|
Recognition
Revenue from the rendering of services should be
recognised by reference to the stage of completion
of the transaction when the following conditions
are met:
| a) |
the amount of revenue
can be measured reliably [IAS11.23(a),24] [IAS18R.20(a)]; |
|
| b) |
the flow of economic benefits to the
entity is probable [IAS11.23(b),24(a)] [IAS18R.20(b)]; |
|
| c) |
the stage of completion
at the period end can be measured reliably [IAS11.23(c)]
[IAS18R.20(c)]; and |
|
| d) |
the costs incurred
to date and the costs to completion can be measured
reliably [IAS11.23(d),24(b)] [IAS18R.20(d)]. |
Management should delay the recognition of revenue
until the above criteria are met. Revenue might
therefore be recognised, in extreme cases, after
all conditions of the service or construction contract
have been fulfilled, even if the contract spans
more than one accounting period.
Services performed within the period
Services are often performed within the reporting
period and linked to a discrete revenue-generating
event such as artistic performances, tuition, advertising,
professional advice and financial services. The
percentage of completion basis is applicable to
such services, but the stage of completion increases
from 0% to 100% within one accounting period. Consequently,
the difficulties normally encountered with respect
to determining the stage of completion do not arise.
Where the receipt of revenue after the service
is performed is contingent on a future event outside
of the service provider's control, the revenue should
not be recognised until that future event has occurred.
For example, receipt of revenue may be dependent
on approval from a regulatory authority .
Services performed over more than one reporting
period
Recognition of revenue from services and construction
contracts that are provided over a period beyond
the reporting period is more complex and involves
estimates. An entity must be able to estimate reliably
the stage of completion of the contract and the
costs expected to complete it [IAS11.23(c)] .
Revenue is recognised according to the stage, or
percentage, of completion of the contract [IAS18R.20].
The method used to determine the stage of completion
will depend on the nature of the contract. A consistent
approach should be taken to the revenue recognition
of similar contracts. The more common methods are
[IAS11.30] [IAS18R.24]:
| a) |
the proportion
of costs incurred for work performed to date
compared to the total estimated contract costs; |
|
| b) |
the proportion of physical work performed
to date compared to total construction work; |
|
| c) |
the proportion of
services performed to date as a percentage of
total services to be performed. |
A straight line basis of revenue recognition is
used for service revenues only when the service
is provided by an indeterminate number of acts over
a specified time period and when there is no other
method available that provides a better measure
of the stage of completion [IAS18R.25] .
Costs incurred that relate to future work to be
performed should be excluded from the determination
of stage of completion [IAS11.31] [IAS18R.24].
When the outcome of a contract cannot be estimated
reliably, but the contract overall is expected to
be profitable, revenue should be recognised to the
extent of recoverable expenses [IAS11.32] [IAS18R.26].
This is described as the "zero profit method".
Any expected loss on a contract should be recognised
as an expense immediately [IAS11.36]. The recoverability
of costs associated with the service or construction
contract that are included in the balance sheet
should be considered for recoverability .
Issuance of invoices is not a reliable indicator
of the percentage of a contract's completion. Cash
collection is also not an appropriate basis [IAS11.30]
[IAS18R.24] . However, the effect
of delays between the recognition of revenue and
the receipt of cash according to an agreed billing
and payment schedule should be reflected in the
financial statements. Such delays are reflected
by discounting revenue from the date of recognition
until the expected date of receipt [IAS18R.11] .
Extended payment terms outside an entity's established
normal business terms may indicate concern about
fulfilment of the contract and the future probable
flow of economic benefits to the entity; for example,
if 12 months' credit is given when normal terms
provide for 30 days' credit. The revenue recognition
for a contract in these circumstances should be
reassessed. Revenue should not be recognised where
concerns about collection are significant.
The treatment of the costs incurred in relation
to contracts spanning more than one accounting period
are considered in the chapter on contract expense
and the residual balances
deferred in the balance sheet are considered in
the chapter on construction contract work in progress
.
Multiple element contracts
Entities in certain industries often bundle the
sale of a number of goods and services into one
contract. An example is the provision of software,
installation of hardware and after-sales customer
support by an IT entity. The determination of whether
contracts should be accounted for as single or multiple
element contracts requires considerable judgement.
A contract has separate elements if the product
or service elements represent a separate earnings
process
A multiple element contract should generally be
separated into its constituent parts and each part
accounted for separately, unless the commercial
effect of each transaction cannot be understood
without considering the separate components as a
single transaction [IAS11.8] [IAS18R.13]. The total
contract price must be allocated to each element.
The allocation should be in proportion to the fair
value of the individual elements .
Any price discount that has been given in respect
of a multiple element contract will therefore be
allocated proportionately to each element .
Where the performance of one element of a contract
is closely linked to the performance of another,
it may be more appropriate to treat the two elements
as one contract. Two elements are
closely linked if the commercial effect of one element
cannot be properly understood without considering
the two elements as if they were one. The terms
of each multiple element contract should therefore
be carefully considered to ensure that the correct
treatment is applied [IAS18R.13]. The percentage
of completion basis of revenue recognition should
be used separately for the individual elements of
a multi-element contract, provided the normal recognition
criteria for the percentage of completion basis
are met.
Financial service fees
Financial service fees are not always recognised
as part of service revenue. Loan origination fees
and commitment fees relating to a loan commitment
outside the scope of IAS 39 are part of the ongoing
involvement with the financial instrument. They
are treated as an adjustment to the effective interest
rate. Fees charged for servicing a loan should be
recognised as the service is provided, while fees
linked to a specific act such as loan syndication
fees if the entity retains no part of the loan package
for itself should be recognised when the service
has been provided [IAS18R Appendix 14].
Initial measurement
Revenue for services provided should be measured
at the fair value of the consideration receivable
[IAS11.12] [IAS18R.9] . Revenue should
be discounted if the inflow of cash is deferred
and the impact of the time value of money is significant.
The present value of the consideration receivable
should be recognised as revenue, and the unwinding
of the discount on the receivable should be recognised
as a component of interest income [IAS18R.11] . This treatment reflects the financing element
of the terms of the contract .
Revenue recognised should include any variations
and claims to the extent that it is probable that
they will be agreed [IAS11.13-14] .
However, contingent revenue should not be recognised
until it is virtually certain of recovery, that
is, it is no longer contingent [IAS37R.31]. For
example, a bonus for early completion of a contract
should be recognised only when the contract has
been completed within the timescale set. Contingent
revenue should be disclosed where receipt is probable
[IAS37R.34].
Subsequent measurement
Concerns about the collectability of revenues already
recognised should be reflected as a doubtful debt
expense and not an adjustment to revenues [IAS18R.22].
However, if contract terms are renegotiated, adjustments
to contract revenue should be recognised in the
income statement prospectively.
Disclosure
The entity's accounting policies for revenue recognition,
including the methods used to determine stage of
completion, should be disclosed [IAS11.39(b),(c)]
[IAS18R.35(a)]. Disclosure should also be made of
revenue recognised during the period analysed between
each significant category of revenue [IAS11.39(a)]
[IAS18R.35(b)]. Separate disclosure should be made
of revenue arising from the provision of services
and royalty revenue [IAS18R.35(b)(ii),(b)(iv)].
Other disclosures that should be made in respect
of construction contracts include:
| a) |
contract costs
incurred and recognised profits (less recognised
losses) to date
[IAS11.40(a)]; |
|
| b) |
advances received before work is performed.
Include within Trade and other payables [IAS11.40(b)]; and |
|
| c) |
positive and negative
WIP balances and retentions [IAS11.40(c),41-45]. |
|
