Rev Rec & Contruction Contracts-IAS 11 IAS 18-KPMG-P45

Revenue Recognition & Construction Contracts

IAS 11, IAS 18

Presenter: Aleem Ullah Azim

IFRS Baseline 2013 Revenue Recognition 4FOR INTERNAL USE ONLY. [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country].

Revenue vs income

Income is an increase in economic benefits other than contributions from

shareholders

Gai

n on

sal

e of

he

ad o

ffice

Revenue is income that arises in the ordinary course of activities

Sal

e of

dom

estic

/ in

dust

rial r

obot

s


Overall approach: Step 1

Separate componentsIAS 11, IAS 18

Sale of goods Construction contractsRendering of

services

Step

1: I

dent

ify c

ompo

nent

s


Overall approach: Step 2St

ep 2

: Allo

cate

con

side

ratio

n

Relative fair values; orFair value of undelivered components

Sale of goods Construction contractsRendering of

services


Overall approach: Step 3

Effective control / significant R&R

passed on continuous

basis

Can outcome be estimated reliably?

Rendering of services

Construction contracts

To extent of recoverable expenses

recognised

no

By reference to stage of

completion

yes

Step

3: R

ecog

nise

reve

nue

Sale of goods

Effective control / significant R&R passed in their

entirety

Upon completion, upon / after

delivery

R&R = risks and rewards


A question for you: Components (3)

Customer buys a D-900 robot Customer also buys the post-sales maintenance pack

(3 years)

Customer also pays a fee to activate the D-900, which is non-refundable

How many components does this contract have?


Identifying separate components

Component has stand-alone value to the customer

Vendor sells the item on a stand-alone basis or

customer could resell it

Customer derives value that is not dependent on

receiving other components

or

Fair value of component can

be measured reliably

&

Criteria for combining / segmenting construction

contracts

Discussed later in the module


A question for you: Allocation (2)

Customer buys a D-900 and post-sales maintenance pack for L$ 1,200

Lila-Droid sells the D-900 on its own for L$ 1,000, and the maintenance pack on its own for L$ 500

Customer also pays a L$ 100 activation feeHow much revenue should be allocated to the D-900?


Maximum use of observable data

Cost-plus-margin method is a last resort


Recognising revenue: Common criteria

Probable future economic benefits

Revenue can be measured

reliably

Costs are identifiable and

can be measured reliably


Recognising revenue: The types


Sale of goods Rendering of services


Sale of goods

Should not maintain effective control or have managerial involvement to the extent

normally associated with ownershipBill and hold

Significant risks and rewards of ownership have passed to the customer

Installation

Consignment sales

Warranties

Right of return


Bill and hold: Strict recognition criteria

Customer specifically acknowledges the deferred

delivery instructions

Item is on hand, identified and ready for delivery to the customer

when the sale is recognised

Probable that delivery will be made

The usual payment terms apply


A question for you: Consignment sales

Lila-Droid delivers 600 of the latest D-900s to retailer Shop-Until-You-Drop

Shop-Until-You-Drop will pay Lila-Droid as robots are sold, on a monthly basis

Robots not sold by the end of the season will be returned to Lila-Droid

When should Lila-Droid recognise revenue and why?


A question for you: Installation

Customer buys a D-900 robot The D-900 cannot work until she is integrated with the

customers Home Management System

The installation requires a specialist engineer from Lila-Droid

Can revenue be recognised prior to installation?


A question for you: Warranties (1)

Customer buys a D-900 robot Lila-Droid will repair any faults that occur in the first

12 months

This warranty is part of the standard sales contractCan revenue be recognised while the warranty is outstanding?


A question for you: Warranties (2)

Customer buys a D-900 robot Lila-Droid will repair any faults that occur in the first

36 months

This is a special extended warranty that the customer chose it is not standard

How should revenue be recognised?


A question for you: Rights of return

Lila-Droid sells 1,000 D-900s in the month of September Customers may return robots no questions asked

within 10 days if they keep the receipt

Historically the rate of return has been 2%How should revenue be recognised?





Specific IFRICs


What is a construction contract?

Specifically negotiated for the construction of an asset / combination of assets that are closely interrelated / interdependent in terms of design,

technology, function or ultimate purpose / use

Not limited to buildingsIn our view, includes complete assets and components if they are complex

custom-designed items

Fixed price Cost plus


Segmenting and combining contracts

Each segment functions on a stand-alone basis and:

Separate proposals submitted for each component

Each component subject to separate negotiation and could be accepted / rejected

Costs / revenue for each component can be identified

Segment contract

Do not function on a stand-alone basis and:

Negotiated as part of a single package

Effectively part of a single project with an overall profit margin

Performed concurrently or in continuous sequence

Combine contracts


Recognising revenue

Expected loss recognised immediately

Outcome of contract can be estimated reliably

Recognise revenue to extent of recoverable costs incurredno

Output measures:Surveys of work performed

Physical proportion complete

Stage of completion can be measured reliably

yes

Input measure:Contract costs incurred to total

estimated contract costs


Contract revenue and contract costs

Comprises:

Initial amounts agreed

Variations, claims, incentive payments

Reduced by penalties for late delivery

Contract revenue

From date of securing contract:

Directly related costs

Costs attributable to contract activity in general that can be allocated on systematic and rational basis

Other costs chargeable to the customer

Contract costs


Which of these are valid contract costs?

Material

Labour

General / administration

Design

Overheads

Insurance

Amortisation

Depreciation

Pre-contract costs


A question for you: Stage of completion (1)

Lila-Build contracted with Customer to build a customised state-of-the-art warehouse

Customer agrees to pay L$ 1.8m on completion and an additional L$ 0.2m a year later if there are no defects

In this period Lila-Build has incurred costs of L$ 0.5m and expects to incur L$ 0.3m more

How should revenue and costs be recognised?



Last period Lila-Build had incurred costs of L$ 0.5m and expected to incur L$ 0.3m more

Lila-Build has now incurred costs of L$ 0.7m, but expects total costs to be L$ 1m

The price has not changed: Customer will pay L$ 1.8m on completion and an additional L$ 0.2m a year later if there are no defects

How should revenue and costs be recognised in this period?


Service contracts: Revenue recognition

In our view, expected loss recognised immediately

Outcome of contract can be estimated reliably

Recognise revenue to extent of recoverable costs incurredno

Output measures:Surveys of work performed

Physical proportion complete

Stage of completion can be measured reliably

yes

Input measure:Contract costs incurred to total

estimated contract costs



Lila-Droid contracts with Customer to maintain its fleet of aging robots for the next 2 years

Customer pays L$ 2,400 in total Lila-Droid estimates that the performance effort will be

spread evenly over the 2-year period

How should the stage of completion be measured?



Lila-Droid contracts with Customer to maintain its fleet of new robots for the next 2 years

Customer pays L$ 2,400 in total Lila-Droid estimates that the performance effort will be

more weighted towards the second year

How should the stage of completion be measured?

IFRS Baseline 2013 Revenue Recognition 40

Agenda

The basicsIdentify componentsAllocate considerationRecognise revenueDisclosureThe closing


Disclosure

Accounting policies

Breakdown by type

Judgements and estimates


Which statements are true?

Revenue relates to the ordinary activities of an entity

Gains on the sale of property, plant and equipment can be classified as revenue

The classification of items as income vs revenue is an accounting policy choice, to be applied consistently

Income is a subset of revenue


Which statements are true?

A deliverable has stand-alone value if a vendor sells that item separately or the customer could resell it

A deliverable has stand-alone value if the customer receives value from it independent of other deliverables

A deliverable has stand-alone value if it is identified in the contract

A deliverable has stand-alone value only if there is a market available on which the item is bought and sold regularly


Which tests apply to all revenue types?

The significant risks and rewards of ownership have transferred to the customer

Revenue can be measured reliably

Future economic benefits are probable

Costs can be measured reliably


1) Revenue is a subset of income2) Revenue relates to ordinary

activities3) Look for stand-alone value in

identifying components4) Allocate consideration having

regard to fair values5) Revenue recognised when risks

and rewards passed (sale of goods)

FOR INTERNAL USE ONLY. [year] [legal member firm name], a [jurisdiction] [legal structure] and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in [Country].


Thank you

Revenue Recognition & Construction ContractsIAS 11, IAS 18Slide Number 2Slide Number 3Revenue vs incomeOverall approach: Step 1Overall approach: Step 2Overall approach: Step 3Slide Number 8A question for you: Components (1)A question for you: Components (2)A question for you: Components (3)Identifying separate componentsSlide Number 13A question for you: Allocation (1)A question for you: Allocation (2)Maximum use of observable dataSlide Number 17Recognising revenue: Common criteriaRecognising revenue: The typesSale of goodsBill and hold: Strict recognition criteriaA question for you: Consignment salesA question for you: InstallationA question for you: Warranties (1)A question for you: Warranties (2)A question for you: Rights of returnRecognising revenue: The typesWhat is a construction contract?Segmenting and combining contractsRecognising revenueContract revenue and contract costsWhich of these are valid contract costs?A question for you: Stage of completion (1)A question for you: Stage of completion (2)Recognising revenue: The typesService contracts: Revenue recognitionA question for you: Stage of completion (1)A question for you: Stage of completion (2)Recognising revenue: The typesSlide Number 40DisclosureSlide Number 42Slide Number 43Which statements are true?Which statements are true?Which tests apply to all revenue types?Slide Number 47Thank you

Rev Rec & Contruction Contracts-IAS 11 IAS 18-KPMG-P45

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