The financial reporting workshop REVENUE RECOGNITION (IAS 18) 6th FEBRUARY 2015 LAICO REGENCY, Nairobi REVENUE RECOGNITION (IAS 18)

Introduction Revenue Sources Measurement Revenue recognition Content Introduction Revenue Sources Measurement Revenue recognition Disclosures IFRS 15

1. Introduction Definition of revenue: Revenue is the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an enterprise.

2. Revenue Sources Three main Sources: Sale of goods, Provision or rendering of services, Letting out the firms assets and earning interest, royalties, and dividends Revenue does not comprise gains on the sale of property plant and equipment (PPE) – unless the PPE items were leased out under an operating lease

3. Revenue Measurement 1. Revenue is measured at the fair value of the consideration received or receivable

3. Revenue Measurement 2. If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate

3. Revenue Recognition -Goods Revenue arising from the sale of goods is recognized when all of the following criteria have been satisfied: 1. The significant risks and rewards of ownership are transferred

3. Revenue Recognition -Goods 2. Seller does not have continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold

3. Revenue Recognition -Goods 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 seller

3. Revenue Recognition -Goods 5.The costs incurred or to be incurred in respect of the transaction can be measured reliably.

3. Revenue Recognition -Goods Examples in Appendix of IAS 18 Bill and Hold Goods are ready and delivery will be made Goods shipped subject to conditions Installation and Inspection (When complete) Consignment Sales (When sold to third party) Cash on delivery (When delivery is done) Lay away sales When final installment is made Order and payment at same time When goods are delivered Sale and repurchase No revenue (Difference may be interest income) Sale to intermediate parties Revenue recognized only when risks and rewards of ownership transfer Subscription to publications Revenue recognized when items are despatched

3. Revenue Recognition -Goods Appendix to IAS 18 Real Estate Revenue is normally recognized when legal title passes to the buyer. However, in some jurisdictions the equitable interest in a property may vest in the buyer before legal title passes and therefore the risks and rewards of ownership have been transferred at that stage. In such cases, provided that the seller has no further substantial acts to complete under the contract, it may be appropriate to recognize revenue. In some cases, real estate may be sold with a degree of continuing involvement by the seller such that the risks and rewards of ownership have not been transferred. In such cases, the nature and extent of the seller’s continuing involvement determines how the transaction is accounted for. It may be accounted for as a sale, or as a financing, leasing or some other profit sharing arrangement. If it is accounted for as a sale, the continuing involvement of the seller may delay the recognition of revenue

3. Revenue Recognition -Services When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognized by reference to the stage of completion of the transaction at the end of the reporting period.

3. Revenue Recognition -Services 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;

3. Revenue Recognition -Services (b) it is probable that the economic benefits associated with the transaction will flow to the entity;

3. Revenue Recognition -Services (c) the stage of completion of the transaction at the end of the reporting period can be measured reliably; and

3. Revenue Recognition -Services (d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably

3. Revenue Recognition -Services Examples in Appendix of IAS 18 Installation fees Revenue recognition based on stage of installation. If done at the same time with sale of goods, then recognize on sale of goods. Servicing fees included in price of product The amount is deferred and recognised as revenue over the period during which the service is performed. Advertising Commissions Media commissions are recognised when the related advertisement or commercial appears before the public. Production commissions are recognized by reference to the stage of completion of the project. Insurance agencyCommissions Revenue recognized on date of renewal policies, but if tied to additional services then when the services are rendered

3. Revenue Recognition -Services Examples in Appendix of IAS 18 Financial Services fees Fees that are an integral part of the effective interest rate of a financial instrument are generally treated as an adjustment to the effective interest rate. Origination fees, These fees are an integral part of generating an involvement with the resulting financial instrument and, together with the related direct costs, are deferred and recognized as an adjustment to the effective interest rate. Commitment fees received by the entity to originate a loan together with the related direct costs, is deferred and recognised as an adjustment to the effective interest rate

3. Revenue Recognition -Services Examples in Appendix of IAS 18 Origination fees received on issuing financial liabilities measured at amortised cost, are included, with the related transaction costs incurred, in the initial carrying amount of the financial liability and recognised as an adjustment to the effective interest rate. Fees charged for servicing a loan. Fees charged by an entity for servicing a loan are recognised as revenue as the services are provided. Investment management fees. Fees charged for managing investments are recognised as revenue as the services are provided. Commission on the allotment of shares to a client The commission is recognised as revenue when the shares have been allotted.

3. Revenue Recognition -Services Appendix to IAS 18 Placement fees for arranging a loan between a borrower and an investor The fee is recognized as revenue when the loan has been arranged. Loan syndication fees. Such a fee is recognized as revenue when the syndication has been completed Admission Fees Revenue from artistic performances, banquets and other special events is recognized when the event takes place Tuition fees. Revenue is recognized over the period of instruction. Initiation, entrance and membership fees Revenue recognition 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, the fee is recognized as revenue when no significant uncertainty as to its collectability exists

3. Revenue Recognition -Services Appendix to IAS 18 Franchise Fees Equipment and other assets : Revenue recognized as assets are transferred. Subsequent Services: Fees from the services is recognized as services are delivered. Continuing franchise fees : Fees charged for the use of continuing rights granted are recognized as revenue as the services are provided or the rights used. Fees from the development of customized software Fees from the development of customized software are recognized as revenue by reference to the stage of completion of the development, including completion of services provided for post-delivery service support.

3. Revenue Recognition –Div,Int & R For interest, royalties and dividends, if it is probable that the economic benefits will flow to the enterprise and the amount of revenue can be measured reliably, revenue should be recognised as follows:

3. Revenue Recognition –Div,Int & R Interest: on a time-proportionate basis that takes into account the effective yield

3. Revenue Recognition –Div,Int & R Royalties: on an accruals basis in accordance with the substance of the relevant agreement

3. Revenue Recognition –Div,Int & Roy Dividends: when the shareholder's right to receive payment is established.

4. Disclosures 1. The accounting policy adopted for recognizing each type of revenue 2. For each of the categories, disclose the amount of revenue from exchanges of goods or services

4. Disclosures 3. The amount of each significant category of revenue, including: - Sale of goods - Rendering of services - Interest - Royalties - Dividends.

IFRS 15 – Revenue from contracts with customers.

4. IFRS 15 IFRS 15 is effective from year 2017, is an improvement of IAS 18. The standard replaces the following:

5. IFRS 15 IAS 11, Construction Contracts. IAS 18, Revenue IFRIC 13, Customer Loyalty Programs IFRC 15, Agreements for the Construction of Real Estate IFRC 18, Transfer of Assets from Customers SIC 31, Revenue-Barter Transactions Involving Advertising Services

4. IFRS 15 Applies to all contracts with customers, except: Lease contracts (refer to IAS 17) Insurance contracts (refer to IFRS 4) Financial instruments and other contractual rights or obligations (refer to IFRS 9/IAS 39, IFRS 10, IFRS 11, IAS 27, and IAS 28) Certain non-monetary exchanges.

4. IFRS 15 Vs IAS 18 Definition of revenue: According to IAS 18 revenue mainly arises from, the sale of goods; the rendering of services; and the use by others of entity assets yielding interest, royalties and dividends. IFRS 15 uses a different approach, which simply explains that revenue arises from contracts with customers.

4. IFRS 15 Vs IAS 18 Revenue measurement: The two standards are substantially in agreement only that IFRS 15 talks of contract price.

4. IFRS 15 Vs IAS 18 Revenue Recognition: Here, the two standards differ remarkably. For IAS 18 we have discussed previously. For IFRS 15, it talks about a FIVE step model to be followed:

4. IFRS 15 Vs IAS 18 1. The identification of the contract with the customer. 2. The identification of the separate performance obligations in the contract.

4. IFRS 15 Vs IAS 18 3. The entity to determine the transaction price, which is the amount of consideration that an entity expects to be entitled to in exchange for the promised goods or services.

4. IFRS 15 Vs IAS 18 4. The allocation of the transaction price to the separate performance obligations. 5. Revenue to be recognized as each performance obligation is satisfied

4. IFRS 15 Vs IAS 18 IFRS 15 has a separate section for presentation, which is not expressed in IAS 18.

4. IFRS 15 Vs IAS 18 Statement of financial position 1. Contract assets and contract liabilities from customers are presented separately 2. Unconditional rights to consideration are presented separately as a receivable.

2. IAS 1 Presentation of Financial Statements. 4. IFRS 15 Vs IAS 18 Statement of profit or loss and other comprehensive income 1. Line items (revenue and impairment) are presented separately in accordance with the requirements of 2. IAS 1 Presentation of Financial Statements.

Disclosures in IFRS 15 are improved 4. IFRS 15 Vs IAS 18 Disclosures in IFRS 15 are improved 1. Contracts with customers (information regarding): Disaggregation of revenue Contract assets and contract liabilities Performance obligations (incl. remaining).

2. Significant judgments: Performance obligation satisfaction 4. IFRS 15 Vs IAS 18 2. Significant judgments: Performance obligation satisfaction Transaction price (incl. allocation) Determining contract costs capitalized.

3. Use of practical expedients (related to): 4. IFRS 15 Vs IAS 18 3. Use of practical expedients (related to): Significant financing component (12 month) Contract costs (12 month amortization).

4. Contract costs capitalized: Method of amortization 4. IFRS 15 Vs IAS 18 4. Contract costs capitalized: Method of amortization Closing balances by asset type Amortization and impairment.

4. IFRS 15 Vs IAS 18 IFRS 15 also has an application guidance, like the appendix to IAS 18. The guidance considers the following:

Sale with a right of return Warranties 4. IFRS 15 Vs IAS 18 Contract costs Sale with a right of return Warranties Principal versus agent considerations Customer options for additional goods or services Customers’ unexercised rights

Non-refundable upfront fees (and some related costs) Licensing 4. IFRS 15 Vs IAS 18 Non-refundable upfront fees (and some related costs) Licensing Repurchase agreements Consignment arrangements Bill-and-hold arrangements Customer acceptance.