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.

1. Revenue Recognition in IFRS Yash Batra, ACA

2. 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.

6. 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

7. 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 .

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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

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16. 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

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25. 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.

26. 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)

27. 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)

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29. 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.

30. 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

31. 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.

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