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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″ custom_padding_tablet=”0px||0px|” custom_padding_last_edited=”on|desktop” prev_background_color=”#ffffff” next_background_color=”#000000″][et_pb_row][et_pb_column type=”4_4″][et_pb_toggle admin_label=”Index” _builder_version=”3.0.106″ title=”Index” open=”off”]23.1.1 Exclusions from Section 23.
23.2.1 Extract from FRS 102-Section 23.3-23.4.
23.2.2.1 Revenue – definition and basic requirements.
23.2.2.1.1 Definition of revenue.
23.2.2.1.2 Recognition criteria.
23.2.2.1.2.1 Definition of probable.
23.2.2.1.2.2 Reliable measurement
23.2.2.1.2.3 Sales incentives/rebates/settlement
23.2.2.1.3 Principal versus agent
23.2.2.1.3.1 Definition of an agent
23.2.2.1.3.2 Definition of a person acting as principal
23.2.2.1.3.3 Indication that a party is acting as principal
23.3.1 Extract from FRS 102- Section 23.5.
23.4 Exchanges of goods or services.
23.4.1 Extract from FRS 102 – Section 23.6-23.7.
23.5 Identification of the revenue transaction.
23.5.1 Extract from FRS 102 – Section 23.8-23.9.
23.5.2.2 Assessing whether separable identifiable components exist
23.5.2.2.1 Methods of allocating total consideration between components.
23.5.2.2.1.1 The relative fair value basis.
23.5.2.2.1.2 Cost plus a reasonable margin method.
23.5.2.3 Customer loyalty awards.
23.5.2.3.1 Issues to consider when determining the fair value of an award.
23.6.1 Extract from FRS 102 – Sections 23.10-23.13.
23.6.2.2 Revenue recognition criteria.
23.6.2.2.1 Example of risk and rewards of ownership transferring.
23.6.2.2.2 Assessing whether ongoing managerial involvement exists.
23.6.2.3 Right of return in exchange for cash/vouchers.
23.6.2.7 Sale of extended guarantee.
23.6.2.9 Recognition where risk and rewards of ownership based on shipment terms.
23.6.2.10 Sale of goods with retention of title clause.
23.6.2.11 Bill and hold sales.
23.6.2.12 Goods shipped subject to conditions.
23.6.2.14 Payments in advance.
23.6.2.15 Sale and repurchase agreements.
23.6.2.16 Sales to intermediate parties, such as distributors, dealers or others for Resale.
23.6.2.17 Subscriptions to publications and similar items.
23.6.2.18 Instalment sales, under which the consideration is receivable in instalments.
23.7 Agreements for the construction of real estate.
23.7.1 Extract from FRS 102 – Section 23A.14-23A.15.
23.8.1 Extract from FRS 102 – Sections 23.14-23.16, 23.21, 23.23-23.24.
23.8.2.1 Service recognition criteria.
23.8.2.1.1 Costs that relate to future activity.
23.8.2.1.2 Reliable measurements not probable.
23.8.2.1.3 Collectability no longer profitable.
23.8.2.1.4 Changes in estimates in revenues.
23.8.2.2 Intermediate number of acts over specified period.
23.8.2.3 Service with a significant act
23.8.2.4 Stage of completion method – 3 methods.
23.8.2.4.1 Proportion of costs method.
23.8.2.5 Other specific examples as extracted from the Appendix to Section 23 of FRS 102.
23.8.2.5.2 Servicing fees included in the price of the product
23.8.2.5.3 Advertising commissions.
23.8.2.5.4 Insurance agency commissions.
23.8.2.5.5 Financial services fees.
23.8.2.5.8 Initiation, entrance and membership fees.
23.8.2.5.9.1 Franchise fees: Supplies of equipment and other tangible assets.
23.8.2.5.9.2 Franchise fees: Supplies of initial and subsequent services.
23.8.2.5.9.3 Franchise fees: Continuing franchise fees.
23.8.2.5.9.4 Franchise fees: Agency transactions.
23.8.2.5.10 Fees from the development of customised software.
23.9.1 Extract from FRS 102 – Sections 23.17-23.27.
23.9.2.1 Definition of construction contract and its importance.
23.9.2.1.1 Requirements of length of a construction contract
23.9.2.2 Combination and segmentation of contracts.
23.9.2.3 Recognition of Contract revenue and contract costs.
23.9.2.4.1 Changes in fair value – reasons.
23.9.2.4.2 Penalties and variations – recognition and impact
23.9.2.4.3 Incentive payments.
23.9.2.5.1 Directly related contract costs.
23.9.2.5.2 Incidental income from directly related costs.
23.9.2.5.3 Costs directly attributable to the contract in general – overhead costs.
23.9.2.5.3.1 Costs excluded from directly attributable overhead costs.
23.9.2.5.4 Directly attributable costs to be excluded (specific costs)
23.9.2.6 Percentage of completion.
23.9.2.6.1 Methods to determine the percentage of completion.
23.9.2.6.1.1 Preparation of costs incurred over total expected costs.
23.9.2.6.1.2 Surveys of work performed.
23.9.2.6.1.3 Completion of physical preparation of contract work.
23.9.2.6.2 Assessment of which method to use.
23.9.2.7 Reliable measurement – stage of completion cost to complete.
23.9.2.8 Loss expected on contract
23.10.1 Extract from FRS102 – Section 23.29(a)
23.11.1 Extract from FRS102 – Section 23.29(b)
23.11.2.2 Assignment of rights.
23.11.2.3 Licence fee or royalty contingent on future events.
23.11.2.4 Points to consider when deciding recognition initially or over a period of time.
23.12.1 Extract from FRS102 – Section 23.29(c)
23.13.1 Extract from FRS102 – Section 23.30.
23.13.2.1 Accounting policies.
23.13.2.1.2 Acconting policy for insuracne broker
23.13.2.1.4 Accountig policy note where turnover is derived from investments.
23.13.2.1.5 Accounting policy for a software company.
23.13.2.1.6 Extract from accounting policy showing royalty income.
23.13.2.1.8 Contracting work – accounting policy.
23.13.2.2 Note to the financial statements.
23.13.2.2.1 Turnover and segmental analysis.
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23.8 Rendering of services
23.8.1 Extract from FRS 102 – Sections 23.14-23.16, 23.21, 23.23-23.24
23.14 When the outcome of a transaction involving the rendering of services can be estimated reliably, an entity shall recognise revenue associated with the transaction by reference to the stage of completion of the transaction at the end of the reporting period (sometimes referred to as the percentage of completion method). 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;
(b) it is probable that the economic benefits associated with the transaction will flow to the entity;
(c) the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
(d) the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
Paragraphs 23.21 to 23.27 provide guidance for applying the percentage of completion method.
23.15 When services are performed by an indeterminate number of acts over a specified period of time, an entity recognises revenue on a straight-line basis over the specified period unless there is evidence that some other method better represents the stage of completion. When a specific act is much more significant than any other act, the entity postpones recognition of revenue until the significant act is executed.
23.16 When the outcome of the transaction involving the rendering of services cannot be estimated reliably, an entity shall recognise revenue only to the extent of the expenses recognised that are recoverable.
23.21 This method is used to recognise revenue from rendering services (see paragraphs 23.14 to 23.16) and from construction contracts (see paragraphs 23.17 to 23.20). An entity shall review and, when necessary, revise the estimates of revenue and costs as the service transaction or construction contract progresses.
23.23 An entity shall recognise costs that relate to future activity on the transaction or contract, such as for materials or prepayments, as an asset if it is probable that the costs will be recovered.
23.24 An entity shall recognise as an expense immediately any costs whose recovery is not probable.
23.8.2 OmniPro comment
23.8.2.1 Service recognition criteria
Section 23.14 of FRS 102 makes it clear that revenue should be recognised by reference to stage of completion at the end of the reporting period once it is probable that will the future economic benefits re profitable to flow from the transaction and they can be reliably measured.
The recognition critieria in relation to future economic criteria being probable has already been discussed at 23.2.2.1.2 and above so no further discussion is required on this as this applies the same to services as it does to goods.
Similarly, a reliable measurement must be available in order for revenue to be recognised (see 23.2.2.1.2.2, 23.8.2.1.2 and 23.9.2.9). When providing a service not only costs incurred to date must be incorporated but also future costs to be incurred needs to be determined before any revenue can be recognised. It may not always be easy to assess the future costs to be incurred especially in construction contracts.
23.8.2.1.1 Costs that relate to future activity
In relation to costs incurred to date, consideration also needs to be given as to whether any of these costs can be deferred.
As per section 23.23 of FRS 102 where costs incurred up to the date of assessing revenue relate to inventory/future activity/prepaids which will be used in future periods or which relate to PPE or intangibles, these costs should be ignored and instead capitalised (possibility of interest costs capitalised where capitalisation policy is adopted). An asset should only be capitalised in any event if it meets the definition of an asset i.e. it will provide future economic benefits. However not all such costs would be deferred. An example would be staff training, although this benefits the whole project, it must be expensed as incurred. If recovery of costs are not probable and assets are previously created then it must be expensed immediately as per section 23.24 of FRS 102.
23.8.2.1.2 Reliable measurements not probable.
As per section 23.16 of FRS 102 here a reliable estimate of either future costs, percentage of completion cannot be determined, revenue should only be recognised to the extent that it covers costs incurred up to that date if it is probable the costs incurred to date will be recoverable (i.e. no profit recognised). This is likely to be the case in the early stages of the transactions.
Example 20A: Reliable measurement
Company A carries out architectural services. It has entered into a contract to provide services for a fixed price of CU500,000. This contract is the first of its type. At the end of year 1, the firm has incurred CU100,000 in costs. At the yearend Company A cannot determine what the future costs are likely to be. As a result, the company should recognise revenue of CU100,000 such that no profit or loss is recognised.
Example 20B: Reliable measurement
If we take example 20A and now assume at the end of year 2 the company expects a loss on the project of CU100,000. Company A should recognise a provision for this future loss of CU100,000.
23.8.2.1.3 Collectability no longer probable
Where the collectability of any amount already recognised as revenue is no longer probable, a provision should be made and debited against revenue in that period. (Section 23.27 of FRS 102)
23.8.2.1.4 Changes in estimates in revenues
Where a change in the estimates of revenue occurs, these are recognised in revenue prospectively. Section 23.21 of FRS 102 requires the entity to review estimates of revenue and costs regularly as the service is performed and adjust as required. See further details at 23.9.2.9.
23.8.2.2 Intermediate number of acts over specified period
Section 23.15 of FRS 102 refers to services being performed by an indeterminate number of acts over a, specified period of time and the requirement to recognise the revenue over the specified period of time unless there is another method which better reflects the stage of completion. An example here would be a maintenance contract entered into with a customer for one year. In this case revenue would be recognised on a straight-line basis over the life of the maintenance contract (e.g. maintenance contract for CU120,000 per annum, then revenue would be recognised at CU10,000 per month). Costs of providing the maintenance services should be expensed as incurred with no deferral etc.
23.8.2.3 Service with a significant act
Section 23.5 of FRS 102 also deals with a service which has a significant act which is much more significant than any other act and the fact that the revenue should be recognised until the significant act is executed. The reason for this is that the entity has not yet performed under the contract. Where the significant act has been performed but consideration is contingent, revenue can be recognised to the extent that the entity can determine that there is a probable inflow of economic benefits that can be reliably measured.
Stage payments may not necessarily identify when a significant act has been performed so judgement made be required. The key point is to ensure the service contract is clearly defined so that the contract defines when value has been given under the service. If the seller performs under these terms it would be appropriate to recognise based on this.
Example 21: Stage of completion – detailed in the contract
Company A is an architectural company that provides services to the client. Before a service is provided Company A requires customers to sign a contract stating that the Company has the right to receive payment for any work performed and will be paid for services rendered at the appropriate rate in the contract, even if the contract is broken. If we assume the fee for preparing a drawing of a house including an initial consultation for a customer is CU1,000.
In this case, Company A can recognise revenue over the period in which Company A works on the drawing and meets with the client (i.e. on the percentage of completion basis). If the customer decides to cancel the contract halfway through, then Company A can still recover CU500 from the customer because per the terms of the contract the customer agreed to pay on this basis.
Example 22: Stage of completion
If we take example 21 and assume that the terms of the contract stated that Company A had no right to receive payment until the drawing was completed, then revenue cannot be recognised until the significant act i.e. the completion of the drawing has been fulfilled.
23.8.2.4 Stage of completion method – 3 methods
Revenue is recognised under this method by reference to when the work is performed. This is the same method used for measuring revenue in construction contracts as detailed at 23.9.2.6 In applying this, the method that can be used as stated in Section 23.22 of FRS 102 of the standard are:
(a) the proportion that costs incurred for work performed to date bear to the estimated total costs. Costs incurred for work performed to date do not include costs relating to future activity, such as for materials or prepayments (see 23.8.2.4.1 and 23.9.2.6.1.1);
(b) surveys of work performed (see 23.8.2.4.2 and 23.9.2.6.1.2); and
(c) completion of a physical proportion of the contract work or the completion of a proportion of the service contract (see 23.8.2.4.2 and 23.9.2.6.1.3).
Progress payments and advances received from customers often do not reflect the work performed.’
Therefore the key driver of revenue recognition is the extent of work performed not the progress payments. Any progress payments in excess of the work performed should be included in deferred revenue and any accrued payments should be shown as accrued revenue where an invoice has not been raised.
The standard does not specify which of the three methods above should be used, it instead leaves this open to judgement, but the one used should reflect the actual amount of work done in the period. The method used should not overstate the work completed.
23.8.2.4.1 Proportion of costs method
The proportion of costs measure uses the amount, inputs or efforts put into the contract measured in terms of cost.
Example 23: Proportion of costs method
Company A is a solicitors firm. They have entered into a contract with a customer to carry out work on the transfer of a property to a third party. Under the terms of the contract a fee of CU2,000 will be charged. The Company estimate that this will cost the firm CU1,300 at the firms charge out rates. At the end of month the company has incurred CU650 in costs. On this basis 50% (CU1,300 total costs expected less CU650 costs incurred) of revenue can be recognised (i.e. CU1,000).
23.8.2.4.2 Other methods
For the other two method mentioned in (b) and (c) above (i.e. survey of work completed method or the completion of the physical proportion of the contract method), these are an output measure as they relate to the degree of output work done through physical verification. This method would not be applicable for a professional firm as it cannot be measured. This is more application to a physical contract which can physically be observed. For example where a company is constructing houses it can physically see the houses that are complete.
23.8.2.5 Other specific examples as extracted from the Appendix to Section 23 of FRS 102.
23.8.2.5.1 Installation fees
The seller recognises installation fees as revenue by reference to the stage of completion of the installation, unless they are incidental to the sale of a product, in which case they are recognised when the goods are sold (Section 23A.18 of FRS 102).
23.8.2.5.2 Servicing fees included in the price of the product
When the selling price of a product includes an identifiable amount for subsequent servicing (e.g. after sales support and product enhancement on the sale of software), the seller defers that amount and recognises it as revenue over the period during which the service is performed. The amount deferred is that which will cover the expected costs of the services under the agreement, together with a reasonable profit on those services (Section 23A.19 of FRS 102).
23.8.2.5.3 Advertising commissions
Media commissions are recognised when the related advertisement or commercial appears before the public. Production commissions are recognised by reference to the stage of completion of the project (Section 23A.20 of FRS 102).
23.8.2.5.4 Insurance agency commissions
Insurance agency commissions received or receivable that 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 agent defers the commission, or part of it, and recognises it as revenue over the period during which the policy is in force (Section 23A.21 of FRS 102).
OmniPro comment
See example for illustration purposes
Example 24: Insurance agency commissions
Company A is an insurance underwriter who also provides claims support to a set amount of insurers. The insurance renewals would usually straddle year end. Commission is earned from the insurance company based on each policy taken out with them which incorporates the fact that the broker deals with any claims. Commission is recognised as the policies are accepted by customers. At the year end Company A will have to assess the volume of policies which straddle the Company’s year end and then assess the costs it incurs in servicing claims and dealing with customers after renewal. Based on this assessment of costs, revenue should be deferred.
23.8.2.5.5 Financial services fees
The recognition of revenue for financial service fees depends on the purposes for which the fees are assessed and the basis of accounting for any associated financial instrument. The description of fees for financial services may not be indicative of the nature and substance of the services provided. Therefore it is necessary to distinguish between fees that are an integral part of the effective interest rate of a financial instrument, fees that are earned as services are provided, and fees that are earned on the execution of a significant act (Section 23A.21 of FRS 102).
23.8.2.5.6 Admission fees
The seller recognises revenue from artistic performances, banquets and other special events when the event takes place. When a subscription to a number of events is sold, the seller allocates the fee to each event on a basis that reflects the extent to which services are performed at each event (Section 23A.22 of FRS 102).
OmniPro comment
Note where fees are received in advance these should be shown as deferred revenue. Also costs which meet the definition of an asset can be deferred however all advertising costs must be expensed as incurred.
23.8.2.5.7 Tuition fees
The seller recognises revenue over the period of instruction (Section 23A.23 of FRS 102).
23.8.2.5.8 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 about its collectability exists. If the fee entitles the member to services or publications to be provided during the membership period, or to purchase goods or services at prices lower than those charged to non-members, it is recognised on a basis that reflects the timing, nature and value of the benefits provided (Section 23A.24 of FRS 102).
23.8.2.5.9 Franchise fees
Franchise fees may cover the supply of initial and subsequent services, equipment and other tangible assets, and know-how. Accordingly, franchise fees are recognised as revenue on a basis that reflects the purpose for which the fees were charged. The following methods of franchise fee recognition are appropriate.
23.8.2.5.9.1 Franchise fees: Supplies of equipment and other tangible assets
The franchisor recognises the fair value of the assets sold as revenue when the items are delivered, or title passes (Section 23A.25 of FRS 102).
23.8.2.5.9.2 Franchise fees: Supplies of initial and subsequent services
The franchisor recognises fees for the provision of continuing services, whether part of the initial fee or a separate fee, as revenue as the services are rendered. When the separate fee does not cover the cost of continuing services together with a reasonable profit, part of the initial fee, sufficient to cover the costs of continuing services and to provide a reasonable profit on those services, is deferred and recognised as revenue as the services are rendered (Section 23A.27 of FRS 102).
The franchise agreement may provide for the franchisor to supply equipment, inventories, or other tangible assets at a price lower than that charged to others or a price that does not provide a reasonable profit on those sales. In these circumstances, part of the initial fee, sufficient to cover estimated costs in excess of that price and to provide a reasonable profit on those sales, is deferred and recognised over the period the goods are likely to be sold to the franchisee. The balance of an initial fee is recognised as revenue when performance of all the initial services and other obligations required of the franchisor (such as assistance with site selection, staff training, financing and advertising) has been substantially accomplished (Section 23A.28 of FRS 102).
The initial services and other obligations under an area franchise agreement may depend on the number of individual outlets established in the area. In this case, the fees attributable to the initial services are recognised as revenue in proportion to the number of outlets for which the initial services have been substantially completed (Section 23A.29).
If the initial fee is collectible over an extended period and there is a significant uncertainty that it will be collected in full, the fee is recognised a cash instalment are received (Section 23A.30 of FRS 102).
23.8.2.5.9.3 Franchise fees: Continuing franchise fees
Fees charged for the use of continuing rights granted by the agreement, or for other services provided during the period of the agreement, are recognised as revenue as the services are provided or the rights used (Section 23A.31 of FRS 102).
23.8.2.5.9.4 Franchise fees: Agency transactions
Transactions may take place between the franchisor and the franchisee that, in substance, involve the franchisor acting as agent for the franchisee. For example, the franchisor may order supplies and arrange for their delivery to the franchisee at no profit. Such transactions do not give rise to revenue (Section 23A.32 of FRS 102).
23.8.2.5.10 Fees from the development of customised software
The software developer recognises fees from the development of customised software as revenue by reference to the stage of completion of the development, including completion of services provided for post-delivery service support (Section 23A.23 of FRS 102).
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Example 1: Probable or possible criteria on sale.
Example 2: Sales incentives/rebates.
Example 6: Deferred payment example.
Example 7: Deferred payment example.
Example 8: Identifying separable components and allocating relative fair value.
Example 9: Identifying separable components and allocating relative fair value – goods.
Example 10: Relative fair value results in a loss.
Example 11: Cost plus a reasonable margin.
Example 12: Customer loyalty awards
Example 13: Right of return in exchange for cash/vouchers.
Example 15: Discount coupons – buy one get one free.
Example 17: Sale of extended guarantee.
Example 18: Interest free credit
Example 19: Construction real estate – buyer has the right to specify structural design.
Example 20: Construction real estate – buyer has no right to specify structural design.
Example 20A: Reliable measurement
Example 20B: Reliable measurement
Example 21: Stage of completion – detailed in the contract
Example 22: Stage of completion.
Example 23: Proportion of costs method.
Example 24: Insurance agency commissions.
Example 25: – Proportion of cost basis.
Example 26: Inability to reliably measure the contract
Example 28: Application of change in estimate.
Example 29 – Extract from the Accounting policy notes.
Example 32: Extract from notes to the financial statements for revenue derived by brokers.
Example 33: Extract from notes to the financial statements for construction contracts
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