IAS 18 Revenue

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IAS 18 Revenue
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Scope

• This Standard shall be applied in accounting for
  revenue arising from the following transactions
  and events
• (a) the sale of goods
• (b) the rendering of services and
• (c) the use by others of entity assets yielding
  interest, royalties and dividends.

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Scope out

• This Standard does not deal with revenue arising
  from
• (a) lease agreements (IAS 17)
• (b) dividends arising from investments which are
  accounted for under the equity method (IAS 28)
• c) insurance contracts within the scope of IFRS
  4, Insurance Contracts
• (d) changes in the fair value of financial assets
  and financial liabilities or their disposal (IAS
  39)
• (e) changes in the value of other current assets
• (f) initial recognition and from changes in the
  fair value of biological assets related to
  agricultural activity
• (g) initial recognition of agricultural produce
  (IAS 41) and
• (h) the extraction of mineral ores.

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Effective Dates

• This Standard becomes operative for financial
  statements covering periods beginning on or after
  1 January 1995.

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Definition

• Revenue
• 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...
• measured at the fair value of the consideration
  received or receivable

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Measurement of Revenue

• Financing component of revenue

When the arrangement effectively constitutes a
financing transaction, (e.g. an entity may
provide interest free credit to the buyer or
accept a note receivable bearing a below-market
interest rate from the buyer), the fair value of
the consideration is determined by discounting
all future receipts using an imputed rate of
interest.
180 days
To be paid in 180 days
Sales date Nominal amount 100
Discounted amount 95
Discounted at market rate
Interest income 5
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Sale of Goods

• Revenue from the sale of goods shall be
  recognised 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.

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Rendering of Services

• When the outcome of services rendered can be
  estimated reliably, revenue shall be recognised
  by reference to the stage of completion at the
  balance sheet date.
• The outcome of a transaction can be estimated
  reliably 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 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.

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Interest, Royalties and Dividends

• interest shall be recognised using the effective
  interest method as set out in IAS 39, paragraphs
  9 and AG5AG8
• (b) royalties shall be recognised on an accrual
  basis in accordance with the substance of the
  relevant agreement and
• (c) dividends shall be recognised when the
  shareholder's right to receive payment is
  established (e.g. Formal approval of shareholders
  rather than expectation of management)

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Measuring Revenue "Gross" Or "Net

• In an agency relationship, "gross" amounts
  collected by the agent on behalf of the principal
  are not benefits that flow to the agent and,
  therefore, are not revenue.
• The agent's revenue is the "net" amount of the
  commission.
• INDICATORS OF AGENT
• The supplier (and not the seller) is the
  primary obligor in the arrangement.
• The seller earns a fixed or determinable
  amount.
• The supplier (and not the seller) has credit
  risk.

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MEASURING REVENUE "GROSS" OR "NET

• INDICATORS OF PRINCIPAL
• Is the primary obligor in the arrangement.
• Has general inventory risk (before the customer
  order is placed or on customer return).
• Has latitude in establishing price.
• Changes the product or performs part of the
  service.
• Has discretion in supplier selection.
• Is involved in determining product or service
  specifications.
• Has physical loss inventory risk (after the
  customer order or during shipping).
• Has credit risk.
• Is responsible for warranty or quality risk on
  the product(s) sold or service(s) rendered.

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SALES ARRANGEMENTS IN WHICH THE SELLER HAS
PARTIALLY PERFORMED ITS OBLIGATIONS

• Q Does failure to deliver one item or to perform
  one service specified by a sales arrangement
  preclude the immediate recognition of any revenue
  for that sales arrangement?

A No. Revenue from the sales arangement may be
recognised in full if the remaining obligation is
inconsequential or perfunctory. Costs to
complete shall be reliably estimable and accrued
for.
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SALES ARRANGEMENTS IN WHICH THE SELLER HAS
PARTIALLY PERFORMED ITS OBLIGATIONS

• Not Inconsequential - Perfunctory if
• Essential to functionality of delivered item
  (e.g. installation, training)
• Faliure to complete would result in customers
  rejection or right to refund
• No history of timely completion or reliable
  estimate of costs by seller
• Historically, cost to complete varied
  significantly
• Sources required to complete are specialized and
  are not readily available in the market.
• Cost to complete is more than insignificant
  compared to total fee / profit.

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UP-FRONT FEES

• Upfront fee is recognised as revenue over the
  life of the agreement if
• The fee is not in exchange for products delivered
  or services performed
• The fee is negotiated in conjunction with the
  pricing of other elements
• Customer would ascribe a lower value or no value
  to the upfront fees in the absence of the
  performance of other elements of the arrangement
• The vendor does not sell the initial right or
  activities seperately.

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GOODS SHIPPED FOB SHIPPING POINT BUT SELLER
ARRANGES SHIPPING
Insured by Company A
Assumed risk during shipment
FOB Shipping Point
Company A

• May Company A recognise revenue once its products
  have been shipped?

No. While title has passed, Company A has
retained a significant risk of ownership. The
fact that Company A's insurance would cover a
substantial loss is evidence that it has managed
its risk, but Company A has still retained the
risk.
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GOODS SHIPPED FOB DESTINATION BUT SHIPPING
COMPANY ASSUMES RISK
Company A
FOB Destination

• May Company A recognise revenue once its products
  have been shipped?

No. While Company A has managed its risk, it has
not transferred tisk to the buyer.
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UNLIMITED RIGHT OF RETURN

• Q Company A distributes VCDs and DVDs and allows
  key customers to return any slow-moving stock.
  The returns could result in replacement with
  other VCDs and DVDs or return of cash. Company A
  is able to make a reliable estimate of the amount
  of returns.How should Company A account for its
  revenues?

A The entity has transferred to the buyer the
significant risks and rewards of ownership.
Revenue should be recognised on initial delivery
of the goods in an amount that reflects a
reduction for the estimated amount to be
returned.
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RETENTION OF TITLE
Non-cancellable purchase order
Title is witheld until payment
Company A
Customer
May Company A recognise revenue once its products
have been shipped?
A If a seller retains legal title solely to
protect the collectibility of the amount due,
revenue recognition is not precluded.
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CUSTOMER ACCEPTANCE PROVISION
Delivery
Production
Customer Acceptance
Collection
-Only if the probability of non-acceptance can
be reliably estimable based on historical data.
Recognize revenue at delivery with a provision
for estimated returns?
OR?
-Otherwise wait until earlier of acceptance and
expiry of acceptance period.
Wait until acceptance?
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LAY AWAY SALES (ÖN ÖDEMELI SATISLAR)
Company A
Total price 2000 Upfront paid 1200
Delivery is witheld until final payment

• Company Z's lay away policy requires that
  customers put down at least 25 per cent of the
  sales price as an up-front, non-refundable
  deposit. Once a deposit is received, Z identifies
  the product to be sold and segregates it in its
  warehouse.
• Company Z's experience with lay away sales is
  that most sales are consummated with an average
  six-month lay away period before the customer
  pays the entire sale amount.
• How should Company Z account for the deposit
  received?

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LAY AWAY SALES
Revenue is recognized when a "significant"
deposit is received. The determination of whether
a deposit is considered significant is a matter
of careful judgment, based on all of the relevant
facts and circumstances. In any case, the final
conclusion should be supported by sufficient
objective evidence. In this case, the deposit
is significant, and therefore, Company A would
recognise the sale for the home theatre for
2,000 in November 2001, with a receivable for
800.
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REVENUE RECOGNITION "TRADE LOADING" AND "CHANNEL
STUFFING"

• Sometimes manufacturers or dealers try to
  enhance the apparent volume of their sales,
  profits, and/or market share by inducing their
  wholesale customers to buy more product than they
  can promptly resell. The result is accelerated,
  but not increased, volume, because the
  wholesalers' inventories become bloated and their
  future orders from the manufacturers are reduced.
  This practice is known as "trade loading" or
  "channel stuffing".
• How is revenue recognised in the case of trade
  loading or channel stuffing?

If the revenue recognition criteria in IAS 18.14
for sales of goods are met, the revenue should be
recognised. Revenue is recorded net of the
expected returns. Therefore, management must
estimate the amount of product to be returned.
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BILL AND HOLD SALES
Non-cancellable purchase order
Customer
Company A
Delivery is delayed on customers request

• Revenue can only be recognized only if the
  following are met
• Delivery is probable
• Item is identified and ready for delivery
• Buyer specifically acknowledges the deferred
  delivery instructions
• Usual payment terms apply
• Buyer must have a substantial business purpose
  for bill and hold basis

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SALE WITH A BUYBACK AGREEMENT/OPTION
Title is transferred at delivery
Sold for 50m - agreed to buyback at 60m
Company A
Bought back for 60m
Should Company A recognise revenue and cost of
goods sold at the time of delivery?
A No. Company A has not transferred to the
buyer the significant risk and reward of
ownership. Transaction is in the nature of a
financing arrangement.
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SALE WITH A BUYBACK AGREEMENT/OPTION
Company A is
A a) Company A retains benefit of ownership
(ability to profit from price difference). If
significant, revenue should not be recognised
until expiration.
b) If A had the right to buy back at market price
and the goods are readily available in the
market, revenue is recognized at the time of
delivery.
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SALES WHERE THERE ARE SEPERATELY IDENTIFIABLE
COMPONENTS
Q Company Z operates a chain of supermarkets
and they have just launched their campaign for
the month of Ramadan. The campaign includes a
fixed price of 240 TL for a Ramadan pack which
includes an assortment of different food
products, an alarm clock, 5 time free car
washing service from the car washing centers
operated next to the supermarkets (the car
washing service is owned by Company Z) and cell
phone top up card for 1,000 minutes to be used in
the mobile virtual network operated by Company
Z. How should Company account for the 240 TL
received from the customers of this campaign?
A IAS 18 paragraph 13 requires to apply the
recognition criteria to the separately
identifiable components of a single transaction
in order to reflect the substance of the
transaction. As a result, Company Z would have
to divide this pack to separately identified
components and recognise revenue separately for
every component by applying appropriate
recognition criteria.
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