Prescribe the treatment of revenue arising from certain transactions and events

Transcription

1 Ind AS 18 REVENUE

2 Objectives Prescribe the treatment of revenue arising from certain transactions and events Criteria for the recognition of revenue in case of sale of goods and services, as well as the criteria for recognition of interest and dividends. Assess complex transactions to determine whether: The risks and rewards of ownership of goods have been transferred and/or The outcome of a contract for the rendering of services can be estimated reliably.

3 Measurement Revenue shall be measured at the fair value of the consideration received or receivable. - fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. When the inflow of cash is deferred, the fair value may be less than the amount of cash receivable. For example, an entity may provide interest free credit to the buyer or accept a note receivable bearing a below-market interest rate from the buyer as consideration for the sale of goods. When the arrangement effectively constitutes a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an imputed rate of interest. The difference between the fair value and the nominal amount of the consideration is recognised as interest revenue

4 Ind AS Revenue from the sale of goods should be recognised when all the conditions have been satisfied : Transferred significant risks and rewards to the buyer The entity retains neither continuing managerial involvement nor effective control over the goods sold. Revenue can be measured reliably. It is probable that the economic benefits of the transaction will flow to the entity. The costs incurred or to be incurred can be measured reliably.

5 Ind AS Revenue from the rendering of services should be recognized (by reference to stage of completion or % of completion method) when the outcome of the transaction can be estimated reliably.. This occurs when all the following conditions are satisfied: The amount of revenue can be measured reliably. It is probable that the economic benefits associated with the transaction will flow to the entity. The stage of completion of the transaction at the balance sheet date can be measured reliably. The costs incurred for the transaction and the costs to complete the transaction can be measured reliably. It is usually necessary for the entity to have an effective internal financial budgeting and reporting system. The entity reviews and, when necessary, revises the estimates of revenue as the service is performed.

6 % of completion method The recognition of revenue on the basis of % of completion method provides useful information on the extent of service activity and performance during a period. Ind AS 11 on Construction Contracts also requires the recognition of revenue on this basis. The requirements of Ind AS 11 are generally applicable to the recognition of revenue and the associated expenses for a transaction involving the rendering of services.

7 Examples

8 Revenue recognition sale of goods B enters into a consignment agreement with its supplier S, whereby B becomes S agent. Q - Can S recognise revenue on dispatch of goods to B? A No. S can recognise revenue only when B sells the goods to third parties S, a department store, has a policy of refunding cost if a product is returned within one month Q Can S recognise revenue on sale? A Yes, but only if it can reliably estimate the liability for returns and such provision is made in the books

9 Revenue recognition sale of goods B is a manufacturer whose production line broke down and its warehouse was full. B requested its supplier, S, to postpone its regular dispatches of raw material which are contracted to be received every week for a year. Q Can S recognise revenue before delivery? A Yes. Revenue is recognised when the buyer takes the title provided it is probable that delivery will be made, the inventory is ready and separated for delivery, usual payment terms apply, and the buyer specifically acknowledges the deferred delivery instructions

10 Revenue recognition sale of services S charges Rs 1,000 as installation fee of a new telephone and Rs 3,000 as connection fee with a 2 year tenure. Q Can S recognise Rs 4,000 as revenue upon making the connection? A No. It can recognise only Rs 1,000 installation fee, as that service is provided. It must defer and recognise Rs 3,000 connection fee over the 2 year tenure of the connection, as connection is a continuing service

11 Revenue recognition sale of services S sells software for a price that includes servicing it for a 2 year period Q Can S recognise the full price as revenue upon making the sale? A No. It must unbundle the software from the service, recognise revenue from sale of software upon making the sale and defer and recognise revenue of the service element over the 2 year period over which service will be rendered

12 Revenue recognition sale of services S, a club, charges Rs 100,000 as entrance fee. An additional annual fee of 20,000 is charged for using the club facilities. Q Can S recognise the entrance fee as revenue upon receipt? A Yes, since it only permits membership and there is no significant collection uncertainty.

13 Revenue recognition sale of services (contd.) S, a club, charges Rs 100,000 as entrance fee. Members may use the games and gym free but must pay for bar and restaurant Q Can S recognise the entrance fee as revenue upon receipt? A No, since it will provide continuing games and gym usage facility over a future period

14 Revenue recognition sale of services S board declares a 10% dividend in March. In June this is ratified by the AGM. Y, a shareholder, year-end is March. Q Can Y recognise a dividend income in March? A No. Dividend is recognised only when the right of shareholders to receive it is established. It can only be recognised in the following period.

15 Revenue recognition sale of services S has a brand that it licences to B for a 5 year period for a lumpsum royalty of Rs 5 cr. The royalty agreement gives B an option of two 2 year extensions at Rs 2 cr each. S also gets 10% of gross sales. Q Is the revenue recognised a) Rs 5 cr upon licence grant, and annually 10% of gross sales as determined b) Rs 5 cr deferred and recognised over the 5 year licence usage period, and annually 10% of gross sales as determined A b)

16 Case Pick & Pay donates certain perishable food products, which have reached their sell-by date, but are still fit for human consumption, to the Rescue Shelter for Homeless people. Q Can revenue be recognized in respect of the goods that are donated? A No. There is no probable inflow of economic benefits

17 Case Company A sells goods FOB shipping point, and it is clear that title transfers to the buyer at the time of shipment. Company A s business practice is to arrange for shipping the goods to the buyer and to deal directly with the shipping company. Company A s business practice is also that if there is any damage or physical loss during transit, Company A provides the buyer with replacement products at no additional cost. If the loss or damage in transit is substantial, Company A s insurance coverage would cover all or most of the loss. Q May Company A recognise revenue once its products have been shipped?

18 Case A No. While title has passed, Company A has retained a significant risk of ownership (i.e., responsibility for damage or loss in transit). The fact that Company A s insurance would cover a substantial loss is evidence that it has managed its risk, but Company A has still retained the risk. The criterion for recognising revenue set out in Ind AS 18.14(a) has not been met.

19 Case Company A sells goods free on board (FOB) destination, which means that title does not pass to the buyer until delivery, and Company A is responsible for any loss in transit. To protect itself from loss, Company A contracts with the shipping company for the shipping company to assume total risk of loss while the goods are in transit. May Company A recognise revenue when the goods are shipped? No. While Company A has managed its risk, it has not transferred risk to the buyer. Therefore, the criterion in Ind AS 18.14(a) has not been met until the goods have been delivered

20 Measuring revenue gross or net Ind AS 18.8 states that in an agency relationship, "gross" amounts collected by the agent on behalf of the principal are not benefits that flow to the agent and, therefore, are not revenue. The agent's revenue is the "net" amount of the commission However, Ind AS 18.8 does not provide guidance or indicators of when a seller is an agent or a principal Q What are appropriate indicators? A Determination requires judgement and depends on facts and circumstances of each case

21 Measuring revenue gross or net Examples indicating, individually or in combination, that seller may be acting as a principal seller: Is the prime obligor in the arrangement (often a strong indicator) Has general inventory risk (before the customer order is placed or on customer return) Has latitude in establishing price Changes the product or performs part of the service Has discretion in supplier selection Is involved in determining product/ service specifications Has physical damage to inventory risk (after the customer order or during shipping) Has credit risk Is responsible for warranty or quality risk on the product(s) sold or service(s) rendered

22 Measuring revenue gross or net Examples indicating, individually or in combination, that the seller may be acting as an agent, and that therefore net revenue reporting is appropriate, include situations in which: The supplier (and not the seller) is the primary obligor in the arrangement. (often a strong indicator) The seller earns a fixed or determinable amount The supplier (and not the seller) has credit risk These lists are not comprehensive and some factors may weigh heavier than others The primary obligor in an arrangement is the party who commits to the contract and therefore is the first party to turn to when something goes wrong. The primary obligor bears the general risk of the arrangement

23 Cash discount A seller offers a cash discount for immediate or prompt payment (i.e., payment earlier than required by the normal credit terms). A sale is made for Rs 100 with the balance due within 60 days. If a customer pays within 10 days, he will receive a 2% discount on the total invoice Q How should the seller account for this early payment term?

24 Cash discount A Generally, one would consider cash discount (to obtain realisation of receivable before the end of credit period as a finance cost), assuming that it is cost of saving interest cost. Revenue is, therefore, recognised gross.

25 Vendor installation S sells a machine and is required to install it on the customer's premises. The sales contract requires the customer to officially inspect and accept or reject the installation. Based on A's experience, the probability of customer acceptance of the equipment after installation is completed is very high. Q Should revenue be recognised when the machine is delivered (if necessary, with a provision for estimated additional installation costs) or after customer acceptance?

26 Vendor installation A It depends on whether the transaction includes two separately identifiable components of revenue: delivery of the machine and its installation. If the installation cannot be unbundled, then revenue should be recognised on delivery of the machine only if, among other criteria: It is probable that the customer will accept the machine The installation process is simple in nature, for example the installation of a factory tested television receiver which only requires unpacking and connection of power and antennae

27 Vendor installation A sales contract requires payment of 90 % on completion of delivery and installation of a machine, and remaining 10 % at the earlier of customer acceptance or 90 days. Assume installation is not separately accounted for. Q How should revenue be recognised? A Since installation is not a component of revenue to be accounted for separately, 100 % of revenue should be recognised when the significant risks and rewards of ownership of the machine have been transferred to the buyer Revenue recognition is not affected by settlement terms unless there is uncertainty regarding the flow of the economic benefits related to the transaction to the entity.

28 Orders with advance payment S receives 90% advance payment for supplying a consignment of computers to B on signing a sale contract The goods are under production in P s factory in Malaysia. P, who is also a party to the contract, has committed to deliver the goods directly to B within 3- months Q Can S recognise revenue upon signing the contract? A No. Revenue can only be recognised when goods are supplied to B

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