Insights into Revenue Recognition under Ind AS. Structure of the discussion. Exclusion from Ind AS 18 and 11. Ind AS 18 Significant Differences

Transcription

1 Insights into Revenue Recognition under Ind AS Structure of the discussion Ind AS 18 Ind AS 11 Presentation at the Ind AS workshop organised by SIRC of ICAI on 9 March 2017 Revenue from Sale of goods Revenue from rendering of services Revenue from use of entity s of assets by others Construction contracts Ind AS 115 Revenue from customer contracts is deferred for the time being Chinnsamy Ganesan FCA DISA(ICA) Exclusion from Ind AS 18 and 11 Ind AS 18 Significant Differences Other types of income (gains) Substance over form Multiple Element Arrangements Framework, other standards and Interpretations Ind AS 104 Insurance Ind AS 17 Leases Ind AS 109 Financial Instruments Ind AS 41 Agriculture Ind AS 28 Associates and JVs Ind AS 16 Gain on Disposal of PPE Ind AS 40 Investment Property Treatment of Extended Credit period Treatment of Extended Warranty Effective Interest Rate method/up-front fees % completion for Service Contracts 1

2 Ind AS 18 Significant Differences Revenue Vs Income Accounting for real estate developers Royalty recognition principles Revenue Income Barter Transactions Transfer of assets from customers Economic benefits arising in the ordinary course of an entity s activities. Income includes such benefits that arise from all activities whether ordinary or otherwise Service concession arrangements Customer loyalty programs Definition of Revenue Sale of Goods In the course of the ordinary activities Gross inflow of economic benefits Substance over form Contractual terms Result in an increase in equity Other than contributions from equity participants Linked transactions May require judgement 2

3 Revenue Initial recognition Sale of Goods Transfer of significant risks and rewards of ownership of the goods It is probable that economic benefits associated with the transaction will flow to the entity Neither continuing managerial involvement effective control over the goods sold are retained The cost incurred or to be incurred in respect of sale can be measured reliably All conditions have to be satisfied The amount of revenue can be measured reliably Transfer of significant risks and rewards usually occurs when legal title or possession is transferred to the buyer. It may, however, occur before or after delivery. Consider : Who has the performance risk? Who has the price risk? Whether installation is significant part of the contract? Who has the inventory return risk? Rebuttable Presumption Transfer of risks and rewards of ownership coincides with the transfer of title or the passing of possession to the buyer. Transfer of legal title is, therefore not a condition for revenue recognition under Ind AS 18 Multiple Element Arrangements 3 Step approach in certain circumstances, it is necessary to apply the recognition criteria to the seperately identifiable components of a single transaction in order to reflect the substance of the transaction For example, when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognised as revenue over the period during which the service is performed Identify components Allocate consideration Recognise revenue 3

4 Separating Components Multiple elements Decision tree Identify the arrangement Are the Ind AS 18 segmentation criteria met? No Does the delivered item have standalone value to customer? No Yes Aggregate with other parts of the transaction? Yes Can the fair value of delivered item be measured reliably? Yes Separate revenue recognition for each component One How many elements? Can elements be separated? No More than one Yes Allocate consideration One Element Combined Separate Elements Recognise based on the general principles Multiple Elements When cannot be separated? Allocating Considerations Elements do not have stand alone value or could not be sold separately in stand alone transaction Fair value cannot established for each element Delivery of future elements is not within the control of the vendor or is not probable Other elements are significant Allocate considerations based on relative fair value of the elements Key factor - Commercial substance to be viewed from the perspective of buyer and not from seller 4

5 Initial Measurement Initial Measurement Any guidance on extended credit period? To be measured at the fair value of the consideration received or receivable Cash sale - amount of cash received credit sale - present value of the cash receivable Net of all discounts (trade discount, volume discount and cash discount) present value of the revenue is recognised if a longer, interest-free credit period is given Discount rate - customer s borrowing rate, not the seller s borrowing rate. Can also be the rate by which the price has been discounted to arrive current cash sales price The difference between the fair value and the nominal amount of the consideration should be deferred in the balance sheet and recognised as interest revenue using the effective interest method (as per Ind AS 109) Software Industry Software Industry Sale of hardware and software Assessment of transfer of risk and rewards and multiple element arrangement is essential. Sale of standard off-the shelf packages Recognise revenue on delivery Maintenance services or other after sales support with initial contract Multiple element arrangement analysis is required Software subject to significant levels of customer rejection due to incompatible hardware and software Customer acceptance is often required to give the necessary assurance of a completed sale Obligation to provide free upgrades when and if available No legal obligation but may require multiple element assessment if the service id not insignificant Fees from development of customised software Revenue is recognised by reference to the development s stage of completion 5

6 Rendering of Services Rendering of Services The amount of revenue can be measured reliably The transaction s stage of completion at the balance sheet date can be measured reliably Outcome should be really estimated All conditions to be satisfied It is probable that economic benefits associated with the transaction will flow to the entity The costs incurred or to be incurred in respect of the transaction can be measured reliably Yes Recognise revenue according to stage of completion Profit? Reliable estimate of outcome? Recognise expected loss immediately Expenses recoverable? Yes No Yes No Recognise revenue to the extent of recoverable expenses (no profit recognised) No No revenue is recognised (costs incurred are recognised as expenses) Rendering of Services Interest Revenue Straight line method Output method Input method Interest revenue should be recognised using the effective interest method Selection of method depends on the fact pattern of each contract Effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected useful life of the financial instrument to the net carrying amount of the financial asset or liability 6

7 Royalty Revenue Dividend Revenue Should be recognised on an accrual basis in accordance with the substance of the relevant agreement Should be recognised when shareholder s right to receive is established Care! Lumpsum payments at the inception of the agreement Care! Local rules and regulation to be considered to determine the timing of right to receive Ind AS 11 - Construction Contracts Selecting the right Standard Contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function, or their ultimate purpose or use the date of commencement and the date of completion fall into different accounting periods Contract of Consultancy for constructing an asset Ship breaking activity Contract for development of software Contracts not exceeding one accounting period Maintenance contracts Developer of Property 7

8 Contract types Contract revenue Initial revenue agreed Based on term of contract Fixed Price Cost Plus Variation in contract work Probability and reliable measurement Contract Contract Claims Negotiations have reached advanced stage and probable/ reliable measurement Incentives Meeting performance standards and reliable measurement Contract costs Costs to be excluded Directly related to the Contract Specifically chargeable costs Allocable indirect costs Cost of variation General Selling administrative costs costs Depreciation on idle machinery Cost of securing the contract 8

9 Combining and Segmenting Revenue Recognition Contract covers a number of assets A group of contracts Optional additional asset in contract Revenue can be measured reliably Only separate if: Separate proposals and negotiation Costs and revenues can be identified Contractor or customer can accept or reject a part of the contract relating to each asset Combine if: Negotiated together Closely interrelated Performed concurrently or in continuous sequence Only separate if: Significantly different Price negotiated without regard to original contract Probable that the economic benefits will flow to the entity Stage of completion can be measured reliably Costs can be measured reliably Fixed Cost Plus Price Contract Methods to decide % of completion Key points to consider Proportion of costs incurred to total estimated cost Completion of a physical proportion Foreseeable future losses Advance and retention moneys Surveys of work Preferable is cost proportion method Costs relating to next stage of completion When reliable estimate cannot be made of outcome Running bills raised on the customers 9

10 Major Disclosures Going forward Contract revenue recognised as revenue during the period method used to determine contract revenue methods used to determine the stage of completion in respect of contracts in progress aggregate of cost/ recognised profits advances received retention money Ind AS 115 A single revenue standard to cover all types of revenue Terms of contract/ performance obligation is the driver Revenue at a Point in time or Over the time 5 Step process prescribed by the Standard Implementation issues at each step 5 Step approach of Ind AS 115 Thank you Identify the contract with a customer Identify the performance obligations Determine the transaction price Allocate the transaction price Recognise revenue ganesanca@yahoo.com/