1. IAS 18 Revenue K K Tulshan Executive Director, Cyber Media

2. 2 IAS 18 v AS 9 Measurement  IAS 18 – Fair Value / Discounting Method  IAS 18 – Proportionate completed method only  AS 9 – Completed service contract method also Interest Revenue  IAS 19 – Effective interest method  AS 9 – Time proportion basis

3. 3 Introduction Why a standard on revenue  Usually the largest single item reported  Top line in the income statement  Generally accepted as a measure of size and growth of an entity  Key variable in a number of calculations / ratios. Directly impacts Gross Margin Operating Profit EBITDA EPS

4. 4 Objective Prescribes the accounting treatment of revenue arising from certain types of transactions and events Lays down the revenue recognition criteria Identify the circumstances when the criteria will be met

5. 5 Scope Applies to revenue from  The sale of goods  The rendering of services  Use by others of assets belonging to the activities and giving rise to interest, royalties and dividends

6. 6 Exclusions IAS 18 does not apply to revenue from  Lease agreements (IAS 17)  Dividends from investment in associates (IAS 28)  Insurance contracts (IAS 4)  Changes in the fair value of financial assets and liabilities or their disposal (IAS 39)  Changes in the fair value of other current assets  Initial recognition and changes in the fair value of biological assets related to agricultural activity (IAS 41)  Initial recognition of agricultural produce (IAS 41)  The extraction of mineral ores  Construction contracts (IAS 11)

7. 7 Key Terms - Revenue Is the gross inflow of economic benefits during the period arising in the course of ordinary activities when those inflows result in increases in equity, other than increases relating to contributions from equity participants

8. 8 Revenue Includes only amount on own account Excludes amount collected on behalf of third parties such as  Sales tax  GST  VAT  Amount collected on behalf of principal as in agency relationship

9. 9 Income versus Revenue Income  is increases in economic benefits  during the accounting period  in the form of inflows or enhancements of assets or decreases of liabilities  that result in increases in equity,  other than those relating to contributions from equity participants Income includes  Revenue  Gains Gains - example  Disposal of non-current assets

10. 10 Approach Determine substance of the contract Identify components within the contract Test recognition criteria Compute amount at which revenue is to be measured Disclose the requisite information

11. 11 Identification of the transaction Segmenting:  Recognition criteria usually applied separately to each transaction.  Sometimes applied to the separately identifiable components of a single transaction in order to reflect the substance of the transaction Example:  when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognised as revenue over the period during which the service is performed.

12. 12 Identification of the transaction Combining:  Also applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole. Example:  an entity may sell goods and,at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together.

13. 13 Identification of transaction: Exchange transactions Exchange Transactions:  When similar nature goods or services are swapped, no revenue  When dissimilar goods or services are swapped, recognize revenue and measure it on Fair value of goods or services received If not possible, then on fair value of goods or services given up Less any adjustment for cash / cash equivalent

14. 14 Exchange transactions Exercise 1:  ABC swapped dissimilar goods with XYZ.Market value of inventory of ABC is 1.2 lacs and XYZ is 1.3 lacs. ABC also paid Rs. 6,000 besides the inventory.  How will you measure revenue for ABC & XYZ

15. 15 Exchange transactions Exercise 1 - Solution  ABC 1.3-0.06=1.24 lacs  XYZ 1.2+0.06=1.26 lacs

16. 16 Revenue from Sale of Goods Goods includes  Goods produced by the party for the purpose of sale  Goods purchased for resale

17. 17 Revenue from Sale of Goods Recognize when ALL the following conditions are satisfied 1)The entity has transferred to the buyer the significant risks and rewards of ownership of goods 2)The entity retains neither continuing involvement to the degree usually associated with ownership nor effective control over the goods sold 3)The amount of revenue can be measured reliably 4)It is probable that the economic benefits associated with the transaction will flow to the entity 5)The costs incurred or to be incurred in respect of the transaction can be measured reliably

18. 18 Revenue from Sale of Goods Condition 1: Transfer of significant risks and rewards of ownership  Usually occurs when legal title or possession is transferred to buyer  May also occur before or even after delivery

19. 19 Revenue from Sale of Goods Examples of retaining significant risk of ownership  When the entity retains an obligation for unsatisfactory performance not covered by normal warranty provisions  When the receipt of revenue from a particular sale is contingent on the derivation of revenue by the buyer from its sale of goods  When the goods are shipped subject to installation and the installation is a significant part of the contract which has not yet been completed by the entity  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

20. 20 Revenue from Sale of Goods Examples of not retaining significant risk of ownership  a seller may retain the legal title to the goods solely to protect the collectibility of the amount due.  a retail sale when a refund is offered if the customer is not satisfied.

21. 21 Revenue from Sale of Goods Condition 2: Retains neither continuing involvement to the degree usually associated with ownership nor effective control over the goods sold Indicators  The seller can control the future price of the item  The seller is responsible for the management of the goods subsequent to the sale  The terms of the transaction allow the buyer to compel the seller, or give an option to the seller, to repurchase the item  The seller guarantees the return of the buyer’s investment or a return on that investment for a limited or extended period

22. 22 Measurement of Revenue Fair value of the consideration received / receivable  Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.  Generally, revenue is the amount of cash or cash equivalents received or receivable.  However, when the inflow of consideration is deferred, discount all future receipts using an imputed rate of interest, and Recognize difference as interest revenue Reduce trade discounts and rebates

23. 23 Revenue from Sale of Goods Condition 3: The amount of revenue can be measured reliably  An entity is generally able to make reliable estimates after it has agreed to the following with the other party to transaction Each party’s enforceable rights regarding the goods to be provided and received by the parties The consideration to be exchanged The manner and terms of settlement  In addition, it will be necessary for an entity to have an effective internal budgeting and reporting system for it to make reliable estimates and, in subsequent periods, to compare those estimates to the actual costs incurred to date

24. 24 Revenue from Sale of Goods Condition 4: It is probable that the economic benefits associated with the transaction will flow to the entity Illustration  It may be uncertain that a foreign government authority will grant permission to remit the consideration from a sale in a foreign country  Recognize only when permission is granted

25. 25 Revenue from Sale of Goods Condition 5: The costs incurred or to be incurred in respect of the transaction can be measured reliably Matching Concept If expenses can not be measured reliably,  the revenue can not be recognized.  In such a case, consideration, if any received is recognized as a liability.

26. 26 Revenue from Rendering of Services Recognize  By reference to the stage of completion at the end of reporting period  When outcome of a transaction can be estimated reliably

27. 27 Revenue from Rendering of Services Outcome of a transaction can be estimated reliably if ALL the following conditions are satisfied 1)The amount of revenue can be measured reliably 2)It is probable that the economic benefits associated with the transaction will flow to the entity 3)The stage of completion of the transaction at the end of the reporting period can be measured reliably 4)The costs incurred on the transaction and the costs to complete the transaction can be measured reliably

28. 28 Revenue from Rendering of Services Reliable estimates can be made after an entity has agreed the following with other parties of the transaction  Each party’s enforceable rights regarding the service to be provided and received by the party  The consideration to be exchanged  The manner and terms of settlement In addition, it will be necessary for an entity to have an effective internal budgeting and reporting system for it to make reliable estimates and, in subsequent periods, to compare those estimates to the actual costs incurred to date

29. 29 Revenue from Rendering of Services Stage of Completion / Performance over time Percentage completion method Completion contract method not permitted Methods for determining the stage of completion includes  Surveys of work performed  Services performed to date as a percentage of total services to be performed  The proportion that costs incurred to date bear to the estimated costs of the transaction Progress payments / advances – not reliable indicators Use SLM when indeterminate number of act If one specific act more significant – postpone till that act is performed

30. 30 Revenue from Rendering of Services When the outcome of a transaction cannot be estimated reliably  Revenue is recognized to the extent of expenses that are likely to be recovered  If it is probable that no expenses could be recovered then no revenue is recognized Costs incurred are recognized as expense When the outcome can be recognized reliably  Recognize on percentage completion method

31. 31 Revenue from Interest, royalties and dividends General Principle  It is probable that the economic benefits associated with the transaction will flow to the entity; and  The amount of revenue can be measured reliably

32. 32 Revenue from Interest Recognize using the effective interest method when 1)The amount of revenue can be measured reliably 2)It is probable that the economic benefits associated with the transaction will flow to the entity

33. 33 Revenue from Interest When unpaid interest has accrued before the acquisition of an interest-bearing investment, allocate subsequent receipt of interest between pre-acquisition and post-acquisition periods Recognise only the post-acquisition portion as revenue.

34. 34 Revenue from Royalty Recognize on accrual basis in accordance with the substance of the relative agreement when 1)The amount of revenue can be measured reliably 2)It is probable that the economic benefits associated with the transaction will flow to the entity

35. 35 Revenue from Dividend Recognize when 1)The amount of revenue can be measured reliably 2)It is probable that the economic benefits associated with the transaction will flow to the entity 3)The shareholder’s right to receive payment is established

36. 36 Uncertainty over collection If arises after recognition  Recognize as an expense & not as an adjustment from revenue

37. 37 Disclosures Accounting policies adopted for recognition of revenue Methods adopted to determine the stage of completion of transactions involving the rendering of services Amount of each significant category of revenue including revenue arising from  Sale of goods  Rendering of services  Interest  Royalties  Dividend Amount of revenue arising from the exchange of goods or services included in each significant category of revenue Contingent liabilities and contingent assets from items such as warranty costs, claims, penalties or possible losses

38. Thank You krishankt@cybermedia.co.in 9810013524

39. Examples

40. 40 General Assumptions Revenue can be measured reliably Economic benefits will flow to the entity Costs can be measured reliably

41. Sale of Goods Examples

42. 42 Bill and hold sales Exercise 1: Delivery is delayed at the buyer’s request but the buyer takes title and accepts billing

43. 43 Bill and hold sales Recognise revenue when the buyer takes title provided:  it is probable that delivery will be made;  the item is on hand, identified and ready for delivery to the buyer at the time the sale is recognised;  the buyer specifically acknowledges the deferred delivery instructions; &  the usual payment terms apply.

44. 44 Goods shipped subject to conditions Exercise 2: Installation and inspection

45. 45 Goods shipped subject to conditions Revenue is normally recognised when the buyer accepts delivery & installation and inspection are complete Revenue is recognised immediately upon the buyer’s acceptance of delivery when:  the installation process is simple in nature ;or  the inspection is performed only for purposes of final determination of contract prices

46. 46 Goods shipped subject to conditions Exercise 3: On approval when the buyer has negotiated a limited right of return

47. 47 Goods shipped subject to conditions If there is uncertainty about the possibility of return, revenue is recognised when the shipment has been formally accepted by the buyer or the goods have been delivered and the time period for rejection has elapsed.

48. 48 Goods shipped subject to conditions Exercise 4: Consignment sales under which the recipient undertakes to sell goods on behalf of the shipper

49. 49 Goods shipped subject to conditions Revenue is recognised by the shipper when the goods are sold by the recipient to a third party.

50. 50 Goods shipped subject to conditions Exercise 5: Cash on delivery sales

51. 51 Goods shipped subject to conditions delivery made and cash received by the seller or its agent.

52. 52 Lay away sales Exercise 6: Under which the goods are delivered only when the buyer makes the final payment in a series of instalments

53. 53 Lay away sales Revenue recognised when the goods are delivered When experience indicates that most such sales are consummated, recognise when a significant deposit is received provided - goods are on hand - identified & - ready for delivery to the buyer

54. 54 Advance payments Exercise 7: Goods yet to be manufactured or purchased by the buyer

55. 55 Advance payments when the goods are delivered to the buyer

56. 56 Sales to intermediate parties Exercise 8: Such as distributors, dealers

57. 57 Sales to intermediate parties Revenue from such sales is generally recognised when the risks and rewards of ownership have passed When the buyer is acting, in substance, as an agent, sale treated as a consignment sale

58. 58 Subscription sales Exercise 9: Magazine subscriptions

59. 59 Subscription sales When the items involved are of similar value in each time period :  SLM basis over the period in which the items are dispatched When items vary in value from period to period :  on the basis of the sales value of the item dispatched in relation to the total estimated sales value of all items covered by the subscription

60. 60 Instalment Sales Exercise 10: Sale of refrigerator

61. 61 Instalment Sales Revenue attributable to the sales price, exclusive of interest:  recognised on the date of sale Sale price is the present value of the consideration Interest element recognised as revenue as it is earned using the effective interest method

62. Rendering of Services Examples

63. 63 Installation Fees Example 1:

64. 64 Installation Fees recognised by reference to the stage of completion of the installation If installation is only incidental to the sale of a product recognise when the goods are sold

65. 65 Servicing fees Example 2: Servicing fees included in the price of the product

66. 66 Servicing fees When the selling price of a product includes an identifiable amount for subsequent servicing (e.g.,after sales support and product enhancement on the sale of software), that amount is deferred and recognised as revenue over the period during which the service is performed. The amount deferred is that which will cover the expected costs of the services under the agreement, together with a reasonable profit on those services.

67. 67 Advertisement commissions Example 3:

68. 68 Advertisement commissions Media commissions : recognised when the related advertisement or commercial appears before the public. Production commissions: recognised by reference to the stage of completion of the project.

69. 69 Insurance Agency commissions Example 4:

70. 70 Insurance Agency commissions Insurance agency commissions received or receivable which do not require the agent to render further service :  recognised by the agent on the effective commencement or renewal dates of the related policies. When it is probable that the agent will be required to render further services during the life of the policy,  the commission, or part thereof, is deferred and recognised over the period during which the policy is in force.

71. 71 Entrance and membership fees Example 5:

72. 72 Entrance and membership fees depends on the nature of the services provided if the fee permits only membership, and all other services or products are paid for separately, or if there is a separate annual subscription:  recognise fee when no significant uncertainty as to its collectability exists. If the fee entitles the member to services or publications to be provided during the membership period, or to purchase goods or services at prices lower than those charged to non-members:  recognise on a basis that reflects the timing,nature and value of the benefits provided.

73. Interest, Royalty & Dividends Examples

74. 74 License fees and royalties Example 1:

75. 75 License fees and royalties Fees and royalties paid for the use of an entity’s assets ( trademarks, patents, software, music copyright, etc.) :  recognised in accordance with the substance of the agreement. As a practical matter, this may be on a SLM basis over the life of the agreement, e.g.,when a licensee has the right to use certain technology for a specified period of time.

76. 76 License fees and royalties In some cases, whether or not a licence fee or royalty will be received is contingent on the occurrence of a future event. Recognise revenue only when it is probable that the fee or royalty will be received, which is normally when the event has occurred.

77. Specific applications

78. 78 Advertising Barter Transactions SIC 31 Applies to an exchange of dissimilar advertising services.

79. 79 Advertising Barter Transactions SIC 31 Revenue from a barter transaction involving advertising cannot be measured reliably at the fair value of advertising services received. 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.

80. 80 Customer Loyalty Programmes-IFRIC 13 Applies to customer loyalty award credits that:  an entity grants to its customers as part of a sales transaction; &  subject to meeting any further qualifying conditions, the customers can redeem in the future for free or discounted goods or services The Interpretation addresses accounting by the entity that grants award credits to its customers

81. 81 Customer Loyalty Programmes-IFRIC 13 Allocate the fair value of the consideration received or receivable in respect of the initial sale between the award credits & the other components of the sale. Consideration allocated to the award credits to measured by reference to their fair value, i.e., the amount for which the award credits could be sold separately.

82. 82 Customer Loyalty Programmes-IFRIC 13 If the entity supplies the awards itself, recognise the consideration allocated to award credits as revenue when :  award credits are redeemed &  it fulfils its obligations to supply awards. Amount of revenue recognised to be based on the number of award credits that have been redeemed in exchange for awards, relative to the total number expected to be redeemed.

83. 83 Customer Loyalty Programmes-IFRIC 13 If a third party supplies the awards, the entity should assess whether it is collecting the consideration allocated to the award credits on its own account (i.e. as the principal in the transaction) or on behalf of the third party (i.e. as an agent for the third party).

84. 84 Customer Loyalty Programmes-IFRIC 13 If the entity is collecting the consideration on behalf of the third party  measure its revenue as the net amount retained on its own account, i.e. the difference between the consideration allocated to the award credits and the amount payable to the third party for supplying the awards; and  recognise this net amount as revenue when the third party becomes obliged to supply the awards and entitled to receive consideration for doing so.

85. 85 Customer Loyalty Programmes-IFRIC 13 If the entity is collecting the consideration on its own account: measure revenue as the gross consideration allocated to the award credits and recognise revenue when it fulfils its obligations in respect of the awards.

86. 86 Customer Loyalty Programmes-IFRIC 13 If at any time the unavoidable costs of meeting the obligations to supply the awards are expected to exceed the consideration received and receivable for them, it becomes an onerous contract. Recognise liability as per IAS 37 The need to recognise such a liability could arise if the expected costs of supplying awards increase, e.g., if the entity revises its expectations about the number of award credits that will be redeemed.

87. 87 Example-Award supplied by the entity A grocery retailer operates a customer loyalty program. It grants program members loyalty points when they spend a specified amount on groceries. Program members can redeem the points for further groceries. The points have no expiry date. In one period, the entity grants 100 points. Management expects 80 of these points to be redeemed. Management estimates the fair value of each loyalty point to be one currency unit (CU1), and defers revenue of CU100.

88. 88 Year 1 Observation: At the end of the first year, 40 of the points have been redeemed in exchange for groceries.

89. 89 Year 1 Recognise revenue of (40 points/80* points) * CU100 = CU50.

90. 90 Year 2 Observation: In the second year, management revises its expectations. It now expects 90 points to be redeemed altogether. During the second year, 41 points are redeemed, bringing the total number redeemed to 40 + 41 = 81 points.

91. 91 Year 2 The cumulative revenue that the entity recognises is (81 points/90 points) * CU100 = CU90. The entity has recognised revenue of CU50 in the first year, so it recognises CU40 in the second year.

92. 92 Year 3 In the third year, a further nine points are redeemed. Management continues to expect that only 90 points will ever be redeemed

93. 93 The cumulative revenue to date is (90 points/90 points) * CU100 = CU100. Recognise the remaining CU10 in the third year.

94. 94 Example-Award supplied by a third party A retailer of electrical goods participates in a customer loyalty program operated by an airline. It grants program members one air travel point with each CU1 they spend on electrical goods. Program members can redeem the points for air travel with the airline, subject to availability. The retailer pays the airline CU0.009 for each point. In one period, the retailer sells electrical goods for consideration totalling CU1 million. It grants 1 million points.

95. 95 Example-Award supplied by a third party Allocation of consideration to travel points The retailer estimates that the fair value of a point is CU0.01. It allocates to the points 1 million * CU0.01 = CU10,000 of the consideration it has received from the sales of its electrical goods.

96. 96 Example-Award supplied by a third party Revenue recognition Having granted the points, the retailer has fulfilled its obligations to the customer. The airline is obliged to supply the awards and entitled to receive consideration for doing so.

97. 97 Example-Award supplied by a third party Revenue measurement If the retailer has collected the consideration allocated to the points on its own account, it measures its revenue as the gross CU10,000 allocated to them. It separately recognises the CU9,000 paid or payable to the airline as an expense. If the retailer has collected the consideration on behalf of the airline, i.e., as an agent for the airline, it measures its revenue as the net amount it retains on its own account. This amount of revenue is the difference between the CU10,000 consideration allocated to the points and the CU 9,000 passed on to the airline.

98. Thank You