IFRS15 Revenue from Contracts with Customers (3/5)
- Point of recognition - control is passed
- Contract modification - change in scope / price
- Do these changes result in new contract?
1) Are additional G/S distinct?
2) Price of additional G/S reflect stand alone price?
> can include normal vol. discount but not if not publicly available
Issues with timing of revenue recognition (2)
- The operating cycle - from devising an idea (1) to receipt of cash (9), rev. recog. on delivery of G/S to cust. (8) (as per standards)
- E.g. Cal Micro Fraud - Rev. manipulation - keeping Q open, booking false sales, ask cust to accept additional products (pay later), poor quality products knowing be returned next Q
Previous IAS18 rules (3/5)
- Significant risks and rewards transferred,
- Entity doesn’t retain managerial involvement or control,
- Amount of rev. be reliably measured:
1) Probable that CF will come
2) Costs to be reliably measured
5 step rev. recog. model
1) Identify the contract
2) Identify Performance Objectives (PO’s)
3) Determine transaction price
4) Allocate transaction price to PO
5) Recog. rev. on completion of PO
1) Identify the Contract (4/8)
- Obligations for all parties
- Commercial substance
- Probable that payments will be made
- Combined:
> ‘Single Commercial Objective’
> Similar Time
> Amount paid depends on other contract
> Related - Could be single PO
2) Identify the PO’s (2)
- G/S distinct if: 1) Cust. benefits from G/S on own AND 2) promise to transfer G/S is ‘separately identifiable’
- PO = Promise to cust. to transfer a G/S
3) Determine Transaction Price (2)
- Rev. measured at FV (MV) of consideration received
- If payment not received for period of time (e.g. installments), can discount to reflect time value of money.
4) Allocate Transaction Price to PO’s (2/5)
- Stand alone selling price of PO
- If not directly observable, estimate:
> Market assessment
> Expected cost plus a margin
> Residual - 3 components, know SA for 2, leftover into 3rd
5) Recog. rev. on completion of PO (2/7)
- Rev. allocated to each PO is allocated when that PO is satisfied.
- When control is passed to the customer:
> Entity has right to payment
> Legal title
> Physical possession transferred
> Rewards & risks
> Asset been accepted
Issue 1 (3)
The operating cycle
- Where do we decide the sale occurs, 9 steps from devising an idea (1) to receipt of cash (9).
- Standards say you should recog. rev. once G/S delivered to cust. (8)
Issue 2 (4/6)
Contract Modification:
- Change in scope / price
- Result in separate contracts, 2 part test:
1) Additional G/S distinct?
2) Price of additional G/S reflect its stand alone price? - If G/S distinct > as if old contract terminated and create new contract
- If not distinct > modification as adjustment to rev.
Issue 3 (4)
Transactions in Multiple Parts
- ‘Bundled transactions’ - all together in one contract
- E.g. mobile phone contracts, products with insurance
- Unbundle any components & recog. rev. separately at diff times.
- Transactions recognised according to their own econ. substance.
Issue 4 (2)
The principle / agent problem
- Agent does not control the G/S
- E.g. Lastminute.com, Agents reporting whole rev. & costs of principle as own, bottom line profit stay same but makes co look a lot larger.
Issue 5 (5)
Expected / Fair Values of rev. based on forecast models
- E.g. Tesco Accounting Scandal:
> Recog. supplier rebates as rev.
> Payments for product placement, advertising & promotions recog. as rev. - should be reduction in CoS
> Rev. recog. based on forecast models > FV not actual
> Market share lost, model assumptions remained unchanged
Blue Jeans Retail Scenario, Accounting Entries (5)
Dr Cash / Debtors - total rev in here
Cr Revenue - 99%units sold, not inc. refund estimate
Cr Deferred Income (/Provision for Refund) - SAA
Dr Cost of Sales - Same as rev. so 99%
Cr Inventory - Taking out 99%, even tho 1% has left and is with cust.
Blue Jeans Retail Scenario, Recording Sales Transactions
5
Sales - 99% @ SP
Cost of Sales - 99% @ cost
Gross Profit
Remaining Inventory - 1% @ Cost (lower of 2)
Deferred Revenue - 1% @ SP
Blue Jeans Retail Scenario
- If level of refund cannot be accurately estimated, rev. prob not recog. till after refund period.
- IFRS15 adoption > changes in way org. account for expected refunds.
- Previously, create provision for just the lost margin and not lost sales i.e. (20-12.50) x 20
