Shared
Revenue recognition criteria are generally applied on a transaction-by-transaction basis. However, under certain circumstances they must be applied to individual elements transaction in order to reliably reflect its content.
A comment
. The selling price of the product includes a certain amount for subsequent maintenance. This amount is deferred and recognized as revenue over the period during which the service is performed.
Conversely, recognition criteria may be applied simultaneously to two or more transactions when they are related in such a way that their commercial effect cannot be determined without reference to the series of transactions as a whole.
A comment
. A company can sell goods and at the same time enter into a separate contract for the purchase of goods in the future, thereby reducing the impact of the first transaction. In this case, the two transactions are considered together.
Original IAS 18 Revenue is available in publication ""
The following are examples to demonstrate the application of IAS 18 to the most common business situations in practice.. The examples focus on specific aspects of a transaction and are not a comprehensive analysis of all significant factors that could affect revenue recognition.
When using the examples it is assumed that:
The amount of revenue can be reliably estimated;
? exists high probability that future economic benefits will flow to the company;
? costs incurred or expected can be reliably estimated.
1. Selling goods
Legislation in different countries may set revenue recognition criteria that differ from those set out in IAS 18. Therefore, the examples in this section of the appendix should be read in the context of the sale of goods law in the country in which the transaction occurs.
1.1 Sales under the “check out and defer” scheme
Sometimes revenue may be recognized even though the goods have not been formally transferred from the seller to the buyer. Delivery of goods may be delayed at the request of the buyer due to some special circumstances, but he acquires ownership of these goods and signs the relevant documents.
Revenue is recognized when the buyer acquires title if:
Delivery is highly likely to be carried out;
? the product is in stock and ready to be shipped to the buyer;
? the buyer confirms the condition of deferred delivery;
? apply normal conditions payment.
Example 1.
A buyer who regularly purchases goods requests the seller of goods to store the goods until he finds a suitable warehouse, provided that responsibility for the risks lies with him. Revenue can be recognized immediately.
1.2 Shipment of goods with installation and testing
Revenue is generally recognized when the customer takes delivery after completion of installation and testing.
Example 2.
The company supplies special equipment for industrial enterprises.
Acceptance inspection, installation and testing of equipment are mandatory and take up to 30 days. Revenue may be recognized once the equipment has been tested and installed.
However, revenue may be recognized immediately upon the customer's acceptance of delivery if:
? the installation process is not complicated in nature (for example, installing a factory-tested TV, which only requires unpacking and connecting power and antenna);
? testing is performed only to finalize contract prices (for example, iron ore, sugar or soybeans).
1.3 Sale with the buyer's right to refuse the goods when the buyer has agreed to a limited right of return
If there is uncertainty about the likelihood of return, then revenue is recognized when the shipment has been formally accepted by the customer or when the goods have been delivered and the time period has elapsed possible return goods.
Example 3.
Publishing house sells books to stores retail. The contract provides for the right to return unsold copies within 6 days.
The following three options for recording revenue are possible in conditions where the seller is exposed to return risks:
? If it is not possible to estimate the amount of refunds, and if this amount may be significant, revenue is deferred until the right of return expires, that is, revenue may be recognized after 6 days.
? If it is possible to reliably estimate the amount of future returns based on the experience of past years, then only part of the revenue is reflected - the amount of which the seller is confident (or a reserve is created for the estimated amount of returns).
? If the amount of returns is expected to be insignificant, revenue and returns are recognized as such, at the time they occur. That is, the publishing house reflects revenue as sales occur, and the return of books as it occurs.
1.4 Sale under consignment agreement
The recipient (buyer) undertakes to sell the goods on behalf of the supplier (seller).
Revenue is recognized by the supplier when the goods are sold by the recipient to a third party.
Example 4.
In January, the company delivered goods to its consignor under a consignment agreement.
In February, this product was sold to third parties, and the funds from the consignor were received by the company only in March. Revenue should be recognized in February based on the consignee's notice.
1.5 Sales with payment in cash upon receipt of goods
Revenue is recognized upon delivery and receipt of money by the seller or his agent.
Example 5.
The toy manufacturer sells its products, including on the Internet. Customers usually pay for orders upon receipt.
Revenue is recognized when the toy manufacturer's agent receives payment after the toys are delivered to customers.
1.6 Deferred sale
The goods are delivered only when the buyer makes the final payment in a series of installments.
Revenue from such sales is recognized upon delivery of the goods. However, if experience shows that the majority of such sales are completed successfully, then revenue may be recognized when a significant portion of the deposit is received, provided that the goods are on hand, separated from other goods and ready for shipment to the customer.
Typically, this method of sales is typical for expensive goods.
1.7 Prepayment (for goods that are not yet in stock)
Revenue is recognized only when the goods are delivered to the customer.
Advances received are not revenue, since the basic criteria for its recognition are not met. Advances are reflected as an obligation of the receiving party to provide goods or services for this amount.
1.8 Sales agreements with subsequent repurchase of previously sold goods
It is very important here to determine economic essence transactions, since revenue is recognized or not recognized depending on the nature of the transaction.
If the terms of the agreement transfer the risks and rewards of ownership to the buyer, revenue must be recognized.
If the terms of the agreement require the seller to retain the risks and rewards of ownership (even though title has changed), then the purpose of the transaction is to raise financing and no revenue should be recognized.
Example 6.
Johnny's company is a producer of cognac, the production process of which requires three years of aging. John sells cognac to distributors at a 150% markup on cost.
On January 1, 2012, John sold 150,000 liters of cognac aged 1 year financial company Empire at cost, with John receiving an option to repurchase the cognac at any time over the next two years at a premium to cost of 15% per annum on a pro-rata basis. The Empire also receives an option to sell Johnny's cognac for the next two years at a similar price.
Task: Explain how this transaction should be reflected in the financial statements John.
Solution: According to one of the IFRS Principles, the principle of substance over form, it is necessary to analyze all the terms of the transaction to determine its economic essence and reflect it in reporting not just on the basis of its legal form. IN in this case John sold semi-finished cognac to a financial company at cost (although sales are usually carried out on other terms). In addition, the presence of options for repurchase/sale on both sides gives reason to believe that the repurchase of the sold cognac will most likely occur. Johnny also pays for the use of the money received as a borrower.
Conclusion: This transaction is not an ordinary purchase and sale, it is a transaction to raise financing secured by unaged cognac. In this case, revenue is not recognized; the goods should not be written off from the income statement. financial situation. The transaction must be reflected as a loan, with interest expenses reflected in the income statement total income.
1.9 Selling through intermediaries
Revenue from sales to intermediaries (such as distributors, dealers or others for the purpose of resale) is generally recognized when the risks and rewards of ownership have been transferred.
However, if the buyer acts as an agent, the sale is accounted for as a consignment sale.
1.10 Subscription to printed publications and similar products
If during each period the transaction items have the same value, then revenue is recognized on a straight-line basis over the period during which the goods are delivered.
Example 7.
We sell an annual subscription to the monthly magazine.
Each month after the release of the next issue, 1/12 of the revenue should be recognized.
When the cost of goods varies from period to period, revenue is recognized based on the selling price of the goods delivered relative to the total estimated selling price of all goods covered by the subscription.
1.11 Sale by installments
Installment sales mean sales under contracts for which consideration is paid in instalments.
Revenue attributable to the sales price, excluding interest, is recognized at the date of sale.
The selling price equals the discounted value of expected payments at the notional interest rate.
The interest component is recognized as revenue using the effective interest rate over the maturity date of the payment.
The same approach applies in the case of deferment of a lump sum payment.
Example 8.
The company sells the car for $12,000, with payment deferred for a year. The acceptable interest rate is 10%.
At the time of sale, revenue is recognized in the amount of $10,909 (12,000/1.1 1) - this is the discounted amount of the future contractual payment. The difference of $1,091 is the interest component of the transaction (the loan fee) which is recognized as revenue on a monthly (or other appropriate) basis.
1.12 Property For Sale
Revenue is generally recognized when title passes to the customer. However, the nature and timing of revenue recognition is greatly influenced by the provisions of the specific contract and current legislature in the state in question, so only by analyzing them can it be determined whether the seller must fulfill any significant obligations in order to complete the sale.
Example 9.
The company sells the house, and at the same time it assumes the obligation to repair it. Revenue should be recognized when repairs are completed.
The property may be sold with the seller retaining title until full payment is made as a guarantee against non-payment by the buyer. In this case, revenue is recognized only to the extent of the cash consideration received.
2. Provision of services
2.1 Installation fee
Installation fees are recognized as revenue by stage of work.
Example 10.
The company installs a computer network for the customer in several separate buildings under one contract: in production, administrative, experimental buildings and in a warehouse.
Revenue may be recognized as work is completed on each building. However, if the installation is part of the sale of the goods, it is recognized when the goods are sold.
2.2 Service fee included in the price of the product
Recognized as revenue over the period the service is provided.
Example 11.
The company sold the photocopier for $800, including annual maintenance costs. The fair value of the maintenance work is $300, and the photocopier must be inspected quarterly.
In this case, $500 is recognized immediately as sales revenue, and $75 ($300/4) is recognized after each inspection as service revenue.
2.3 Advertising commission
Commission funds mass media are recognized when the relevant advertising or commercial broadcast is shown to the public. Advertising producers' commissions are recognized according to the stage of completion of the project.
Example 12.
In June, the advertiser orders a publication advertisement in the July and November issues of the magazine.
The advertising agency's commission is $500. Revenue is recognized in the amount of $250 after each advertisement is released.
2.4 Insurance company commission
Recognized at the time the contract begins or extends, unless the contract requires the provision of additional services to the policyholder.
If such a requirement is reflected in the contract, the proceeds are carried forward and recognized over the life of the policy.
Example 13.
The client signs a policy, according to which Insurance Company receives a commission of $250, and insurance payments will be carried out monthly throughout the year.
The insurance company also has an obligation to collect insurance premiums, and the insurance company's agent must ensure that they are collected at the client's place of residence. The fee for each collection is $10. This amount is included in the initial fee of $250, as the client does not pay anything additional.
In this situation, revenue is initially recognized at $130 (less the cost of collection services) and $10 after each collection.
2.5 Rewards for Financial services
The recognition of fees for financial services as revenue depends on the purpose of the fees calculated and the basis of accounting for the relevant financial instrument.
The title of fees for financial services may not reveal the nature and content of the services provided.
Therefore, it is necessary to differentiate between rewards:
Being an integral part effective income by financial instrument;
? earned as services are provided;
? received after performing any significant action.
2.5.1 Fees that are an integral part of the effective return on a financial instrument
Such awards are generally accounted for as an adjustment to effective real income.
For example, fees for preparatory work received by an entity in connection with the origination or acquisition of a financial instrument, checking the creditworthiness of a borrower, negotiating, preparing and processing transaction documents, and completing a transaction are deferred and recognized as an adjustment to effective real income.
Example 14.
A finance company provides a two-year loan of $25,000 at 10% interest with interest paid at the end of each year.
Fees for loan preparation, document processing, and other similar services related to the operation of the loan are $400, payable in advance.
This amount is reflected as deferred income; and subsequently - on a monthly basis, simultaneously with the accrual of interest income, is recognized as revenue for the current period - only $200 each year for two years.
The purpose of this revenue recognition is to reflect compensation for continued participation. However, when a financial instrument is subject to valuation fair value through the statement of comprehensive income, the consideration is recognized as revenue on initial recognition of the instrument.
2.5.2 Rewards received as services are provided
Fees accrued for servicing the debt (for example, for collecting the client’s funds, servicing the network of his mailboxes) are recognized as revenue as services are provided - on an ongoing basis during the period of circulation (repayment) of the debt.
2.5.3 Rewards received after completing a significant action
Rewards are recognized as revenue when significant actions are completed. For example, consideration for the distribution of customer shares is recognized as revenue after the shares are distributed.
2.6 Entry fee
Revenue from artistic performances, banquets and other special events is recognized when they occur.
When tickets are sold for multiple events, the fee is allocated to each event on a basis that reflects the level of service performance for each specific event.
2.7 Tuition fee
Revenue is recognized over the training period.
2.8 Initial (introduction) and membership fees
Initial (enrollment) fees are recognized as revenue unless there is significant uncertainty regarding their receipt, if the fee only allows membership and all other services are paid separately.
If a contribution entitles a member to use any services, it is recognized on a basis that reflects the timing, nature and extent of the benefits provided.
Example 15.
To become a member of the professional guild of lawyers, you need to pay an initiation fee of $400 and an annual membership fee of $260.
The $400 may be recognized as revenue immediately upon enrollment of a new member if it does not involve the provision of any services to the member. Revenue must be deferred in the event that a new guild member, having paid an entrance fee, acquires the right to receive any services; Revenue will be recognized when the related services are provided or when the right to receive them expires.
2.9 Revenue from franchise transactions
The commission for the provision of a monopoly or preferential right may cover the provision of initial and subsequent services, fixed assets and other tangible assets, as well as know-how. Such remuneration is recognized as revenue depending on the purpose of the remuneration.
2.9.1 Deliveries of fixed assets or other tangible assets
An amount based on the fair value of the assets sold is recognized as revenue upon delivery of the assets or transfer of ownership.
Example 16.
Under a franchising agreement, a fast food enterprise must purchase food preparation equipment from the franchisor. Ownership passes after installation and testing of the equipment.
2.9.2 Provision of initial or subsequent services
Initial consideration is recognized as revenue after all initial services have been provided. Fees for the provision of ongoing services are recognized as revenue as services are provided. Recognition of a portion of the consideration must be deferred to the extent sufficient to cover the costs of ongoing services and provide a reasonable return on those services (to satisfy this requirement, a portion of the initial consideration is recognized as deferred revenue).
2.9.3 Fee for the permanent right to use the benefit
Recognized as revenue as services are provided or rights are exercised.
2.10 Fee for developing custom software
Royalties for the development of custom software are recognized as revenue based on the stage of development completion, including post-sales support services.
Example 17.
The company has a software development contract for $30,000.
The contract stipulates that $5,000 of this amount is for after-sales software support.
Only $25,000 is recognized as revenue when software development is completed and accepted by the customer.
$5,000 of service support is written off in equal installments to revenue over the period the support is provided.
3. Interest, royalties and dividends
Royalties and royalties (trademarks, patents, software, copyrights for musical works, feature films) are usually recognized in accordance with the terms of the contract.
In practical terms, recognition may be provided on an even basis over the life of the contract (for example, where the licensee has the right to use the technology for a specified period of time).
If the collection of license fees or royalties is contingent on the occurrence of a future event, then revenue is recognized only to the extent that it is probable that the royalties will be collected (which typically occurs upon the occurrence of the specified event).
Goods include products produced by an enterprise for sale and goods purchased for resale (for example, goods purchased by a retailer, land or other property held for resale).
The provision of services usually involves the enterprise performing a contractually agreed task within a specified period of time. Services may be provided during one reporting period or more than one.
The use of enterprise assets by other parties leads to revenue in the form of:
1) interest - fees charged for the use of cash and equivalents Money or from amounts owed to the company;
2) royalties - payments for the use of long-term assets of the enterprise, for example, patents, trademarks, copyrights and computer software;
3) dividends - distribution of profits between the owners of share capital in proportion to their participation in the capital of a certain class.
Revenue - the gross receipt of economic benefits for a certain period in the ordinary course of business of the enterprise, leading to an increase in capital not associated with contributions from capital participants.
Revenue should be measured at the fair value of the consideration received or receivable.
The amount of revenue arising from a transaction is usually determined by a contract between the entity and the buyer or user of the asset. In most cases, consideration is provided in the form of cash or cash equivalents, and the amount of proceeds is the amount of cash or cash equivalents received or receivable. However, if the receipt of cash or cash equivalents is delayed, the fair value of the consideration may be less than the face amount of cash received or receivable. When the contract is effectively a financing transaction, the fair value of the consideration is determined by discounting all future proceeds using an implied interest rate. The imputed interest rate is the most accurately determined value of the following:
1) the prevailing rate for a similar financial instrument of the issuer with a similar credit rating; or
2) an interest rate that discounts the face amount of a financial instrument to current prices of goods or services in cash sales.
The difference between fair value and nominal consideration is recognized as interest income.
If goods or services are exchanged for goods or services of similar nature and value, the exchange is not treated as a transaction creating revenue. When goods are sold or a service is provided in exchange for different goods or services, the exchange is treated as a transaction that creates revenue. Revenue is measured at the fair value of the goods or services received, adjusted for the amount of cash or cash equivalents transferred. If the fair value of the goods or services received cannot be measured reliably, revenue is measured at the fair value of the goods or services transferred, adjusted by the amount of cash or cash equivalents transferred.
Revenue from the sale of goods should be recognized if all of the following conditions are met:
1) the enterprise has transferred to the buyer significant risks and rewards associated with ownership of the goods;
2) the enterprise no longer participates in management to the extent usually associated with ownership and does not control the goods sold;
3) the amount of revenue can be reliably estimated;
4) it is probable that the economic benefits associated with the transaction will flow to the enterprise;
5) the costs incurred or expected to be incurred in connection with the operation can be reliably estimated.
If the entity retains significant ownership risks, the transaction is not a sale and no revenue is recognized. Under various circumstances, an enterprise may retain significant ownership risk. Situations where an entity retains significant risks and rewards associated with ownership include the following:
1) the company continues to be liable for unsatisfactory performance not covered by standard warranty conditions;
2) receipt of proceeds from a specific sale depends on the receipt of proceeds by the buyer as a result of further sale of goods;
3) the goods supplied are subject to installation, and the installation constitutes a significant part of the contract, which the enterprise has not yet fulfilled;
4) the buyer has the right to terminate the purchase and sale transaction for the reason specified in the purchase and sale agreement, and the enterprise has no confidence in receiving income.
If the entity retains only insignificant risks of ownership, the transaction is a sale and revenue is recognized.
Determination of revenue from the provision of services
If the outcome of a transaction involving the provision of services can be measured reliably, revenue from the transaction should be recognized in accordance with the stage of completion of the transaction at the end of the reporting period. The outcome of an operation can be reliably assessed if all of the following conditions are met:
1) the amount of revenue can be reliably estimated;
2) it is probable that the economic benefits associated with the transaction will flow to the enterprise;
3) the stage of completion of the transaction at the end of the reporting period can be reliably assessed;
4) the costs incurred in performing the transaction and the costs required to complete it can be reliably estimated.
Revenue arising from the use by other entities of the entity's assets that generate interest, royalties and dividends should be recognized on the following basis:
1) it is probable that the economic benefits associated with the transaction will flow to the enterprise;
2) the amount of revenue can be reliably estimated;
3) interest is recognized using the effective interest method;
4) royalties are recognized on an accrual basis in accordance with the content of the relevant agreement;
5) dividends are recognized when the shareholders' right to receive payment is established.
When unpaid interest accrues before the acquisition of an investment containing interest, subsequent receipt of interest is allocated between the pre-acquisition period and the post-acquisition period; only a portion of the post-acquisition interest is recognized as revenue.
Royalties accrue in accordance with the terms of the relevant contracts and are generally recognized on that basis unless, based on the content of the contract, another systematic rational basis for recognizing revenue is more appropriate.
Magazine "IFRS in Practice"
The revenue recognition standard is one of the most important and most widely used. Therefore, it is important for every beginning specialist to clearly understand the approaches to its accounting. Let's look at examples of what is the difference in the assessment and recognition of revenue depending on situations: shipment of goods, provision of services, receipt of interest, royalties, dividends.
Updated Conceptual Framework financial statements recognize relevance and fair presentation as fundamental characteristics of financial information.
Relevant information is information that influences decision making, and truthfully presented information is information about real economic facts (not legal forms).
In real life, many factors can create conditions for potential decoration of financial results of activities (window dressing - financial veiling, combing, tinting the balance sheet in order to create the appearance of high liquidity). In order to eliminate the impact of such phenomena, as well as to comply with the principle of fair presentation, IAS 18 Revenue was developed.
Below is a typical application of the principle of truthful representation.
EXAMPLE
The Caucasian Cognac Company (KKK) produces 15-year-old cognac. A year after the cognac is bottled, it sells the entire stock commercial bank at cost RUB 1,000,000. with the right of repurchase within five years with payment of 15 percent per annum.
Strictly in form, this is a sale, and KKK must reflect the sale with revenue recognition:
DT “Settlements with customers” RUB 1,000,000;
CT “Revenue” RUB 1,000,000;
Dr. “Cost” RUB 1,000,000;
CT “Inventories” 1,000,000 rub.
In terms of economic content, this is credit financing in the amount of 1,000,000 rubles. for five years at 15 percent per annum. The statement is confirmed by the following circumstances:
- the product has not gone through all stages of processing and the bank will not be able to sell it;
- the bank does not have the technologies and specialists necessary to complete the production cycle;
- the contract contains an option under which KKK has the right to buy, and the bank is obliged to sell on demand;
- cognac is sold at cost, without markup.
DT “Cash” 1,000,000 rub.;
CT “Credits and Loans” RUB 1,000,000;
Further, interest is accrued annually in the amount of RUB 150,000;
Dt “Borrowing costs” RUB 150,000;
CT “Interest debt” RUB 150,000.
There are no sales or cost recognition transactions.
It is noteworthy that, unlike other standards, IAS 18 does not contain principles, but specific rules for recognizing revenue in various situations.
The purpose of the standard is to determine when revenue is recognized, namely when it is probable that future benefits that can be measured reliably will flow to the entity.
Revenue estimation. Revenue is measured at the fair value of the consideration received or receivable, taking into account the amount of any trade or volume discounts provided by the entity (paragraph 10 of IAS 18). If the buyer is granted a deferred payment, the fair value of the consideration is discounted at an implied interest rate determined as (clause 11 of IAS 18):
- the prevailing rate for a similar financial instrument of the issuer with a similar credit rating;
- An interest rate that discounts the face amount of a financial instrument to the current prices of goods or services when sold for cash.
The difference between the fair value and the nominal amount of consideration is recognized as interest income in accordance with the paragraphs of the standard and in accordance with IFRS 9 Financial Instruments.
EXAMPLE
The ARM company sells equipment for 920,000 rubles. with a payment deferment of one year. The cost of equipment is 500,000 rubles. The company's cost of capital (the weighted average interest rate on all sources of financing for the company) is 15 percent per annum.
Revenue is 800,000 rubles. (920,000 rub. / (1 + 15%)1). Income of 120,000 rubles.
(920,000 – 800,000) is recognized evenly throughout the year in 10,000 rubles. per month.
Accounts receivable recognized at fair value.
At the time of equipment sale:
DT “Settlements with customers” RUB 800,000;
CT “Revenue” 800,000 rub.
Interest income is accrued monthly:
Dt “Settlements with customers” 10,000 rubles;
CT “Interest income” 10,000 rub.
Identification of the contract. Revenue recognition criteria must be applied to individual elements of the contract to show its content.
EXAMPLE
The NRM company sells production equipment that requires maintenance every six months for RUB 700,000, including two years of maintenance. Typically, semi-annual maintenance for two years costs 200,000 rubles. Thus, two elements can be distinguished in the contract: the sale of equipment and its subsequent maintenance, which are subject to separate recognition. At the time of sale of equipment, revenue is recognized in the amount of RUB 500,000. (700,000 - 200,000) at a time, and 50,000 rub. (RUB 200,000 / 4) are taken into account every six months for a two-year period as maintenance is performed.
It also happens differently when recognition criteria must be applied to several contracts, since the complex effect cannot be determined without analyzing the group of contracts as a whole. For this situation, an example is the situation described above with the sale of cognac reserves, when it is necessary to take into account both the purchase and sale agreement for the transfer of cognac to the bank, and the potential agreement for the purchase of cognac from the bank, confirmed by an option, and possibly business practices. For various operations in the course of which revenue arises (sale of goods, provision of services, receipt of dividends, interest, royalties), there are specific features of revenue recognition. Let's look at them.
SALE OF GOODS
Revenue from the sale of goods is recognized when all of the conditions specified in paragraph 14 of IAS 18 are met:
- significant risks and benefits of owning the goods have been transferred to the buyer;
- the enterprise does not participate in management to the extent associated with ownership and does not control the transferred goods;
- the amount of revenue can be reliably estimated;
- there is confidence in obtaining economic benefits as a result of fulfilling the contract;
- the costs incurred or expected to be incurred in connection with the contract can be measured reliably.
In other words, what is important in IFRS is not the transfer of ownership, but the risks and benefits of ownership. For example, in the case of equipment delivery with the transfer of ownership after full payment and settlements one year from the date of delivery, revenue is recognized at the time of delivery if all the risks and benefits of ownership have already passed at the time of delivery. Although in most cases the transfer of risks and benefits of ownership coincides with the transfer of ownership.
Regular credit risks are not a reason for deferring revenue recognition. For example, when equipment is supplied, title is transferred at the time of delivery and payment is made one year after delivery, revenue is recognized at the time of delivery. But sometimes the seller may retain the risks and rewards of ownership despite the goods being shipped, and then recognition of revenue is delayed:
- the seller retains responsibility for the quality of the goods not covered by standard warranties. Let's say a company develops and produces air defense systems under government orders, and after delivery a series of tests takes place. In this case, revenue will be recognized if the tests are successful;
- sale with an agent. Receipt of proceeds from a particular sale is contingent upon the agent receiving proceeds from his sale. For example, in January the SVT company supplied stage equipment to the SHOW store on a consignment basis. In December, the store must return the goods or make payment. The store sold the equipment in July. CBT should recognize revenue in July, even though payment may be due before December;
- sale with essential installation. Items shipped are subject to installation, and installation takes up a significant portion of the contract that has not yet been completed by the supplier. For example, when manufacturing built-in furniture to order, 50 percent of its cost is the furniture itself, and 50 percent is the work of installing and adjusting it at the customer’s place. A furniture company should recognize revenue only after the furniture is installed at the customer's location;
- possibility of termination of the contract. The buyer has the right to terminate the purchase and sale agreement for a reason specified in the agreement, and the company has no confidence in making a profit. For example, a company that distributes powerful, expensive vacuum cleaners offers customers a vacuum cleaner with the right to return without explanation within a year from the date of receipt and return 90 percent of its cost. The return rate is 50 percent. Revenue should be recognized when the right to return the vacuum cleaner ceases;
- uncertainty in obtaining economic benefits (restrictive measures). If at the time of revenue recognition there is uncertainty about the receipt of economic benefits, then revenue recognition is deferred until they are received or the uncertainty is eliminated.
- certainty. However, if such circumstances arise after revenue is recognized, the amount that is not received or the amount that becomes unlikely to be collected is recognized as an expense rather than as an adjustment to the amount of revenue originally recognized.
For example, in 2014, the SAS company, which plays a supporting role in fuel transshipment in seaport, cannot receive payment for its services provided by the American oil company in connection with sanctions. Despite legal and political difficulties, services are still provided and both parties confirm in writing their intentions to continue cooperation. SAS should recognize revenue, but as sanctions tighten, it is necessary to create a reserve for doubtful debts.
Revenue recognition is not deferred in the following situations:
- maintaining negligible ownership risk. The seller retains only a minor risk of ownership. For example, retail store guarantees a refund if the customer is not satisfied with the purchase, within the framework of the Consumer Protection Law. In this case, revenue is recognized because the seller can reliably estimate future returns using historical experience and assume the obligation to return the cash. A reserve is accrued for the predicted return amount.
- warranty service. Availability of standard warranty obligations for free maintenance is not a basis for delaying revenue recognition or adjusting it. The buyer of a coffee machine from a well-known German brand is provided with a three-year warranty from the date of sale. Costs associated with warranty service are immediately recognized as an expense in the form of a provision, but do not reduce revenue.
Exchange of goods. In exchanges of goods of similar nature and value, such as milk or butter (where suppliers exchange inventory at different locations to meet demand at a particular location in a timely manner), no revenue is recognized.
For different goods/services, revenue is recognized in the amount of the cost of goods/services received, adjusted by the amount of funds transferred. And unless this value cannot be reliably estimated, then revenue is determined at the cost of the transferred goods/services, adjusted by the amount of transferred funds (clause 12 of IAS 18).
EXAMPLE
The TEM nuclear industry company exchanges fuel cells with another player in the workover market for a gas centrifuge. The usual cost of fuel cells is 200,000 rubles, the additional payment in cash for a centrifuge is 100,000 rubles, while the cost of a centrifuge is 250,000 rubles. TEM's revenue is defined as 150,000 rubles. (250,000 – 100,000). TEM's accounting for the sale of fuel cells will be as follows:
Dt “Accounts receivable” RUB 150,000;
CT “Revenue” 150,000 rub.
Purchasing a centrifuge:
DT “Fixed assets” RUB 250,000;
Kt " Accounts payable» 250,000 rub.
Calculations and offset mutual demands:
Dt “Accounts payable” RUB 250,000;
CT “Cash” 100,000 rubles;
CT “Accounts receivable” 150,000 rub.
PROVISION OF SERVICES
If the outcome of a service contract can be measured reliably, then revenue from the contract should be recognized by reference to the stage of completion of the transaction at reporting date subject to compliance with the following conditions (clause 20 of IAS 18):
- . the amount of revenue can be reliably estimated;
- there is a likelihood of economic benefits;
- the stage of completion can be reliably assessed;
- transaction costs and costs necessary to complete the contract,
- can be reliably assessed.
- reports on work performed;
- services provided as of the reporting date, as a percentage of the total volume of services;
- proportional ratio of the costs incurred for this moment, to the estimated value of the total costs of the transaction.
Costs incurred at the reporting date include only those that reflect services provided at that date. Estimated total transaction costs include only costs that reflect services provided or to be provided.
To comply with these conditions, a company must have an effective financial planning and reporting system. As the contract progresses, estimates of contract revenue and costs are reviewed and revised.
EXAMPLE
On July 1, 2014, AK Company entered into an agreement with the customer – O.R.O Group. on the provision of compilation services consolidated statements in accordance with IFRS and compliance with IFRS 1 First-time Adoption of IFRS. It is planned to publish financial statements for the first time for 2014, and the date of transition to IFRS is January 1, 2013. The term of provision of services is one year. Contract amount – 5,000,000 rubles. Direct costs under the contract - 3,000,000 rubles. By the end of 2014, the compiler prepared data on the fulfillment of the conditions for the first application of IFRS, developed proforma reporting, and also compiled data for 2013. The customer confirmed the acceptance of work on the first application of IFRS and compilation of data for 2013, the costs of which amounted to RUB 1,500,000. The proforma was not provided to the customer, since the contract provides for the presentation of only the final version of the statements. Proforma costs amount to RUB 250,000.
The following entries will be made in AK accounting in 2014:
DT “Work in progress” RUB 1,750,000. (1,500,000 + 250,000);
CT “Salary arrears” RUB 1,750,000.
Acceptance of work in 2014 by the customer:
Dr. “Cost” RUB 1,500,000;
CT “Work in progress” RUB 1,500,000;
Dt “Accounts receivable” RUB 2,500,000;
CT “Revenue” RUB 2,500,000. (5,000,000 (1,500,000 / 3,000,000).
Linear method recognition of revenue from services. When services are provided an indefinite number of times over a specified period of time, revenue is recognized on a straight-line basis on a recurring basis (unless another method better reflects the stage of completion) (paragraph 25 of IAS 18).
EXAMPLE
The Sport+ company manages fitness clubs and sells annual unlimited subscriptions (client cards) for one year for 30,000 rubles. Revenue is recognized monthly in the amount of RUB 2,500. (RUB 30,000/12 months) during the subscription period. Deferred revenue valuation. If revenue from the provision of services cannot be measured immediately, then revenue is recognized only to the extent of recognized reimbursable expenses (clause 26 of IAS 18).
EXAMPLE
The company RESIDENT SKOLKOVO (RS) entered into a government contract for the development of equipment for Roscosmos. The agreement agreed on reimbursement of research and development costs in the amount of up to 2,000,000 rubles; in case of successful test results, the equipment is planned to be accepted for 3,000,000 rubles. In the first year of work, expenses in the amount of 500,000 rubles were incurred (including labor costs of 300,000 rubles, materials written off for 200,000 rubles).
Based on the results, costs and revenues are recognized:
Dr. “Cost” 500,000 rub.;
CT “Work in progress” RUB 500,000;
CT “Revenue” 500,000 rub.
Revenue is recognized in the amount of costs incurred, since there is only certainty that these costs will be recovered, but there is no reason to believe that the development will be successful. The operation is at a loss. If it is highly probable that the costs will not be reimbursed, then no revenue is recognized and the costs are recognized as expenses immediately (clause 28 of IAS 18).
EXAMPLE
The company RESIDENT SKOLKOVO (RS) entered into a government contract for the development of equipment for Roscosmos. In case of successful test results, the equipment is planned to be accepted for 3,000,000 rubles, but in case of negative results, no compensation is provided. In the first year of work, expenses in the amount of 500,000 rubles were incurred.
The following entries will be made in RS accounting in 2014:
DT “Work in progress” RUB 500,000;
CT “Salary arrears” RUB 300,000;
CT “Materials” 200,000 rub.
At the end of the year, expenses are allocated to financial results:
Dr. “Other expenses” RUB 500,000;
CT “Work in progress” 500,000 rub.
Thus, depending on how accurately the financial result can be determined, revenue can be recognized as the product is ready or in the amount of reimbursable costs, or it can be refused to be recognized and all costs incurred be charged as expenses.
INTEREST, LICENSE FEES AND DIVIDENDS
Revenue from the use of an entity's assets by third parties should be recognized if it can be measured reliably and it is probable that economic benefits will flow. In this case (clause 30 of IAS 18):
- Interest is recognized using the effective interest method;
- royalties are recognized on an accrual basis in accordance with the agreement;
- Dividends are recognized when the shareholders' right to receive payment has been established.
- risk-free interest rate, which arises on the basis of supply and demand for borrowed funds and other objective market factors in the credit sector, that is, in the loan and bond market
- risk premium - determined by the degree of risk of non-repayment and depends on the reliability of the borrower, the availability of collateral, guarantees and sureties of third parties;
- inflation surcharge – determined by the level of inflation and the level of inflation expectations of the lender.
Interest income is determined taking into account the requirements of relevant financial instruments standards and includes the amortization of any discount, premium or other difference between the original carrying amount
the amount of the debt security and its amount at maturity.
EXAMPLE
Bank GPB issues a loan in the amount of 1,000,000 rubles. at 24 percent per annum of the SOE company for one year. This corresponds to the average market loan rate. In addition, the bank charges a loan issuance fee of 1.2 percent
at the time of issue. The following entries will be made in the bank's accounting:
DT “Funds placed in loans” RUB 988,000;
CT “Cash” 1,000,000 rubles;
Dt “Cash” 12,000 rub.
Revenue is recognized monthly:
Dt “Interest receivable” RUB 21,000;
CT “Interest income” RUB 21,000.
The effective interest rate on the loan is 25.5 percent, calculated using the NET IDO formula. In accordance with IAS 39 “Financial Instruments: Recognition and Measurement” this category financial assets, like loans and receivables, should be recognized initially at fair value and subsequently at amortized value using the effective interest rate. Therefore, when reporting in accordance with IFRS, it is necessary to reduce the loan received by the amount of the commission received, and then accrue the part of the income related to the reporting period as interest income. In other words, to prepare for calculating amortized cost, you should remove the countervailing cash flows for issuing a loan and receiving a commission.
If interest is not paid, but accrued before the acquisition of a financial instrument (accumulated income), subsequent receipt of interest is distributed over two periods: before acquisition and after acquisition, and only the second part is recognized as revenue (clause 32 of IAS 18) .
EXAMPLE
June 30, 2014 for 210,000 rubles. the company purchased a bond with a nominal value of 200,000 rubles. At the end of each year, it pays an income of 10 percent.
At the time of acquisition, the company will make the following entries:
Dt " Financial instrument» RUB 210,000;
CT “Cash” 210,000 rub.
At the time of payment of income, the company makes the following entries:
DT “Cash” 20,000 rubles;
CT “Financial instrument” 10,000 rubles;
CT “Income in the form of interest” 10,000 rubles.
Dividends. Dividends are recognized when the shareholder becomes entitled to receive them. If dividends on equity securities are declared before acquisition but not paid, they are deducted from initial cost valuable papers similar to the procedure described above.
Royalty. Royalties (license payments) are accumulated and recognized on an accrual basis according to the content of the agreement, unless another, more suitable systematic rational basis is found (clause 33 of IAS 18).
EXAMPLE
The A-Records company, which owns the rights to the popular melody O‑LA‑LA, has granted the right mobile operators to install this melody as a GOOD’OK service worth 0.1 rub. for each connection of this melody. During the first month, 5,000,000 connections were established, during the second month – 15,000,000. Accordingly, based on data from billing systems and operator reports, the company recognizes revenue:
In the first month:
Dt “Accounts receivable” RUB 500,000;
CT “Revenue in the form of royalties” RUB 500,000. (5,000,000 connections 0.1 rub.).
In the second month:
Dt “Accounts receivable” RUB 1,500,000;
CT “Revenue in the form of royalties” RUB 1,500,000. (15,000,000 connections 0.1 rub.).
INFORMATION DISCLOSURE
According to the standard, the company must disclose (clause 35 of IAS 18):
- accounting policy adopted for revenue recognition, including the methods used to determine the stage of completion of operations related to the provision of services;
- the amount of each significant item of revenue recognized during the period, including revenue arising from:
- sales of goods;
- provision of services;
- percent;
- royalties;
- dividends;
- the amount of revenue arising from the exchange of goods or services included in each significant item of revenue.
The international standard IFRS 18 “Revenue” was put into effect by Order of the Ministry of Finance No. 217n dated December 28, 2015. The purpose of this Appendix is to determine the moment of recognition of such financial indicator, as the proceeds of the enterprise. At the same time, the latter includes both income from sales of goods (services) and different kinds remuneration, interest, royalties, dividends.
IFRS IAS 18 Revenue - main nuances
The concept of revenue is familiar to all accountants: in accounting, this indicator is characterized as an increase in the economic benefit of an enterprise as a result of the receipt of all kinds of assets - from cash to property (clause 2 of PBU 9/99) or the repayment of liabilities. The exception is deposits in authorized capital society. IFRS 18 contains almost the same definition of revenue, which consists in the receipt (gross) of economic benefits in the process of business activities and leading to an increase in the capital of the company.
The use of IFRS is possible in clearly defined situations when preparing financial statements. First of all, this is the sale by an enterprise of goods (services) produced or purchased. In addition, these are cases where third-party firms use assets belonging to the owning organization. Based on the results of such transactions, the official owner accrues interest, royalties or dividends.
The standard under discussion does not consider income arising on the basis of:
- Lease agreements.
- Investment agreements of equity participation.
- Insurance contracts.
- Other transactions (conditions) according to IFRS 18.
Note! The amount of revenue accounted forIAS 18, taken on a gross basis. In practice, this means that tax values that do not increase the profit of the enterprise are not included in the calculation. These are, for example, the amounts of VAT, sales tax, goods/services tax, etc.
IFRS 18 Revenue – when revenue is recognized
The amount of proceeds from the transaction is determined according to the contractual terms. The fair value of the asset less any concessions or discounts provided must be taken into account. The moment of recognition is subject to compliance with the following mandatory conditions:
- The buyer has transferred significant risks, as well as benefits arising from the right of ownership of the goods.
- The selling organization has lost control over the object of the transaction, including the right to manage.
- The amount of revenue can be estimated.
- The costs associated with the sale of an object can be estimated.
- The seller is most likely to receive economic benefits from the sale of the asset.
If we compare the specified criteria with the norms of PBU 9/99, it becomes clear that the clause on the transfer of ownership is not specified in IFRS. At the same time, in PBU such a condition is mandatory for the recognition of income (clause 12).
Based on the above, we can conclude that the criteria listed above are sufficient to be reflected in financial statements prepared according to the rules of international standards. Revenue can be accepted at the time the benefits and risks of the asset are transferred to the buyer, taking into account the nuances of the transaction. In most cases, this moment coincides with the transfer of ownership, but sometimes not.
For example, the seller sold a product that required installation. Or the object does not meet the quality, and the manufacturing company is responsible for it. Or the moment of receipt of income from the seller is directly related to the date of receipt of revenue from the buyer, etc. In all these situations, the moment of revenue recognition is determined in a special manner, taking into account the norms of IFRS 18.
Question 3. IFRS 18 Revenue
Income - the most important indicator financial statements. The rules for their accounting under IFRS differ from Russian standards. The discrepancies are most pronounced when accounting for revenue from such activities as the provision of services, trade through an intermediary, barter transactions and some others.
In international standards, the procedure for assessing and recognizing an organization’s income is regulated by IFRS 18 “Revenue”. In Russian accounting, the analogue is PBU 9/99 “Organizational Income”. Despite the apparent similarity, domestic accounting rules differ in many ways from international ones.
According to IFRS, income includes both the company’s revenue and other income, which, unlike PBU, is not divided into non-operating, operating and emergency. Revenue is the receipt of funds from common species activities (sales, fees, interest, dividends and lease payments). Both in international standards and in accounting, the classification of income from ordinary activities is conditional. The same cash receipts may be the main ones for one enterprise and others for another.
According to PBU 9/99, an organization’s income is an increase in economic benefits as a result of the receipt of assets and the repayment of liabilities, leading to an increase in capital (with the exception of contributions from participants). This definition is almost entirely consistent with the concept of income under IFRS 18. However, there are some differences in the criteria for revenue recognition. One of the main inconsistencies is that instead of the concept of “transfer of ownership,” international standards use “the transfer of significant risks and rewards to the buyer.”
At the same time, the PBU does not provide for an analysis of significant risks associated with ownership of goods. For example, under the terms of a purchase and sale agreement, a certain part of the goods can be returned to the seller within a month from the date of transfer to the client. Under IFRS, the seller recognizes revenue from the sale either when it is confirmed that the goods will remain with the buyer, or after the return period has expired. In domestic accounting, income is reflected immediately as soon as ownership is transferred under the contract (most often after shipment). Then, with a partial return, they show the reverse implementation. In essence, it is a separate delivery, where income appears to the former buyer, who now acts as a seller. There are other differences (table).
Table. Revenue recognition criteria in accordance with IFRS and RAS
|
The right of ownership (possession, use and disposal) of the goods has passed to the buyer or the work has been accepted by the customer (service has been provided) |
The supplier company has transferred to the buyer the significant risks and rewards associated with ownership of the goods |
|
|
This condition is missing |
The selling company no longer controls the goods sold |
|
|
The amount of revenue can be determined |
The amount of revenue can be reliably estimated |
|
|
There is confidence that the transaction will result in an increase in the economic benefits of the organization |
It is probable that the economic benefits associated with the transaction will flow to the company |
|
|
The costs associated with the transaction (both incurred and future) can be determined |
Costs incurred or expected to be incurred in connection with a transaction can be estimated reliably |
|
|
The organization has the right to receive revenue arising from a specific agreement or confirmed in another way |
This condition is missing |
In addition, differences arise during evaluation. By international standards Revenue is measured at the fair value of the consideration received (or receivable). Fair value is the amount at which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction. Often the contract provides for either immediate payment or a minimum deferred payment (about one to three weeks). Such conditions ensure that fair value or an amount close to it is obtained. In case of long delays, it is necessary to discount future cash receipts using a conditional interest rate.
Sale of goods
Let us consider the types of purchase and sale transactions in which the difference between the rules is most clearly manifested Russian accounting and IFRS. Summary information regarding the moment of recognition and measurement of revenue is given in the table.
Table. Differences in accounting for revenue in Russian accounting and IFRS for certain types of transactions.
|
Types of purchase and sale transactions |
||||
|
Moment of revenue recognition |
Revenue Estimation |
Moment of revenue recognition |
Revenue Estimation |
|
|
Barter transactions and exchange contracts |
Barter transactions are always considered as sales |
The amount of revenue under a barter agreement is calculated based on the value of the property received in exchange |
Sales of goods are recognized only in the case of exchange or offset of dissimilar values. Exchange for goods of similar nature and size is not a sale |
When exchanging dissimilar goods, revenue is measured at the fair value of the goods received |
|
Selling goods through an intermediary |
The principal does not recognize revenue if the goods are not sold according to the report of the commission agent (agent). Products shipped to the intermediary are accounted for on account 45 |
Revenue is measured at the contract cost of goods sold |
Amounts recorded in the Goods Shipped account are reclassified to the Goods account or recognized as revenue. The latter occurs if the risks and benefits of ownership are transferred to the buyer and the price can be reliably determined |
Revenue is measured at fair value if the risks and rewards of ownership of the goods have passed to the buyer. |
|
Sale of goods in installments or with deferred payment (providing a commercial loan) |
Revenue is recognized in full |
Revenue is recognized in accordance with the contractual obligations of the parties |
If an installment plan or deferment is granted for a period longer than that usually accepted in business transactions, then sales are considered as two transactions: sales of goods and financial services (interest income) |
Valuation occurs at fair value. In addition, interest income is reflected. Future earnings are discounted |
Barter transactions
A barter agreement involves two organizations exchanging property and each party acting as both a seller and a buyer. IN general case ownership of goods transferred by barter passes to the buyer only after the seller receives other property from him in return (Article 570 of the Civil Code of the Russian Federation). Consequently, until the counter-delivery is received, the goods shipped to the counterparty are not considered sold and are accounted for in account 45 “Goods shipped”.
After receiving the counterparty's products, revenue must be shown in Russian accounting. According to IFRS, this should only be done if the parties have exchanged dissimilar values. In the event that homogeneous and similar in value property is shipped and received through barter, the transaction is not recognized as a sale. There is a difficulty here, since the standards do not define goods that are similar in nature and size. In practice, such values are recognized as values that are similar in their characteristics in application and the same in value.
Principal's income
When the goods are shipped by the consignor to the intermediary, the ownership of the products does not pass to the commission agent. In that main feature mediation agreement. In RAS, the principal records the goods on account 45 before shipment to the final buyer. Revenue is not accrued until the commission agent's report on the sale is received.
When transforming into IFRS reporting, the amounts reflected in account 45 must either be reclassified to account 41 or show revenue. The latter option is used when the risks and advantages of owning property have been transferred to the intermediary, the price of which can be reliably determined (as a rule, it is indicated in the contract).
Commercial loan
Often, under a sales contract, the seller will provide an installment payment plan, which is called a commercial loan. Usually, under such conditions, the buyer transfers not only the cost of the product itself, but also interest for late payment. In domestic accounting, revenue increases by the amount of interest.
According to international standards, the interest specified in the contract is also taken into account. In addition, a contingent calculation of interest is required if the contract specifies a rate significantly lower than the market rate. In this case, to comply general rule When recognizing revenue at fair value, the percentage fixed in the agreement must be adjusted to the actual market value. To do this, you should analyze the conditions under which enterprises (most often banks) provide deferred payments.
In addition, if the deferment period exceeds that usually used in business transactions (for example, more than three months), then the sale is considered as two operations: the sale of goods and the provision of financial services.
Provision of services
The reflection of transactions for the provision of services, as well as purchase and sale transactions, differs in Russian accounting and IFRS. According to international standards, when recognizing revenue for services rendered (work performed), one must be guided by general criteria (we described them above). Additionally, the criterion for determining the stage of completion of work as of the reporting date should be applied. In this case, income is recognized using the “as ready” method. Its essence is that revenue must be reflected at the end of each reporting period, even if the work has not yet been completed. But they do not show the entire amount of remuneration, but a percentage of it, if the intermediate result can be reliably estimated. The last condition is satisfied when there is a reliable estimate of either the degree of completion of the services on the last day of the period, or the costs that are incurred in the course of the work and will be returned by the client. Please note that the presence or absence primary documents does not affect income recognition.
According to the rules of domestic accounting, an organization can show implementation either upon completion of all work, or after completing individual stages. In both cases, revenue is reflected on the basis of the act.
Task No. 1
A newly opened hair salon recorded the following events during its first month of operation:
- 1. August 1, 20xxg. The owner contributed 2000 rubles. to the hairdresser's account;
- 2. On August 2, consumables were purchased for 600 rubles;
- 3. On August 3, 500 rubles were paid. rent per premises;
- 4. On August 5, furniture purchased on credit for RUB 1,200 was installed, and this amount must be returned in three equal installments during August, September and October;
- 5. The hairdresser opened on August 10 and in the first week, which ended on August 16, cash receipts amounted to 855 rubles;
- 6. On August 17, payments to the assistant amounted to 125 rubles;
- 7. receipts of money from the provision of services in the next 2 weeks ending on August 31 amounted to 1900 rubles;
- 8. On August 31, the first part of the debt for furniture was paid;
- 9. On August 31, seizures were made in the amount of 900 rubles.
You need to prepare:
- · balance sheet;
- · Profits and Losses Report;
- · statement of changes in capital;
- · cash flow statement.
Balance sheet, p.
Profit and loss statement, p.
Statement of changes in capital, rub.
Cash flow statement, p.
|
ABC hair salon. Cash flow statement for August 20xx. |
|
|
Operating activities |
|
|
Receipts from clients |
|
|
Rent payments |
|
|
Salary payments |
|
|
Purchase of consumables |
|
|
Income from operating activities |
|
|
Investment activities |
|
|
Financial activities |
|
|
Owner deposits |
|
|
Payments to owners |
|
|
Repayment of a debt |
|
|
Income from financial activities |
|
|
Cash growth |
|