• Save
Revenue Recognition In IFRS By Yash Batra
Upcoming SlideShare
Loading in...5
×
 

Revenue Recognition In IFRS By Yash Batra

on

  • 19,057 views

Detailed Presentation on revenue recognition as per IFRS. Accounting on revenue recognition is critical especially when World has defined path to follow IFRS accounting and reporting of its ...

Detailed Presentation on revenue recognition as per IFRS. Accounting on revenue recognition is critical especially when World has defined path to follow IFRS accounting and reporting of its financial. I have tried to capture all critical aspects of revenue recognition in this presentation.

Statistics

Views

Total Views
19,057
Views on SlideShare
18,988
Embed Views
69

Actions

Likes
6
Downloads
0
Comments
0

3 Embeds 69

http://www.slideshare.net 64
http://www.linkedin.com 4
http://webcache.googleusercontent.com 1

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

Revenue Recognition In IFRS By Yash Batra Revenue Recognition In IFRS By Yash Batra Presentation Transcript

  • Revenue Recognition in IFRS Yash Batra, ACA
  • Disclaimer This communication does not necessarily reflects views of my past of present employers. Views presented here are solely personal to me and only for academic discussion purposes. This material not meant to be professional advise, and no liability is assumed due to any use of this material.
  • Introduction
    • Yash Batra
    • Education: Chartered Accountant & Masters in Commerce
    • Member of The Institute of Chartered Accountants of India
    • Internal audit leadership role with a Fortune 200 company.
    • Eight years of experience in Internal Auditing across Asia Pacific and EMEA Region
    • YashBatra78 at yahoo dot com
  • Objectives
    • Applicable standards on interpretations on revenue recognition (IAS 18, IAS 11 and IAS 20)
    • Sales of Goods
    • Sales of Services
    • Interest, royalties and dividends
    • Multiple Elements Contracts
    • Construction Contracts
    • Government Grants
    • Other
  • Standards and Interpretations
    • Standards IFRS has mainly two standard and four interpretations on revenue recognition. Applicable standards on interpretations on revenue recognition (IAS 18 - Revenue, IAS 11 – Construction Contracts). Also, IAS 20 describes the accounting of ‘Government Grants’.
    • Interpretations Following four interpretations are available:
    • IFIRC 13 - Customer Loyalty Programmes
    • IFIRC 15 - Agreements for the Construction of Real Estate
    • IFIRC 18 - Transfers of Assets from Customers
    • SIC 31 - Barter Transactions Involving Advertising Services
  • IAS 18 - Revenue This Standard applies in accounting for revenue arising from the following transactions and events: Interest, Royalties & Dividends Sale of Goods Rendering of Services
  • IAS 18 - Sale of Goods Revenue from the sale of goods shall be recognized when all the following conditions have been satisfied: (a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; (b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably ; (d) it is probable that the economic benefits associated with the transaction will flow to the entity; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably .
  • IAS 18 - Sale of Goods Examples of transactions where the Seller retains significant risks and rewards of ownership and revenue is not recognized are when: The receipt of revenue from a particular sale is contingent on the buyer in turn obtaining revenue from its sale of the goods. Buyer has the power to rescind the purchase for a reason specified in the sales contract and the entity is uncertain about the probability of return. Goods are shipped subject to installation and installation is a critical part of the contract.
  • IAS 18 - Sale of Services Revenue from the sale of services should be recognize when all the following conditions are satisfied: (a) the amount of revenue can be measured reliably; (b) it is probable that the economic benefits associated with the transaction will flow to the entity; (c) the stage of completion (by using percentage of completion method) of the transaction at the balance sheet date can be measured reliably; and (d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
  • IAS 18 - Interest, Royalties & Dividends Revenue shall be recognized on the following bases: a) Interest income is recognized using the effective interest rate method as set out in IAS 39 b) Royalties are recognized on an accruals basis in accordance with the substance of the relevant agreement. (c) Dividends are recognized when the shareholder’s right to receive payment is established.
  • IAS 18 - Multiple Elements Contracts Many companies often enter into composite contracts especially Technology companies such as software licenses, implementation services, software development services and ongoing maintenance/support services. Under IFRS, the substance of the transaction need to be considered to determine whether the various components should be treated as a single deliverable or accounted for separately (multiple element accounting). Accordingly, the general IFRS revenue recognition criteria are then applied to each component of a contract such as sale of goods and sale of services.
  • IAS 18 - Multiple Elements Contracts In example in case of IT company for sale of software as a single contract including software licenses, implementation services, software development services and ongoing maintenance/support services. a) Sale of software licenses - should be recognize on the sales of goods criteria. b) Implementation services with other support services – revenue is recognize when such services are provided, either on the straight line or percentage completion method.
  • IAS 18 - Multiple Elements Contracts In example in case of IT company for sale of software as a single contract including software licenses, implementation services, software development services and ongoing maintenance/support services. Sale of software licenses recognize on the sale of goods criteria. Services related to the software sold Straight-line or Percentage of completion basis Customized Software Percentage of completion basis
  • Refresh Your Learning!!
  • IFRIC 13-Customer Loyalty Programmes
    • Effective annual periods beginning on or after 1 July 2008
    • Initial sale and award credits are separate components
    • Allocate consideration to award credits equal to the fair value of the undelivered component or relative to the fair value of other components
    • Revenue recognized as obligation is fulfilled
  • IFRIC 13-Customer Loyalty Programmes IFRIC 13 requires consideration to be allocated by reference to the fair value of the award credits – Allocated amount is the amount for which the award credits could be sold separately (observable market) – If market is not observable then management to estimate fair value of credits taking into account redemption rates Total consideration received or receivable Initial Sales Award Credits Allocate based on the Fair Value
  • Refresh Your Learning!!
  • IAS 11 - Construction Contracts
    • Applies to Fixed Price Contract and Cost Plus Construction Projects of contractor of construction of a single assets or multiple assets that are interrelated or interdependent in terms of design, technology, function or ultimate use. A buyers ability to specify the major structural elements of the design is the key factor of construction contract accounting.
    • Under IAS 11, if a contract covers two or more assets, the construction of each asset should be accounted for separately if
    • a) separate proposals were submitted for each asset,
    • (b) portions of the contract relating to each asset were negotiated separately, and
    • (c) costs and revenues of each asset can be measured.
    • Otherwise, the contract should be accounted for in its entirety. [IAS 11.8]
  • IAS 11 - Construction Contracts
    • Accounting
    • Percentage of Completion Method – If the outcome of a construction contract can be estimated reliably, revenue and costs should be recognized in proportion to the stage of completion of contract activity. The entity must be able to make a reliable estimate of total contract revenue , the stage of completion and the costs to complete the contract. When final outcome of the contract cannot be estimated reliably , a zero profit method is utilized (revenue is recognized to the extent of cost).
    • Completion Contract Method – is prohibited under IAS 11.
  • IAS 11 - Construction Contracts
    • The stage of completion of a contract can be determined in a variety of ways: including the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, surveys of work performed, or completion of a physical proportion of the contract work.
    • An expected loss on a construction contract should be recognized as an expense as soon as such loss is probable.
  • Refresh Your Learning!!
  • IAS 20 - Government Grants
    • applies to all government grants and other forms of government assistance.
    • Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity.
    • However, it does not cover government assistance that is provided in the form of benefits in determining taxable income. It does not cover government grants covered by IAS 41 Agriculture, either. The benefit of a government loan at a below-market rate of interest is treated as a government grant.
  • IAS 20 - Government Grants
    • Accounting
    • A government grant is recognized only when there is reasonable assurance that (a) the entity will comply with any conditions attached to the grant and (b) the grant will be received.
    • The grant is recognized as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis.
    • Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although recording both the asset and the grant at a nominal amount is also permitted.
  • Refresh Your Learning!!
  • Other – Extended Warranty If an entity sells the extended warranty, the revenue from the sale should be deferred and recognize over the period covered in warranty. If the extended warranty is the key component of the sale, entity should allocate relative fair value to each components.
  • Other – Extended Warranty Sale of a Laptop with one year warranty of US$ 1000 (3 Year warranty is sold for US$ 100 separately) Sale of Laptop US$ 900 Interest Income US$ 100 Recognize revenue based on principles for sale of goods (based on delivery terms) Recognize revenue based on principles for sale of services (on straight line basis over 3 years)
  • Other – Discounting of Revenue Discounting of revenue to present value where inflow of cash or cash equivalent is deferred. In such cases, an attributable interest rate should be used to determine the revenue and interest income to be recovered over a period of time. Recognize the present value of interest income over 10 months. Sale of a Laptop of US$ 1000 on 10 EMI of US$100 each (Say Interest Cost US$ 100) Sale of Laptop US$ 900 Interest Income US$ 100 Recognize revenue based on principles for sale of goods (based on delivery terms)
  • Refresh Your Learning!!
  • Other – Barter Transactions (SIC 31) Advertising Barter Transactions Revenue from a barter transaction involving advertising cannot be measured reliably at the fair value of advertising services received. However, 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: (a) involve advertising similar to the advertising in the barter transaction; (b) occur frequently; (c) 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; (d) involve cash and/or another form of consideration that has a reliably measurable fair value; and (e) do not involve the same counterparty as in the barter transaction.
  • Other – Barter Transactions (SIC 31) Non Advertising Barter Transactions Use fair value of the goods or services received for measuring a barter transaction. Where the fair value of the goods or services received is not reliably measurable, the fair value of the goods or services surrendered is considered
  • Other – Transfers of Assets from Customers (SIC 31) It applies to a agreements in which an entity receives from a customer an item of property, plant, and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services (such as a supply of electricity, gas or water). In some cases, the entity receives cash from a customer that must be used only to acquire or construct the item of property, plant, and equipment in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services (or to do both). The recipient must recognize 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. The deemed cost of that asset is its fair value on the date of the transfer.
  • Other – Transfers of Assets from Customers (SIC 31)
    • If the entity has only one service obligation, it would recognize 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 recognize 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 recognized is generally determined by the terms of the agreement with the customer. If the agreement does not specify a period, the revenue shall be recognized over a period no longer than the useful life of the transferred asset used to provide the ongoing service.
  • Refresh Your Learning!!
  • Bibliography
    • IAS and IFRS published by Standard setting body responsible for the development of International Financial Reporting Standards (IFRS)
    • http://www.iasb.org/Home.htm
    • Releases published by Big4 firms on revenue recognition.
  • Thank you!!