Revenue Recognition2

Revenue Recognition

7.Construction contracts (cont)

Recognition of contract revenue and expenses

►When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognized as revenue and expenses respectively by reference to the stage of completion of the contract activity at the end of the reporting period. An expected loss on the construction contract shall be recognized as an expense immediately.

►In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:

(a)total contract revenue can be measured reliably;

(b)it is probable that the economic benefits associated with the contract will flow to the entity;

(c)both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably; and

(d)the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred can be compared with prior estimates.

►In the case of a cost plus contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied:

(a)it is probable that the economic benefits associated with the contract will flow to the entity;

(b)the contract costs attributable to the contract, whether or not specifically reimbursable, can be clearly identified and measured reliably.

Revenue Recognition

7.Construction contracts (cont)

►The stage of completion of a contract may be determined in a variety of ways. The entity uses the method that measures reliably the work performed. Depending on the nature of the contract, the methods may include:

(a)the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs;

(b)surveys of work performed; or

(c)completion of a physical proportion of the contract work.

►Progress payments and advances received from customers often do not reflect the work performed.

►When the outcome of a construction contract cannot be estimated reliably:

(a)revenue shall be recognized only to the extent of contract costs incurred that it is probable will be recoverable; and

(b)contract costs shall be recognized as an expense in the period in which they are incurred.

►An expected loss on the construction contract shall be recognized as an expense immediately.

Revenue Recognition

7.Construction contracts (cont)

Changes in estimates

►The percentage of completion method is applied on a cumulative basis in each accounting period to the current estimates of contract revenue and contract costs.

►The effect of a change in the estimate of contract revenue or contract costs, or the effect of a change in the estimate of the outcome of a contract, is accounted for as a change in accounting estimate.

►The changed estimates are used in the determination of the amount of revenue and expenses recognized in profit or loss in the period in which the change is made and in subsequent periods.

Revenue Recognition

8. Customer loyalty programs

Scope of IFRIC 13

►All transactions where an entity grants award credits to its customers as part of a sales transaction (widely used in retail, hotel and airline industries)

►Doesn’t apply where an entity sells award credits separately

Consensus

►Award credits are accounted for as a separately identifiable component of the sales transaction in which they are granted

►Consideration must be allocated to the award credits by reference to their fair value

►Equal to their fair value

►Represents the relative fair value

►Consideration allocated to award credits is deferred until the risk of a claim being made expires (e.g. expiry date of the credits or when redemption becomes remote)

Revenue Recognition

8. Customer loyalty programs (cont)

► Fair value of award credits - amount for which the awards can be sold separately

Fair value could be:

►Directly observable: May be able to apply same fair value to all transactions; beware different conditions

►Not directly observable

Revenue Recognition

8. Customer loyalty programs (cont)

►Example

►Airline company is issuing premium miles for flight booking amounting to 1,000. (FV of Miles 100)

►Accounting Entries at initial sale

► Accounting entries at Year 1 (100 premium miles were redeemed)

<DR> Deferred Revenue 100

Revenue Recognition

8. Customer loyalty programs (cont)

►Not directly observable fair value must be estimated:

1.Value of each credit assuming 100% redemption

►Range of goods and services offered

►Price at which the entity sells the goods/services

►Discounts available to all customers for these goods/services

►Where there is a choice of awards, the frequency with which each type is redeemed

2.Expected redemption rate

►Changes in the popularity of the programme

►Customers building up large balances

►Changing patterns in redemption rates

►Minimum points required

Revenue Recognition

8. Customer loyalty programs (cont)

Revenue recognition

To calculate the amount of revenue to be recognised in any one period:

Revenue Recognition

8. Customer loyalty programs (cont)

►Not directly observable fair value must be estimated:

1.Value of each credit assuming 100% redemption

►Range of goods and services offered

►Price at which the entity sells the goods/services

►Discounts available to all customers for these goods/services

►Where there is a choice of awards, the frequency with which each type is redeemed

2.Expected redemption rate

►Changes in the popularity of the programme

►Customers building up large balances

►Changing patterns in redemption rates

►Minimum points required

Disclosure requirements

An entity shall disclose:

►the accounting policies adopted for the recognition of revenue including the methods adopted to determine the stage of completion of transactions involving the rendering of services

►the amount of each significant category of revenue recognized during the period, including revenue arising from:

►the sale of goods

►the rendering of services

►interest

►royalties

►dividends

►the amount of revenue arising from exchanges of goods or services included in each significant category of revenue