Overview of Accrual Basis IPSASs Revenue from Exchange Transactions (IPSAS 9) 2016 IPSAS 9 Scope (1) Scope Exchange Transactions: Revenue arising from (a) the rendering of services, (b) the sale of goods, or (c) the use by others of the entity s assets yielding interest, royalties, and dividends or similar distributions. Non-exchange Transactions: Revenue from use of sovereign powers (e.g. taxes, duties and fines), grants and donations. Covered by IPSAS 23 Construction Contracts: Dealt with by IPSAS 11 Revenue under IPSAS 9 comprises both revenue and gains as understood by IFRS, i.e. IPSAS 9 Revenue = IFRS Income Other standards such as IPSAS 17 however distinguishes between revenue and gains Page 2 IPSAS 9 Scope (2) IPSAS 9 does not deal with revenues arising from: Lease agreements (see IPSAS 13) Dividends arising from investments that are accounted for under the equity method (see IPSAS 7); Gains from the sale of PPE (see IPSAS 17); Insurance contracts; Changes in the fair value of financial assets and financial liabilities or their disposal (see IPSAS 29); Changes in the value of other current assets; Initial recognition, and from changes in the fair value of biological assets related to agricultural activity (see IPSAS 27); Initial recognition of agricultural produce (see IPSAS 27); and The extraction of mineral ores. Page 3
Exchange vs. Non-Exchange Transaction Exchange-Transactions Transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in exchange. E.g. sales of goods or services lease of PPE at market rates. Non-Exchange Transactions An entity either receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange. E.g. taxes, duties, fines grants, donations. Page 4 Revenue IPSAS 9 Addresses revenue arising from: Sale of goods E.g. sale of publications, merchandise or property held for resale Rendering of services E.g. provision of housing, management of water facilities, management of toll roads, etc. Use by others of the entity s assets: interest, royalties and dividends Interest charges for the use of cash or cash equivalents, or amounts due to the entity. Royalties charges for the use of long-term assets of the entity, e.g. patents, trademarks, copyrights, computer software... Dividends or similar distributions e.g. from equity investments. Page 5 Sale of goods: Recognition criteria Page 6
Rendering of services: Recognition criteria Percentage of completion method: recognition of revenue by reference to the stage of completion of a transaction Page 7 Rendering of services: Determining the stage of completion Possible methods are: a) Surveys of work performed b) Services performed to date as a percentage of total services to be performed c) The proportion that costs incurred to date bear to the estimated total costs of the transaction. Only costs that reflect services performed to date are included in costs incurred to date. Only costs that reflect services performed or to be performed are included in the estimated total costs of the transaction. Page 8 Rendering of services: outcome can be/cannot be estimated reliably 1. Outcome of the rendering of service can be estimated reliably and the entity is expected to make a reasonable surplus => Percentage of completion method 2. Outcome cannot be estimated reliably but entity expects to recover costs => Revenue recognised to the extent that costs are recoverable 3. Outcome cannot be estimated reliably and entity expects to not recover costs => Revenue not recognised Costs incurred recognised as expense Only recognises revenue when uncertainties resolved Page 9
Identification of a transaction The recognition criteria of IPSAS 9 needs to be applied to each transactions In the case of complex transactions, that consists of two or more services/goods, the transaction needs to be broken down in components. e.g. a service unit of an international organization sells technical equipment with a price of CU100.000 for CU140.000 with a commitment to service the equipment for a period of two years, with no further charge. The service unit would recognize on sale of goods of CU100.000. The balance of CU40.000 would be recognized over two years as service revenue. Page 10 Interest, royalties and dividends Use by others of entity s assets Inflow of economic benefits or service potential probable Revenue measured reliably Special requirements: Page 11 How is revenue measured? Fair value of consideration received or receivable Discount if receipt deferred Rebates and discounts Trade discounts taken into account in determining revenue Volume rebates taken into account in determining revenue Uncollectible revenue Expensed / impaired as bad debts Not deducted from revenue Page 12
How is revenue measured? Exchanges of goods and services: Similar nature and value Not revenue generating transaction E.g. oil, milk Dissimilar nature and value Revenue generating transaction Measured at FV of goods / services received adjusted for any cash transferred Page 13 Examples: When is revenue recognised from? Provision of Housing? Rental income is recognised in accordance with tenancy agreement Science and technology research? Stage of completion on individual contracts Tuition fees? Over the period of the instruction Management of facilities, assets or services? Over the term of the contract as the services are provided Page 14 Revenue Disclosure (IPSAS 9) Accounting policy for recognition including methods adopted to determine stage of completion Revenue from: Sale of goods Rendering of services Interest Royalties Dividends Revenue from exchange of goods / services Page 15
Transitional provisions None. Page 16 Audit implications of IPSAS 9 (1/2) Ensure the applicability of IPSAS 9 for significant revenue streams, i.e. ensure that these are exchange transactions Applicable accounting policy: For each significant revenue stream or contract type perform a walkthrough. For each significant revenue stream or contract type select an appropriate sample of transactions Criteria for recognition: Reconcile criteria with supporting documentation (e.g., sales contracts, invoices, goods delivery notes, etc.) Measurement: Determine that revenues represent the fair value of the consideration received (consider rebates, payment terms, contingent considerations) Cut-off testing: Verify the correct allocation of revenue to the current period by testing samples from shortly before and shortly after the balance sheet date Page 17 Audit implications of IPSAS 9 (2/2) Verify the existence of trade receivables through confirmation or through alternative procedures such as inspection of underlying documentation including subsequent cash receipts or cut-off tests (see before). Perform analytical procedures to identify peaks in revenues in the last few days or weeks of the period and test cut-off by inspecting the revenue register, billings and other supporting documents before and after period-end. Credit balances of trade receivables: Inquire about credit balances. Investigate unusual items. Page 18