Revenue Recognition2

Revenue Recognition

IAS 18 «Revenue Recognition»

IAS 11 «Construction contracts»

IFRIC 13 «Customer Loyalty Programmes»

Christoph Ortmueller – Senior Manager

Agenda

Scope of IAS 18

Measurement of revenue

Recognition of revenue

Exchange of goods or services

Amounts collected on behalf of 3rd parties – agency relationships

Sale of goods

Rendering of services

Interest, royalties and dividends

Multiple element transactions

Construction contracts

Customer loyalty programs

Disclosure requirements

Revenue Recognition Project

Scope of IAS 18

Scope:

This Standard shall be applied in accounting for revenue arising from the following transactions and events:

►sale of goods

►rendering of services

►use by others of entity assets yielding interest, royalties and dividends

Definition Revenue

►Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants

Scope of IAS 18

►Revenue arising from construction contracts is not dealt with in IAS 18, but is within the scope of IAS 11 «Construction contracts»

►IAS 18 also doesn’t deal with revenue arising from:

►Lease agreements (IAS 17)

►Dividends arising from investments which are accounted for under the equity method (IAS 28)

►Insurance contracts (IFRS 4)

►Changes in the fair value of financial assets and financial liabilities or their disposal (IAS 39)

►Changes in the value of other current assets

►Initial recognition and from changes in the fair value of biological assets related to agricultural (IAS 41)

►Initial recognition of agricultural produce (IAS 41)

►The extraction of mineral ores

Measurement of revenue

Revenue arising on a transaction

►is usually determined by agreement between the entity and the buyer or user of the asset

►should be measured at the fair value of the consideration received or receivable

►trade discounts and volume rebates allowed by the entity should be deducted from revenues

►Fair value – IFRS 13: The price that would be received to

sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Measurement of revenue

Example: Discounts for prompt settlement

►Company A offers a reduction of 5% of the selling price for paying an invoice within 7 days instead of the usual 60 days

►Company A sold goods for €50,000

►Based on previous experience Company A expects that 40% of customers will pay within 7 days to benefit from the discount

►What amount of revenue should be recognised?

Measurement of revenue

Example: Discounts for prompt settlement

►In such cases, in order to comply with IAS 18's requirement that revenue should be measured at the fair value of the consideration received or receivable, [IAS 18.9], prompt settlement discounts should be estimated at the time of sale and deducted from revenues

Measurement of revenue

►When cash inflow is deferred, the fair value of the consideration will be less than the nominal amount of cash received or receivable. In this case 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 (rate of issuer with similar credit rating or rate that discounts to nominal cash price)

►the difference between the fair value and the nominal amount of the consideration is recognized as interest revenue using the effective interest method as set out in IAS 39 “Financial Instruments: Recognition and Measurement”