ED revenue recognition from contracts with customers

Transcription

1 ED revenue recognition from contracts with customers An overview of the revised proposals 2 October 2012

2 Disclaimer This presentation contains information in summary form and is therefore not intended to be a substitute for detailed research or the exercise of professional judgment. It is also not intended and should not be relied upon as an absolute advice. Consultation with advisor for each specific matter is recommended. Neither Ernst Young nor any other members of the global Ernst & Young network accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this presentation. The views expressed by speakers in this presentation are likely general views and may not be appropriate for every situations despite of being considered similar facts. Page 2

3 Revenue from Contracts with Customers Agenda Overview and project status Key messages for accounting professions Scope The five-step model Other aspects of the model Implementation issues

4 Overview new proposal for revenue recognition The Boards issued a new revenue recognition Exposure Draft (ED) that will replace all existing revenue recognition standards and interpretations The proposed model addresses revenue arising from contracts with customers All industries will be affected Core principle Recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Page 4

5 Project status Based on discussion paper issued in December 2008 Boards redeliberations of the original Exposure Draft were completed in October 2011 The latest Exposure Draft issued 14 November 2011 Open for comment until 13 March 2012 The Boards will continue re-deliberations in September 2012 Final standard may be issued in 1H 2013 Retrospective application, with some relief provided Additional disclosures required if reliefs are applied Not expected to be effective before 1 January 2015 Page 5

6 Revenue from Contracts with Customers Agenda Overview and project status Key messages for accounting professions Scope The five-step model Other aspects of the model Implementation issues

7 Key messages for accounting professions The new standard will result in significant changes in practice in various industries. The proposal would require many companies to allocate more revenue than they currently do Implementation would require many companies to track and update pricing information as contracts are modified and as they offer new products and services. The new model would require capitalisation of incremental costs to obtain a contract. Require significant estimates and judgment (bundle of goods & services, over time and at a point in time, standalone price, onerous performance obligation test, forwarding looking information disclosures etc.) Page 7

8 Revenue from Contracts with Customers Agenda Overview and project status Key messages for accounting professions Scope The five-step model Other aspects of the model Implementation issues

9 Scope and scope exceptions Applies to: Does not apply to: Revenue arising from contracts with customers The sale of some non-financial assets that are not an output of the entity s ordinary activities (i.e., sale of property, plant and equipment (PPE) or intangibles) Leasing contracts Insurance contracts Financial instruments contracts Non-monetary exchanges entered into for the purposes of facilitating the sale to another entity Put options on sale and repurchase agreements where the customer has a significant economic incentive to exercise Collaborative arrangements Page 9

10 Replacement of current standards IAS 11 To be superseded Thai standard Current status Construction Contracts TAS 11 Effective IAS 18 Revenue, TAS 18 Effective IFRIC13 Customer Loyalty Programmes, IFRIC15 Agreements for the Construction of Real Estate, IFRIC18 Transfers of Assets from Customers SIC 31 Revenue Barter Transaction involving Advertising Services. TFRIC 13 Draft TFRIC 15 TFRIC 18 Transfers of Assets from Customers SIC 31 - Effective In process of finalizing the draft Effective Page 10

11 Revenue from Contracts with Customers Agenda Overview and project status Key messages for accounting professions Scope The five-step model Other aspects of the model Implementation issues

12 The five-step model Step 1: Identify the contract with a customer Step 2: Identify the separate performance obligations in the contract Step 3: Determine the transaction price Step 4: Step 5: Allocate the transaction price to the separate performance obligations Recognise revenue when (or as) the entity satisfies a performance obligation Page 12

13 Contract(s) with customers diagram The entity Customers Contract(s) Customer is to obtain goods & services that are output of the entity s ordinary activities Bundle distinct? Performance obligation#1 Performance obligation#2 Performance obligation#3 Page 13

14 Step 1: Identifying the contract Model is applied to each contract Can be written, oral or implied Does not exist if both parties can cancel without penalty Can combine contracts if entered into at or near the same time with the same customer (or related parties), provided any of the following criteria are met: Negotiated as a package Consideration depends on other contract Goods and services are interrelated Page 14

15 Step 1: Identifying the contract (cont.) A contract modification would be any change in the scope or price of a contract If only a price change, allocate the transaction price to all performance obligations using original allocation Treat as a separate contract if the modification both: Adds a separate performance obligation(s) Consideration reflects the standalone selling price Otherwise, treat as part of the original contract Accounted for differently depending on the attributes of the remaining goods and services to be provided Page 15

16 Step 2: Identifying the performance obligations A performance obligation is a promise (explicit or implicit) to transfer a good or service to the customer Identified at contract inception based on: contractual terms customary business practice Pattern of transfer differs from other goods / services and Goods or services are distinct Vendor sold them separately or Customer can use them on its own or with readily available resources (b) Account separately unless: (a) Highly integrated Bundle is significantly customised Page 16

17 Step 2: Identifying the performance obligations (cont) The proposals contain specific application guidance on: Rights of return Product warranties Licences and rights to use Options to acquire additional goods and services (e.g., discount vouchers, customer loyalty points) Principal vs. agent considerations Page 17

18 Step 2: Identifying the performance obligations (cont.) Two-step model to identify distinct performance obligations (POs) Step 1: Individually distinct Step 2: Bundle until distinct Or Are they regularly sold separately? Can customer benefit from the good or service on its own or with other readily available resources? Practical expedient: Treat as one PO if they have the same pattern of transfer Group until a bundle of goods or services is distinct Treat a bundle as one PO if: And The goods or services are highly- interrelated and the entity provides a significant service to integrate them The bundle is significantly modified or customised to fulfil the contract Page 18

19 Step 2: Identifying the performance obligations (cont.) Performance Obligations? 1 1. X IT IT Page 19

20 Step 2: Identifying the performance obligations (cont.) Performance Obligation? , Dr. / 3,600 Cr. Contract liability (service-type warranty) 400 3,200 Dr xxx Cr. xxx Dr. 100 Cr. 100 Page 20

21 Step 3: Determining the transaction price Transaction price The amount of consideration that an entity expects to be entitled in exchange for transferring a good or service to a customer. Must consider the effects of all of the following: Variable consideration Time value of money Non-cash consideration Consideration payable to the customer Collectability (adjacent to revenue) Page 21

22 Step 3: Determining the transaction price variable consideration The transaction price is estimated using the technique most predictive of the amount the entity will receive. A portion of the transaction price could vary in amount and timing for such things as discounts, rebates, refunds, credits, incentives, bonuses, penalties, contingencies or concessions. Expected value Sum of the probabilityweighted amounts in a range of possible outcomes Most predictive when the transaction has a large number of possible outcomes Can be based on a limited number of discrete outcomes and probabilities Most likely amount The single most likely amount in a range of possible outcomes Most predictive when the transaction will produce few outcomes Page 22

23 Step 3: Determining the transaction price variable consideration (cont.) Variable Consideration , , % % 300, % 600, % 900,000 Page 23

24 Step 3: Determining the transaction price variable consideration (cont.) Expected Value Approach 1 Weighted expected value 8 15% -0-10,000 1, % 300,000 10,600 6, % 600,000 11,200 1, % 900,000 11,800 1,180 Expected value approach 10,720 Most likely approach 300,000 ( 60%) 1 10,600 Page 24

25 Step 3: Determining the transaction price time value of money Reflected as an adjustment to the transaction price when significant and the primary purpose of the payment terms would be to provide financing to one party in the contract Evaluation not required if provision of services and receipt of payment are within one year of one another Entity would use a separate financing rate that reflects the borrower s credit risk Effect of financing would be reflected separately from revenue Page 25

26 Step 3: Determining the transaction price consideration payable to the customer Entity would determine whether amounts paid or payable to the customer are: A reduction of the transaction price (and revenue) A payment for distinct goods and services A combination of the two Page 26

27 Step 4: Allocating the transaction price Allocate to each performance obligation based on relative standalone selling prices Estimate the standalone selling price if not directly observable Maximise use of observable inputs Apply estimation methods consistently for goods and services, and customers with similar characteristics Use of a residual technique may be appropriate when prices are highly variable or uncertain Transaction price is not reallocated for subsequent changes in standalone selling prices Page 27

28 Step 4: Allocating the transaction price (cont.) Consideration Handset 100 Wireless Plan 1,440 Total 1,540 Standalone selling price 350 1,440 1,790 Allocate Transaction Price 301 1,239 1,540?? Page 28

29 Step 4: Allocating the transaction price (cont.) 100 Dr. 100 Cr. 100 ) Dr. 60 Cr. 60 Exposure Draft 100 Dr. 100 Contract Asset 201 Cr. 301 ) Dr Cr. Contract Asset Page 29

30 Step 5: Recognising revenue Revenue is recognised When (or as) a performance obligation is satisfied When (or as) the customer obtains control of a good or service. Control of a performance obligation transfers either over time or at a point in time. Page 30

31 Step 5: Recognising revenue constraint on variable consideration Recognition of variable consideration limited to amounts reasonably assured to be entitled Amounts are reasonably assured when: The entity has experience with similar types of performance obligation (or other persuasive evidence); and The entity s experience is predictive of amount of consideration to which the entity will be entitled Licences of intellectual property - revenue based on customer s subsequent sales (e.g., a sales-based royalty) is not reasonably assured until the uncertainty is resolved Page 31

32 Revenue from Contracts with Customers Agenda Overview and project status Key messages for telecom companies The five-step model Other aspects of the model Implementation issues

33 Onerous performance obligations Applies to performance obligations satisfied over time If, at inception, the entity expects the period to satisfaction to be greater than one year. Onerous if: Lowest cost of settling* > allocated transaction price * Lowest cost of settling is the lower of below 2 items a) costs directly related to satisfying the performance obligation b) cost to exit Page 33

34 Contract costs Costs to obtain Costs to fulfil Amortised consistent with the pattern of transfer of the related good or service and subject to impairment testing. Implications on: Capitalise if incremental to obtaining the contract and expected to be recovered Practical expedient: Expense if amortisation period one year What payment to dealers represent Set up / up front fees Capitalise directly related costs if they generate or enhance resources that will be used to fulfil future POs and are expected to be recovered Excludes costs capitalised under other IFRSs Page 34

35 Breakage Customer may make non-refundable prepayments to an entity for the right to receive future goods or services Unexercised rights are referred to as breakage If an entity is reasonably assured of breakage amount Revenue would be recognised in proportion to pattern of rights exercised by customer If an entity is not reasonable assured of breakage amount Revenue would be recognised when the likelihood of exercising rights becomes remote Page 35

36 Bill-and-hold arrangements Following criteria must be met to recognise revenue: The customer must have requested the contract to be on a billand-hold basis The product must be identified separately as the customer s The product currently must be ready for delivery at the location and time specified, or to be specified, by the customer The entity cannot use the product or sell it to another customer The entity would also have to consider whether the custodial services are a material performance obligation to which some of the transaction price should be allocated Page 36

37 Disclosure Key principle To help users of financial statements understand the amount, timing and uncertainty of revenue and cash flows arising from contracts with customers Present both qualitative and quantitative information about: Contracts with customers Significant judgements and changes in judgements made in applying the requirements to those contracts Assets recognised from costs to obtain or fulfil a contract Page 37

38 Disclosure (cont.) Information about contracts with customers Disaggregation of revenue Nature of performance obligations and additional information about onerous performance obligations Maturity analysis if remaining performance obligations in contracts with original duration of more than a year Reconciliation from opening to closing total contract balances Information about judgements and changes in judgements Timing of revenue recognition Determining and allocating the transaction price Page 38

39 Revenue from Contracts with Customers Agenda Overview and project status Key messages for telecom companies The five-step model Other aspects of the model Implementation issues

40 Implementation issues Many current accounting systems do not have the capability to account for numerous individual contracts. Some information required by the proposal is not tracked by billing systems. Examples: They do not track when a customer entered into a contract or when the contract expires. They do not hold information about stand-alone selling prices To accurately account for for individual contracts billing and accounting systems are likely to require extensive and costly changes that would take a considerable period of time to implement. Continue to monitor the Boards deliberations (Last quarter of 2012) Page 40

41 End