ICAI Webcast Revenue Recognition

1. ICAI WebcastRevenue Recognition November 10 2014 IAS 18, IAS 11, IFRIC 18, and SIC 31, IAS 11, IFRIC 15, IFRIC 12, SIC 29​

2. IAS 18 Revenue

3. Objective • prescribe the accounting treatment of revenue arising from certain types of transactions and events. • circumstances in which revenue recognition criteria will be met and, therefore, revenue will be recognised • practical guidance on the application of these criteria.

4. Scope • the sale of goods; • the rendering of services; and • the use by others of entity assets yielding interest, royalties and dividends. • lease agreements • dividends arising from investmentwhich are accounted for under the equity method • insurance contracts within the scope of IFRS 4 • changes in the fair value of financial assets and financial liabilities or • their disposal • changes in the value of other current assets; • initial recognition and from changes in the fair value of biological assets • initialrecognition of agricultural produce and • the extraction of mineral ores. In scope Out of Scope

5. Measurement • Revenue shall be measured at the fair value of the consideration received or receivable. • Financing transaction • Barter or swap of goods of similar nature- not revenue

6. Identification • usually applied separately to each transaction. • in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction

7. Sale of goods- Recognition • the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; • the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; • the amount of revenue can be measured reliably; • it is probable that the economic benefits associated with the transaction will flow to the entity; and • the costs incurred or to be incurred in respect of the transaction can be measured reliably.

8. Rendering of Services • the stage of completion of the transaction at the end of the reporting period. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: • when the buyer has the right to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return. • the amount of revenue can be measured reliably; • it is probable that the economic benefits associated with the transaction will flow to the entity; • the stage of completion of the transaction at the end of the reporting period can be measured reliably; and • the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.3

9. Services • When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable.

10. Interest, Royalties and Dividends • interest shall be recognised using the effective interest method as set out in IAS 39, • royalties shall be recognised on an accrual basis in accordance with the substance of the relevant agreement; and • dividends shall be recognised when the shareholder’s right to receive payment is established.

11. Examples • Bill and Hold sales • Goods shipped subject to conditions • Lay away sales • Sale and repurchase transaction • Sales to intermediate parties • Subscription to publications • Instalment Sales • Fees

12. IAS 11 Construction Contracts

13. Objective and Scope • prescribe the accounting treatment of revenue and costs associated with construction contracts • This Standard shall be applied in accounting for construction contracts in the financial statements of contractors.

14. Definitions • A construction contract is a 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. • A fixed price contract is a construction contract in which the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses. • A cost plus contract is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee.

15. Segregating • separate proposals have been submitted for each asset; • each asset has been subject to separate negotiation and the contractor and customer have been able to accept or reject that part of the contract relating to each asset; and • the costs and revenues of each asset can be identified.

16. Combining • A group of contracts, whether with a single customer or with several customers, shall be treated as a single construction contract when: • the group of contracts is negotiated as a single package; • the contracts are so closely interrelated that they are, in effect, part of a single project with an overall profit margin; and • the contracts are performed concurrently or in a continuous sequence.

17. Additional Asset •  the asset differs significantly in design, technology or function from the asset or assets covered by the original contract; or •  the price of the asset is negotiated without regard to the original contract price.

18. Contract Revenue • Contract revenue shall comprise: • the initial amount of revenue agreed in the contract; and • variations in contract work, claims and incentive payments: • (i) to the extent that it is probable that they will result in revenue; and • (ii) they are capable of being reliably measured.

19. Contract Costs • Contract costs shall comprise: • (a) costs that relate directly to the specific contract; • (b) costs that are attributable to contract activity in general and can be allocated to the contract; and • (c) such other costs as are specifically chargeable to the customer under the terms of the contract.

20. Recognition • When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract shall be recognised 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 recognised as an expense immediately

21. Fixed Price contract- outcome • (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.

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

23. Recognition • When the outcome of a construction contract cannot be estimated reliably: • (a) revenue shall be recognised only to the extent of contract costs incurred that it is probable will be recoverable; and • (b) contract costs shall be recognised as an expense in the period in which they are incurred. • An expected loss on the construction contract shall be recognised as an expense immediately

24. IFRIC 13- Customer Loyalty Programs • allocate some of the proceeds of the initial sale to the award credits as a liability (its obligation to provide the awards). In effect, the award is accounted for as a separate component of the sale transaction. • The amount of proceeds allocated to the award credits is measured by reference to their fair value, that is, the amount for which the award credits could have been sold separately. • The entity shall recognise the deferred portion of the proceeds as revenue only when it has fulfilled its obligations. It may fulfil its obligations either by supplying the awards itself or by engaging a third party to do so.

25. IFRIC 13 • If at any time the expected costs of meeting the obligation exceed the consideration received, the entity has an onerous contract for which IAS 37 would require recognition of a liability. • If IFRIC 13 causes an entity to change its accounting policy for customer loyalty awards, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors applies

26. IFRIC 18- Transfer of Assets from Customers • meets the definition of an asset under the IASB Framework from the perspective of the recipient, the recipient must recognise the asset in its financial statements. • If the customer continues to control the transferred item, the asset definition would not be met even if ownership of the asset is transferred to the utility or other recipient entity

27. IFRIC 18 • If the entity has only one service obligation, it would recognise revenue when the service is performed. • If the entity has more than one separately identifiable service obligation, it should allocate the fair value of the total consideration received to each service and recognise revenue from each service separately in accordance with IAS 18. • If the entity has an obligation to provide ongoing services, the period over which revenue is recognised is generally determined by the terms of the agreement with the customer. If the agreement does not specify a period, the revenue shall be recognised over a period no longer than the useful life of the transferred asset used to • provide the ongoing service.

28. SIC-31 Revenue Barter transaction involving Advertising • a seller can reliably measure revenue at the fair value of the advertising services it provides in a barter transaction by reference only to non-barter transactions that: • involve advertising similar to the advertising in the barter transaction • occur frequently • represent a predominant number of transactions and amount when compared to all transactions to provide advertising that is similar to the advertising in the barter transaction • involve cash and/or another form of consideration (such as marketable securities, non-monetary assets, and other services) that has a reliably measurable fair value • do not involve the same counterparty as in the barter transaction.

29. IFRIC 15- Agreements for Construction of Real Estate • IAS 11 or IAS 18? • An agreement for the construction of real estate is a construction contract within the scope of IAS 11 only when the buyer is able to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether it exercises that ability or not). • If the buyer has that ability, IAS 11 applies. • If the buyer does not have that ability, IAS 18 applies.

30. IFRIC 12- Service Concession Arrangements • a financial asset- specifically an unconditional contractual right to receive a specified or determinable amount of cash or another financial asset from the government in return for constructing or upgrading a public sector asset, and then operating and maintaining the asset for a specified period of time. . • In the other, the operator receives an intangible asset – a right to charge for use of a public sector asset that it constructs or upgrades and then must operate and maintain for a specified period of time.

31. Accounting • The operator recognises a financial asset to the extent that it has an unconditional contractual right to receive cash or another financial asset from or at the direction of the grantor for the construction services. The operator has an unconditional right to receive cash if the grantor contractually guarantees to pay the operator specified or determinable amounts or • the shortfall, if any, between amounts received from users of the public service and specified or determinable amounts, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements. • The operator measures the financial asset at fair value.

32. Accounting • The operator recognises an intangible asset to the extent that it receives a right (a licence) to charge users of the public service. A right to charge users of the public service is not an unconditional right to receive cash because the amounts are contingent on the extent that the public uses the service. • The operator measures the intangible asset at fair value. • SIC 29- Disclosures

33. Accounting • The operator of a service concession arrangement recognises and measures revenue in accordance with IASs 11 and 18 for the services it performs.

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