by the buyer subject to an agreed notice period and payment of a termination penalty

Page 28: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Accounting for revenue from the construction of real

estate

Example 2 solution

• Agreement is not a construction contract

• Agreement is an agreement for the sale of goods.

28

• Entity D applies judgement to decide if the terms of the

contract transfers control along with ownership of the work

in progress in its current state

• If so, this may indicate that the criteria in IAS 18.14 are met

continuously as construction progresses and revenue is

recognised using the percentage of completion method

Page 29: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Service Concession Arrangements

IFRIC 12 – scope (IFRIC 12.4-9)

Service concessions in which

• a public sector body (the grantor) engages a private entity (the operator) to provide services to the public; and

• those services involve the use of infrastructure by the operator (public to private service concessions)

29

Operator only

Applies where:

• grantor regulates services provided, who provided to and pricing

arrangements

• grantor controls any significant residual interest in the infrastructure

at end of arrangement

• infrastructure was either constructed or acquired by operator or

provided by grantor for the purpose of the concession

Contracts within IFRIC 12 are excluded from IFRIC 4 scope

Page 30: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

IFRIC Developments – IFRIC 12 Service

Concessions (continued)

Issues addressed

• rights over infrastructure - do not recognise as property,

plant and equipment of the operator (IFRIC 12.11)

• recognition and measurement of arrangement

30

• recognition and measurement of arrangement

consideration – account for revenue and costs in

accordance with IAS 11 and IAS 18 (IFRIC 12.12-14)

• construction or upgrade services provided – record a

financial asset or an intangible asset depending on the

character of the receivable (IFRIC 12.15-19)

– financial asset if unconditional right to receive cash

– intangible asset if receives a right (licence) to charge users

Page 31: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

IFRIC Developments – IFRIC 12 Service

Concessions (continued)

Other issues addressed

• other services provided during the term of the

arrangement – apply IAS 18 (IFRIC 12.20)

• contractual obligations to maintain or restore

infrastructure recognised and measured in accordance

31

infrastructure recognised and measured in accordance

with IAS 37 (FRIC 12.21)

• borrowing costs incurred in the construction phase –

book as an expense unless there is a contractual right to

receive an intangible asset (IFRIC 12.22)

• subsequent accounting for the financial or intangible

asset that the arrangement gives rise to –

apply IAS 32/39 & IFRS 7 or IAS 38 as appropriate

(IFRIC 12.23-26)

Page 32: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Service Concession Arrangements

Example

• Grantor and operator enter 10-year agreement with following terms and expected costs– construct toll road within 2 years (1-2): CU500 pa

– maintain and operate road for next 8 years (3-10): CU10 pa

– resurface road at end of year 8: CU100

32

• The operator will receive the tolls from road users: estimated at CU200 pa

• Grantor guarantees operator a minimum of CU700 plus interest of 6.18%

• Operator pays interest on borrowings at 6.7%

• Operator usually earns cost plus 5% on construction activities

• Assume all cash flows are due and occur at the end of each year

Page 33: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Service Concession Arrangements

Example solution

• Operator determines revenue to be recognised on construction activities – recovered partly by the minimum guarantee (a financial asset receivable of CU722) and partly from the toll receipts (the licence to collect these is an intangible asset with cost CU361)

33

• Income of CU1,083 recognised for the two years of construction activity (under IAS 11) at fair value of:

– cost plus 5%

– interest income on the outstanding balance of the guaranteed minimum income

– recovery of capitalised borrowing costs on proportion of construction costs funded by borrowings, ie not covered by guaranteed minimum receivable

Page 34: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Service Concession Arrangements

Example solution (cont)

• Toll receipts of CU200 pa are allocated to:

– recovery of the financial asset (plus interest income) CU117 and

– income statement revenue from the intangible asset CU83

34

• The intangible asset is amortised over the 8-year operating

period – CU 45 for each of years 3-10

• The provision for the expected cost of CU100 for

resurfacing at end of year 8 is gradually built up as the road

is used between years 3 – 8, together with the unwinding of

the discount

Page 35: Revenue recognition - IAS 18 - wirc-icai.org recognition - IAS 18.pdf · IAS 18 Revenue Recognition 1 Scope General principles Timing of recognition Multiple element arrangements

Questions

35