Accounting for Revenue
3 June 2011 by Manchi and James
HKAS 18 Revenue
HK(IFRIC) 15 Agreements for the Construction of
Real Estate 物業建築協議
HKAS 20 Accounting for Government Grants and
Disclosure of Government Assistance 政府補助的會
計處理及政府資助的披露
HK(IFRIC) 13 Customer Loyalty Programmes 客戶維
繫計劃 including Improvements to HKFRS 2010
related to IFRIC 13 (by Manchi Kong)
1
HKAS 18 Revenue
• Scope of HKAS 18
1. Revenue from sale of goods
2. Revenue from services rendered
3. Revenue from use of entity’s other
assets (interest, dividend, royalties)
2
Exclusion from HKAS 18
1.
2.
3.
4.
5.
6.
7.
8.
Lease agreement (HKAS17 Leases) “Lease income
from/expense under operating leases shall be recognised
in income on a straight-line basis over the lease term……”
dividend arising from investments which are accounted for under
the equity method (HKAS28 Investments in Associates) – share of
profits
insurance contracts (HKFRS4 Insurance Contracts)
changes in the fair value of financial assets and financial liabilities
or their disposal (HKAS39 Financial Instruments: Recognition and
Measurement)
changes in the value of the other current assets
initial recognition and changes in the fair value of biological assets
related to agricultural activity (HKAS41 Agriculture)
initial recognition of agricultural produce (HKAS41 Agriculture)
the extraction of mineral ores
3
Definition of Revenue
• Gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an entity
when those inflows results in increases in equity.
• Exclude contributions from equity participants,
eg.consideration on allotment of company shares.
• Exclude amounts which do not result in increases in
equity, eg. sales taxes collected on behalf of government.
4
Gross Inflow
Trade/early settlement discount:
• The amount of revenue recognised for a transaction is net of any trade
discounts or volume rebates given, since those discounts and rebates
are not received as consideration by the seller.
• Early settlement discount is not deducted from revenue in full HKFRS
and SMEFRS but is deducted in HKFRS for PE.
Agent:
• gross amounts collected by the agent on behalf of the principal are not
benefits that flow to the agent and therefore, they are not revenue.
Agent’s revenue is the amount of commission.
5
Determining whether an entity is acting as a principal or as
an agent (2009 amendment, HKAS18 Appendix Example 21)
The entity is acting as a principal when it has exposure to significant risks
and rewards associated with the sales of goods or the rendering of services.
Key indicators to consider include:
– The entity is the primary responsibility for the customer
– The entity has general inventory risk
– The entity has latitude in establishing price
– The entity bears the customer’s credit risk
Quiz: Whether a re-invoicing company incorporated by a
manufacturer in Mainland China is acted as principal or agent?
6
Measurement of revenue
• Revenue is measured at the fair value of the consideration received or
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.
• If the inflow of cash or cash equivalents is deferred, the fair value of
the consideration may be less than the normal amount of cash received
or receivable. Part of the revenue should be the interest income which
should be separated and recognised during the credit period. Usual
methods for separation:
1. Prevailing rate for a similar instrument of an issuer with a similar
credit rating.
2. Discounting the nominal amount of the instrument to the current
cash sales price.
7
Measurement of revenue
• Exchange of goods –
1. If exchange for similar nature and value, no revenue is
recognized, oil or milk.
2. If exchange for different nature and value,
a) The revenue is measured at the fair value of the goods or
services received, adjusted for any cash payments made by either
buyer or seller
b) if the fair value of the goods or services received cannot be
measured reliably, revenue is recognised at the fair value of the goods
or services given up, adjusted for any cash payments made or received
8
Sale of goods
All of the following criteria have to be met:
a.
b.
c.
d.
e.
Significant risks and rewards of ownership of the goods transferred
Retains neither continuing managerial involvement nor effective
control over the goods sold
The amount of revenue can be measured reliably
Probable that economic benefits associated with the transaction will
flow to the entity
The costs incurred or to be incurred in respect of the transaction can
be measured reliably
9
Sale of goods
Risks and rewards of ownership
• The time that the risks and rewards is transferred requires an
examination of the circumstances of the transaction.
• Normally, the transfer of the risks and rewards of ownership coincides
with the transfer of the legal title or the passing of possession to the
buyer, eg. retail sales.
• For international trade, the risks and legal title are passed basically
according to the trade term, eg. FOB. Reference of the trade term can
be referred to The International Commercial Terms developed by
International Chamber of Commercial,
http://www.iccwbo.org/incotermsrules/ eg. EXW, DAT, DAP, FAS
10
Sale of goods
Risks and rewards of ownership
• If significant risks of ownership are retained by the seller the
transaction is not a sale and revenue is not recognised, examples:
- when the seller retains an obligation for unsatisfactory performance
not covered by normal warranty provisions
- when receipt of the revenue from a particular sale is contingent on the
derivation of revenue by the buyer from its sale of the goods (similar to
consignment)
- when 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 reason
specified in the sales contract and the seller is uncertain about the
probability of return
11
Sale of goods
Risks and rewards of ownership
• If only an insignificant risk of ownership is retained by the seller, the
transaction is a sale and revenue is recognised, examples:
- an insignificant risk of ownership may be retained by the seller in a
retail sale when a refund is offered if the customer is not satisfied.
Revenue in such cases is recognised at the time of sale provided the seller
can reliably estimate future returns and recognises a liability and
corresponding reduction for returns based on previous experience and
other relevant factors
12
Sale of goods
Inflow of Future Economic Benefits
- Revenue not recognised if inflow is not probable
- For examples, it may be uncertain that a foreign governmental
authority will grant permission to remit the consideration from a sale in
a foreign country
- When an uncertainty arises about the collectibility of an amount
already included in revenue, the uncollectible amount, or the amount in
respect of which recovery has ceased to be probable, is recognised as
an expense. No adjustment to revenue is allowed.
Reliable Measurement for Revenue and Cost (Matching Concept)
- If the corresponding cost of the revenue cannot be measured reliably,
any consideration already received for the sale of the goods is
recognised as a liability
13
Sale of goods - Examples:
1.
Trading of property
Whether the revenue is recognised upon the completion of sale and
purchase agreement or upon the completion of assignment? Why?
How to present in the income statement?
Analysis:
14
Sale of goods - Examples:
2.
Warranty provision
- An entity manufactures an item of customised machinery and gives
a 3-months warranty covering the cost of any adjustments or repair
subsequent to delivery,
- The product is likely to have some serious problems that will need
to be remedied after the delivery, due to the need to suit the
particular customer’s environment
- Under the terms of the sales contract, title passes on delivery
Whether revenue cannot recognised upon the delivery? Why?
Analysis:
15
Sale of goods - Examples:
3.
Machine sold subject to right of return
- A manufacturer sells a machine to a customer who is anticipating
being awarded a contract from the Government and the machine is
used for such specific contract
- The manufacturer allows the customer the right to return the
machine if the customer does not win the contract from Government
- The contract states that title is passed upon the delivery
Whether revenue can be recognised upon the delivery? Why?
Analysis:
16
Sale of goods - Examples:
4
Goods kept in the seller warehouse
- Contract states that title of goods is passed on delivery
- Requested by customer, goods are not delivered until further notice
- Consideration is settled by the customer
Whether revenue can be recognised? When? Why?
Analysis:
17
Sale of goods - Examples:
5.
Forever guarantee
- A retailer offers a lifetime guarantee on its products
- A customer may return any item for any reason at any time and
have its money refunded
- Based on their internal data, 1% of sales are returned under this
policy
How and when to recognise the revenue? Why?
Analysis:
18
Sale of goods - Examples:
6.
Retention of title
- A manufacturer prescribes in the sales contract the retention of title
clause, ie the legal title does not pass on delivery but when
consideration for the goods is received
When is the revenue recognised?
Analysis:
19
Rendering of services
All of the following criteria have to be met:
a.
Amount of revenue can be measured reliably
b.
Probable that the economic benefits associated with the transaction
will flow to the entity (note)
c.
Stage of completion can been measured reliably (HKAS 11
Construction Contract also requires the stage of completion method
to be applied)
d.
Cost incurred and to complete can be measured reliably
(note) like sale of goods, if it is uncertain about the collectibility of an
amount already included in the revenue, the uncollectible amount, or
the amount in respect of which recovery has ceased to be probable,
is recognized as an expense. No offset to revenue is allowed.
20
Rendering of services
Recognition criteria
Can outcome of transaction be estimated reliably?
No
Are expenses incurred likely to be
recovered?
Yes
Revenue is recognised to
the extent of expenses
incurred that are likely to
be recovered. Thus, no
profit is recognised on the
transaction
No
No revenue is
recognised and
the costs
incurred are
recognised as
an expense
Yes
Revenue associated with
the transaction is
recognised by reference
to the stage of
completion of the
transaction at the end of
the reporting period (ie
using the percentage of
completion method)
21
Rendering of services
Examples of methods for determining Stage of completion:
-
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 total
costs of the transaction
Progress payments and advances received from customers often do not
reflect the services performed
22
Rendering of services
Examples:
Insurance agency commissions
Insurance agency commissions received or receivable which do not
require the agent to render further service are recognised as revenue by
the agent on the effective commencement or renewal dates of the
related policies. However, 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 as revenue
over the period during which the policy is in force.
23
Rendering of services
Examples:
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 recognised as revenue when no significant uncertainty as to its
collectibility 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 nonmembers, it is recognised on a basis that reflects the timing, nature and
value of the benefits provided.
24
Interest, Royalties and Dividend
Basic requirement:
a.
It is probable that the economic benefits associated with the
transaction will flow to the entity and
b.
The amount of the revenue can be measured reliably
Interest revenue
Interest revenue should be recognised using the effective interest
(When unpaid interest has accrued before the acquisition of an
interest-bearing investment, the subsequent receipt of interest is
allocated between pro-acquisition portion [offset the amount
recognised at acquisition for interest receivable] and postacquisition portion [recognised as interest income]
25
Interest, Royalties and Dividend
Basic requirement:
a.
It is probable that the economic benefits associated with the
transaction will flow to the entity and
b.
The amount of the revenue can be measured reliably
Royalty income
Royalty revenue should be recognised on an accrual basis in
accordance with the substance of the relevant agreement
26
Interest, Royalties and Dividend
Basic requirement:
a. It is probable that the economic benefits associated with the
transaction will flow to the entity and
b. The amount of the revenue can be measured reliably
Dividend revenue
- Dividend revenue should be recognised when the shareholder’s right
to receive payment is established
- If dividend is received from newly investment, dividend revenue is
recognised in profit or loss irrespective of whether it is declared from
pre- or post-acquisition profits. (if pre-acquisition profits are
recognised, it is necessary to consider whether the equity investment is
impaired)
27
Disclosure
a.
Accounting policies adopted for the recognition of revenue
including the methods adopted to determine the stage of completion
of transactions involving the rendering of services;
Amount of each significant category of revenue recognised during
the period including revenue arising from;
b.
1)
2)
3)
4)
5)
c.
Sale of goods
Rendering of services
Interest
Royalties
Dividend
Amount of revenue arising from exchanges of goods or services
included in each significant category of revenue.
28
HK(IFRIC) 15 Agreement for the Construction of Real Estate
Scope of HK(IFRIC) 15
The interpretation applies to agreements for the construction of real
estate, and to entities that undertake that construction directly or
through sub-contractors
It addresses whether the agreement is within the Scope of HKAS 11 or
HKAS 18 and when revenue from the construction of real estate
should be recognised
In addition to the construction of real estate, such agreements may
include the delivery of other goods or services
29
Accounting for the Construction of Real Estates
The appropriate accounting for an agreement to construct real estate
depends on whether the agreement:
meets the definition of a construction contract; or
is only for the rendering of services; or
is for sale of goods, in which case it is necessary to consider
whether the criteria for recognising revenue from the sale of goods are
met on a continuous basis
Whether an agreement is within the scope of HKAS11 or HKAS 18
depends on the terms of the agreement and all the surrounding facts
and circumstances, and judgement will be required with respect to each
agreement
30
Construction contract
HK(IFRIC)-15 states that an agreement for the construction of real
estate will meet the definition of a construction contract when the
buyer is able to:
specify the major structural elements of the design of the real
estate before construction begins; and/or
specify major structural changes once construction is in progress,
In contrast, if buyers have only limited ability to influence the design,
HK(IFRIC)-15.2 states that the agreement will be for the sale of goods,
and within the scope of HKAS 18
31
Rendering of services
If an agreement does not meet the definition of a construction contract,
it will be within the scope of HKAS18
HK(IFRIC)-15 provides further guidance on how to determine whether
the agreement is for the rendering of services or for the sale of goods
Where the entity is not required to acquire and supply construction
materials because they will be sourced directly by the buyer, the
agreement may be only an agreement for the rendering of services,
revenue will be recognised using the percentage of completion method
providing the criteria in HKAS 18.20 are met
32
Sale of goods
If the entity is required to provide services together with construction
materials in order to perform its contractual obligation to deliver real
estate to the buyer, assuming it does not qualify as a construction
contract, the agreement is for sale of goods
If an agreement is determined to be for the sale of goods, the timing of
revenue recognition will depend on when control and the significant
risks and rewards of ownership are transferred to the buyer, 2
possibilities:
33
Sale of goods
1) The entity may transfer to the buyer control and the
significant risks and rewards of ownership of the real
estate in its entirely at a single time, eg. at completion,
upon or after delivery. In this case, revenue will be
recognised only when the criteria HKAS 18.14 are
satisfied
2) The entity may transfer to the buyer control and the
significant risks and rewards of ownership of the work in
progress in its current state as construction progresses. In
this case, if all the criteria in HKAS18.14 are met
continuously as construction progresses, revenue will be
recognised using the percentage of completion method
Please refer to annex 1 for flowchart
34
HKAS 20- Accounting for Government Grants and
Disclosure of Government Assistance
Hong Kong Financial Reporting Standards
-
-
Government refers to government, government agencies and similar
bodies whether local, national or international. (It is not limited to
grant from Government)
Government grants are sometimes called by other names such as
subsidies, subventions, or premiums.
Government grants shall not be recognised until there is reasonable
assurance that:
(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received.
35
Government Grants
Hong Kong Financial Reporting Standards
-
-
Government grants shall be recognised as income in profit or loss on a
systematic basis over the periods in which the entity recognises as
expenses the related costs for which they the grants are intended to
compensate.
(Method 1) A government grant may take the form of a transfer of a
non-monetary asset, such as land or other resources, for the use of the
entity. In these circumstances it is usual to assess the fair value of the
non-monetary asset and to account for both grant and asset at that fair
value, (like the deferred income method considered below). (Method 2)
An alternative course that is sometimes followed is to record both asset
and grant at a nominal amount.
36
Government Grants
Hong Kong Financial Reporting Standards
-
-
Presentation of grants related to assets
Government grants related to assets, including non-monetary grants at
fair value, shall be presented in the statement of financial position
either by setting up the grant as deferred income or by deducting the
grant in arriving at the carrying amount of the asset.
Presentation of grants related to income
Grants related to income are sometimes presented as a credit in the
statement of comprehensive income, either separately or under a
general heading such as "Other income"; alternatively, they are
deducted in reporting the related expense.
37
Government Grants
Hong Kong Financial Reporting Standards
for Private Entity
-
-
Grant is recognized if no specified future performance
conditions.
Grant with specified future performance conditions is recognised
as deferred income and released to income when the
performance conditions are met.
Not specially mention the recognition and measurement of grant
relating to assets
38
New Standard
- IASB scheduled to issue the new
accounting standard on revenue recognition
end of this year.
- It is a project jointly performed together
with US FASB.
- The new standard intends to consolidate
IAS 11, 18 and IFRICs related to revenue.
- Recognition emphazised mainly on the
transfer of control of good and service.
39
Quiz materials
Recognition of sale of property
• Cheung Kong (Holdings) Limited
• (o) Revenue recognition
• When properties under development are sold, income is
recognised when the property development is completed with
the relevant occupation permit issued by the Authorities and
the significant risks and rewards of the properties are passed to
the purchasers. Payments received from purchasers prior to this
stage are recorded as customers’ deposits received.
Trading Terms
•
•
•
•
EXW
DAT
DAP
FAS
Ex Works
Delivered At Terminal
Delivered At Place
Free Alongside Ship
40
Quiz materials
Recognition of dividend income
The Community Chest
• Recognition of Income
• Income from donations is recognised when cash is received and
includes all sums received up to the balance sheet date.
• Dividend income from unlisted investments is recognised only
when the shareholder’s right to receive payment is established.
• Dividend income from listed investments is recognised when the
share price of the investment goes ex-dividend.
41
Quiz materials
Recognition of dividend income
- Final dividend is recognised when it is approved by the shareholders
- Interim dividend is recognised when it is approved by the board of
directors
Table A of Companies Ordinance
115. The company in general meeting may declare dividends, but no
dividend shall exceed the amount recommended by the directors.
116. The directors may from time to time pay to the members such interim
dividends as appear to the directors to be justified by the profits of the
company.
42
HK(IFRIC)-13
Customer Loyalty Programmes
including Improvements to HKFRS 2010
related to IFRIC 13
by Manchi Kong
43