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  • IAS 18

    Revenue Recognition

    1

    Revenue Recognition

    Scope

    General principles

    Timing of recognition

    Multiple element arrangements

    Links to other standards

  • 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

  • IAS 18 Scope (IAS 18.1 6)

    Sale of goods

    Rendering of services

    Use by others of an entitys 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 andbiological assets IAS 41)

    X Insurance contracts (IFRS 4)

  • 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

  • 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)

  • 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

  • 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?

  • 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

  • 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)

  • 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)

  • 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

  • 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

  • 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

  • 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

  • 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

  • Revenue - Measurement

    Fair value of consideration received or receivable (IAS 18.9)

    16

    If consideration is receivable in the future, use

    present