PRACTICAL GUIDE IAS 18: REVENUE

PRACTICAL GUIDE IAS 18: REVENUE www.consultasifrs.com/uk © 2014 www.consultasifrs.com 1 ConsultasIFRS is an online firm specialized in advisory on...
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PRACTICAL GUIDE IAS 18: REVENUE

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ConsultasIFRS is an online firm specialized in advisory on IFRS.

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The primary issue in accounting for revenue is determining when to recognise revenue. Revenue is recognized when it is probable that future economic benefits will flow to the entity Tand these benefits can be measured reliably. This Standard identifies the circumstances in which these criteria will be met and, therefore, revenue will be recognised. It also provides practical guidance on the application of these criteria. Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. This Standard shall be applied in accounting for revenue arising from the following transactions and events:

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(a) the sale of goods; (b) the rendering of services; and (c) the use by others of entity assets yielding interest, royalties and dividends.

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The recognition criteria in this Standard are usually applied separately to each transaction. However, in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. For example, when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognised as revenue over the period during which the service is performed. Conversely, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole. For example, an entity may sell goods and, at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together. Revenue shall be 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. The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset. It is measured at the fair value

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of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity. Sale of goods Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied: (a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; (b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to the entity; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably. Rendering of services When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the end of the reporting period. 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. The recognition of revenue by reference to the stage of completion of a transaction is often referred to as the percentage of completion method. Under this method, revenue is recognised in the accounting periods in which the services are rendered. The recognition of revenue on this basis provides useful information on the extent of service activity and performance during a period. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable. © 2014 www.consultasifrs.com

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Interest, royalties and dividends Revenue shall be recognised on the following bases: (a) interest shall be recognised using the effective interest method as set out in IAS 39, paragraphs 9 and AG5–AG8; (b) royalties shall be recognised on an accrual basis in accordance with the substance of the relevant agreement; and (c) dividends shall be recognised when the shareholder`s right to receive payment is established.

Case 1 An enterprise sells a piece of heavy equipment for 10,000 under a financing agreement, which has no stated interest rate. The sale takes place on 31 December of Year 0. Annual installments of 2,000 are due each year for five years from the date of purchase. If the buyer had paid cash for the equipment, the sales price would have been 8,000. Calculate the amount of revenue that should be recognised on initial sale and in subsequent periods in relation to this transaction.

Solution Since there is a difference of 2,000 between the cash price of 8,000 and the 10,000 being the amount due if the equipment is paid for in installments, the arrangement is effectively a financing transaction as well as a sale of goods. Step 1. Determine the fair value of consideration The cash price is used as an indication of fair value and consideration attributable to sale of goods. Remaining 2,000 is interest revenue and is recognised as it becomes due each year using the effective interest method below. Therefore, the amount recognised as revenue should be 8,000. The journal entry to recognise the revenue from sale would be: Dr Accounts Receivable Cr Revenue

8,000 8,000

(corresponding cost entry must also be booked) Step 2 – Calculate the effective rate of interest The interest rate that discounts 10,000 to 8,000 over a five-year period should be determined, assuming no down payment and five annual installments of 2,000.

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This value can be calculated using calculator or Excel formula: =RATE (5,-2000,8000) Where:   

5 is the number of periods (five years) -2,000 represents annual cash flows in each of the periods (minus represents the outflow) 8,000 is the present value (cash price in this case)

This gives the rate of: 7.931% Step 3 – Calculate the interest for each period Year

0 *) 1 2 3 4 5 Total

Principal amount outstanding **)

Total payment

Interest element of payment

Principal element of payment

{A}

{B}

{C}= {A}*7.93%

{D}={B}-{C}

8,000 8,000 6,634 5,160 3,570 1,853

2,000 2,000 2,000 2,000 2,000 10,000

634 526 410 283 147 2,000

1,366 1,474 1,590 1,717 1,853 8,000

*) Year 0 is the date of purchase **) before recording repayment The entry to record each payment and interest element in the subsequent periods will be: Year 1 Year 2 Year 3 Year 4 Year 5 Dr Cash 2,000 2,000 2,000 2,000 2,000 Cr Accounts receivable 1,366 1,474 1,590 1,717 1,853 Cr Interest income 634 526 410 283 147

Case 2 An entity is required by contract to pay a royalty to the government in respect of certain intangible assets. The royalty is specified as a percentage of gross proceeds from sales less costs applicable to the royalty owner`s share of production. The entity can pay the royalty in cash or in kind. Should the royalty be netted against the entity`s revenue or recognised as an operating expense?

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Solution The entity should recognise its revenue on a gross basis because it is the primary obligor in the arrangement. The royalty is recognised as an operating expense. If the government is also a shareholder in the entity, these royalty payments should be differentiated from a distribution to shareholders in the form of a royalty.

Case 3 A vendor that sells its products and services through a retailer gives the retailer a cash incentive payment when a related service is sold to end customers in combination with the main product. For example, a retailer sells a warranty along with the vendor`s product. The vendor`s tariff schedules an additional CU10 to be received on this package. The retailer may or may not be required to follow the vendor`s pricing policy. This warranty is serviced by the vendor, and therefore the retailer`s cost is zero. The retailer then remits CU8 (regardless of the actual price received from the end customer) to the vendor (or CU10 with a subsequent payment from the vendor to the retailer of CU2). Should the vendor account for the incentive payment of CU2 as a reduction of revenue or as a promotion expense?

Solution The answer will depend on whether the retailer (intermediary) is acting as a principal or as an agent. If the retailer is acting as an agent, the incentive payment to the retailer of CU2 is similar in substance to a commission and, therefore, should be treated as an expense by the vendor under IAS 18.8. If, however, the retailer is acting as a principal, the incentive payment should be treated as a volume rebate and, accordingly, as a reduction in revenue under IAS 18.10.

Case 4 Company A sells goods `free on board` (FOB) destination, which means that title does not pass to the buyer until delivery, and Company A is responsible for any loss in transit. To protect itself from loss, Company A contracts with the shipping company for the shipping company to assume total risk of loss while the goods are in transit. Is it appropriate for Company A to recognise revenue when the goods are shipped?

Solution No. While Company A has managed its risk, it has not transferred risk to the buyer. Therefore, the criterion in IAS 18.14(a) has not been met until the goods have been delivered.

Royalties - Licence agreement in substance a sale Royalties accrue in accordance with the terms of the relevant agreement, and are usually recognised on that basis unless, the substance of the agreement suggests, it is more appropriate to © 2014 www.consultasifrs.com

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recognise revenue on some other systematic and rational basis [IAS18.33]. How should management recognise royalty revenue? Background A film distributor grants a licence for a fixed fee to a cinema operator in respect of its new film. The licence entitles the cinema operator to show the film an unlimited amount of times throughout the period of the agreement. The cinema operator cannot cancel the licence agreement and the distributor cannot be required to refund any part of the fee to the cinema operator in any circumstances. Solution Revenue should be recognised in full once the licence is granted to the cinema operator and it is probable that the economic benefits associated with the transaction will flow to the distributor. The substance of the agreement is that the film distributor does not have any remaining obligations to perform under the terms of the non-cancellable agreement. The film distributor is also only entitled to the non-refundable fixed fee and no additional amounts from box office receipts. The distributor has transferred substantially all the risks and rewards of ownership to the cinema operator. The transaction is, in substance, a sale of the licence.

Multiple-element Arrangements in Media Industries A multiple-element arrangement is an arrangement with a customer under which different deliverables are required to be provided to and/or performed for that customer. In the media industry, this may involve:   

The sale of a cable subscription agreement combined with the provision of the necessary decoder at a discounted price Activation and setup fees associated with a channel subscription Triple-play agreements (arrangements where the deliverables are television, [IP] telephony, and internet).

The focus of the assessment is on whether, based on the contractual provisions, both a primary service (provision of the cable channel) and incidental services (provision of a decoder) are required to be performed. The other approach would be to divide the arrangement into two transactions (provision of the cable channel and sale of a decoder). The questions that arise here are whether an arrangement involving different deliverables results in revenue being recognized separately for individual elements, and how the total purchase price is allocated among the individual elements under IFRS.

How is revenue recognized when a subscription agreement is sold and a decoder provided (at a discounted price) at the same time? This issue is explained by way of the following example.

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On taking out a 24-month subscription, a customer of cable television provider “All-TV” is provided with the decoder required to receive the channels free of charge. In addition to a monthly fee of $ 20, the customer is also required to pay a one-time activation fee of $ 25 on taking out the subscription. These fees are charged regardless of whether the decoder is provided free of charge. “All-TV” purchases the decoder from a third party for $ 50. The decoder is offered for sale at a regular price of $ 75 regardless of whether customers enter into a subscription agreement. Furthermore, “All –TV” is not obliged to return any portion of the fee. After 24 months, the subscription may be extended at the same monthly fee. Considering this case of study we should recall IAS 18 “Revenue” in order to look up a paragraph which prescribes the accounting treatment of multiple-element agreements. In its paragraph 13 we could find: “The recognition criteria in this Standard are usually applied separately to each transaction. However, in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction. For example, when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognized as revenue over the period during which the service is performed. Conversely, the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole. For example, an entity may sell goods and, at the same time, enter into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together”. As we can see, IFRS does not contain detailed provisions on the breakdown of multiple-element arrangements, it is common practice to follow U.S. GAAP (EITF 00-21), which requires an arrangement to be accounted for as a multiple-element arrangement if:  

 

The arrangement includes multiple deliverables The delivered items have value to the customer separately and on a standalone basis (this is assumed to be the case if the customer is able to purchase the items from an alternative vendor or resell them to a third party) There is objective and reliable evidence of the fair value of the items (If the arrangement includes a general right of return) delivery of the undelivered items is considered probable and substantially in the control of the vendor.

If these criteria are applied, the provision of the cable channel and that of the decoder can be viewed as two separate elements of the subscription agreement, as they each have value to the customer on a standalone basis and that value can be measured separately. The activation fee, on the other hand, does not have separate value to the customer and is therefore merely an additional arrangement consideration. The total consideration in respect of this sale of a subscription agreement combined with the provision of a decoder (at a discounted price) is $ 265 (24 months × $ 10 + $ 25). Each identified © 2014 www.consultasifrs.com

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element must now be allocated its share of the revenue. For this, the consideration is allocated ratably among the elements based on their fair values as follows: Element

Consideration received Subscription $ 240 Decoder (Activation fee) $ 25 Total $ 265

Fair value $ 240 $ 75 $ 315

Share of the total 76,2% 23,8% 100%

Allocation of the selling price $ 202 $ 63 $ 265

Revenue is recognized for each identified element separately. In this case, however, it is important to bear in mind that the total consideration depends to a considerable extent on the subscription fee that will only be received over a two-year period, as the subscriber is only required to pay the monthly fee if the cable channel is actually broadcast. The consideration of $ 240 is therefore contingent on the future provision of the service. Such contingent consideration may not be recognized at the outset. It must be deducted from the elements that are required to be delivered first (in the example, the decoder). Based on the calculation above, “All-TV” therefore only recognizes a revenue of $ 25 when the decoder is delivered, as this consideration has already been received. The remaining consideration of $ 240 for the subscription and decoder is recognized ratably over the expected total term of the subscription. The cost of the decoder is also expensed ratably, with $ 25 recognized as an expense when the decoder is delivered and the remaining expense, also in the amount of $ 25, deferred and recognized ratably over the minimum 24-month term of the agreement.

Income recognition of Franchise fees Franchise agreements between franchisors and franchisees can vary widely both in complexity and in the extent to which various rights, duties and obligations are explicitly addressed. There is no standard form of franchise agreement which would dictate standard accounting practice for the recognition of all franchise fee revenue. Only a full understanding of the franchise agreement will reveal the substance of a particular arrangement so that the most appropriate accounting treatment can be determined. However IASB has included a practical guide in IAS 18 which helps prepares of financial statement to understand how incomes associates to a franchise income should be recognizes.

Practical Issue Franchise fees may cover the supply of initial and subsequent services, equipment and other tangible assets, and know-how. Accordingly, franchise fees are recognized as revenue on a basis that reflects the purpose for which the fees were charged. The following methods of franchise fee recognition are appropriate:

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1.

Supplies of equipment and other tangible assets.

The amount, based on the fair value of the assets sold, is recognized as revenue when the items are delivered or title passes 2. Supplies of initial and subsequent services. Fees for the provision of continuing services, whether part of the initial fee or a separate fee, are recognized 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 recognized as revenue as the services are rendered. 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 recognized over the period the goods are likely to be sold to the franchisee. The balance of an initial fee is recognized 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. 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 recognized as revenue in proportion to the number of outlets for which the initial services have been substantially completed. 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 recognized as cash installments are received. 3. 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 recognized as revenue as the services are provided or the rights used. 4. Agency transactions. Transactions may take place between the franchisor and the franchisee which, 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.

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Revenue recognition considering transfer of risks and rewards In today´s practical example we are going to analyze when revenue should be recognized considering the transfer of risks and rewards. IAS 18.14 establishes that “Revenue from the sale of goods shall be recognized when all the following conditions have been satisfied: (a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods; (b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to the entity; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably. Usually the assessment of when an entity has transferred the significant risks and rewards of ownership to the buyer requires an examination of the circumstances of the transaction. In most cases, 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. This is the case for most retail sales. In other cases, the transfer of risks and rewards of ownership occurs at a different time from the transfer of legal title or the passing of possession [IAS 18.15]. The following practical example intends to clarify the requirements of IAS 18.

Goods insured during delivery Ecoplast manufactures and sells plastic containers. The merchandise is shipped to the buyer by air, but in order to transfer the risk related to the shipment of the merchandise, Ecoplast purchases insurance coverage for the goods while they are in transit from the factory to the buyer´s deposit. The insurance policy reimburses the seller for the full market value of the goods in the event of loss or damage from the point when the goods depart form the factory to the point when the goods arrive at the buyer´s deposit. The legal title passes when the goods arrive at the buyer´s deposit two days later. The seller should recognize revenue for the sale when the goods arrive at the buyer´s deposit. The seller has not transferred the merchandise’s significant risks and rewards of ownership to the buyer when the goods depart from the factory as evidenced by the fact that any insurance proceeds received from the goods´ damage or destruction will be repaid to the seller. Also, legal title does not pass until the goods arrive at the buyer´s location. The criteria above for revenue recognition have, therefore, not been met until the goods arrive at the buyer´s location. © 2014 www.consultasifrs.com

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If, however, an entity retains only insignificant risks and rewards of ownership, a sale has occurred and revenue is recognized. IAS 18.17 notes that, in some situations, a seller might retain legal title solely to protect the collectability of the amount due. In fact, retention of legal title is no guarantee of collectability and the retention of title in such circumstances is normally only to ensure that the seller has a claim in the (usually unlikely) event that the buyer becomes insolvent. While in general retention of legal title may well bring in to question whether the significant risks and rewards of ownership have passed, in these narrow circumstances such a clause would not normally affect revenue recognition by the seller as the significant risks and rewards of ownership have been transferred to the buyer.

Advance royalty or license receipts The general guidance relating to license fees and royalties states that “fees and royalties paid for the use of an entity” assets (such as trademarks, patents, software, music copyright, record masters and motion picture films) are normally recognized in accordance with the substance of the agreement. As a practical matter, this may be on a straight line basis over the life of the agreement, for example, when a licensee has the right to use certain technology for a specified period of time” [IAS 18.IE20].Therefore, under normal circumstances, the accounting treatment of advance royalty or license receipts is straightforward; under the accruals concept the advance should be treated as deferred income when received, and released to the profit and loss account when earned under the terms of the royalty/ license agreement. However, in some industries the forms of agreement are such that advance receipts comprise a number of components, each requiring different accounting treatments. In the record and music industry, a record company will normally enter into a contractual arrangement with either a recording artist or a production company to deliver finished recording masters over a specified period of time. The albums are then manufactured and shipped to retailers for ultimate sale to the customer. The recording artist will normally be compensated through participating in the record company sales and license fee income (i.e. a royalty), but may also receive a non-returnable fixed fee on delivery of the master to the record company.

Example Revenue recognition for licensors in the record and music industry For each recording master delivered by a pop group, NTVG, the group (which operates through a service company) receives payment of US$ 5,000,000. This amount comprises: - a non-returnable, non-recoupable payment of US$ 500,000; - a non-returnable but recoupable advance of US$ 3,000,000; - and a returnable, recoupable advance of US$ 1,500,000. The recoupable advances of US$ 4,500,000 can be recouped against royalties on net sales earned both on the album concerned and on earlier and subsequent albums. This is achieved by computing the total royalties on net sales on all albums delivered under NTVG “service company” agreement with its recording company, and applying against this total the advances and royalties previously © 2014 www.consultasifrs.com

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paid on those albums. It is clear that the non-recoupable advance of US$ 500,000 should be recognized in income when received, since it is not related to any future performance; at the other end of the spectrum, recognition of the returnable advance should be deferred and recognized only when recouped. However, the question arises as to whether the non-returnable but recoupable advance on royalties should be recognized immediately or deferred. If one accepts that revenue may be recognized when it is absolutely assured, there is an argument to justify the immediate recognition of the recoupable advance, since it is non-returnable. Conversely, some might argue that although the advance is non-returnable, it is not earned until it is recouped; furthermore, immediate recognition of royalty advances is likely to lead to a significant distortion of reported income, resulting in there being little correlation between reported income and album sales. However,we believe, from the perspective of NTVG, the earnings process on the non-returnable but recoupable advance of US$ 3,000,000 is complete. This is because NTVG has no other service obligation to fulfill, and the fact that the advance is recoupable is a risk of the record company. Consequently, it should be recognized in revenue immediately on delivery of the master. Similar recognition principles should be applied in the case of advance fees paid on the sale of film/ TV rights.

Example License Fee with continuing obligation WEB2000 grants a license to a customer to use its web-site, which contains proprietary databases. The license allows the customer to use the web site for a two year period (1 January 2011 to 31 December 2012). The license fee of US$ 120,000 is payable on 1 January 2011. How should WEB2000 account for the license fee received? The substance of the agreement is that the customer is paying for a service that is delivered over time. Although WEB2000 will not incur incremental costs in serving the customer, it will incur costs to maintain the website. The revenue from the license should be accrued over the period that reflects the provision of the service. The entity has an obligation to provide services for the next 2 years, therefore the fee of US$ 120,000 received on 1 January 2011 should be recognized as a liability. Each month for the period January 2011 to December 2012, an amount of US$ 5,000 should be released from the liability and recognized as income to reflect the service that is delivered.

Revenue recognition for barter transactions Issue Goods sold or services rendered in exchange for dissimilar goods or services, are regarded as a transaction, which generates revenue [IAS18.12].

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Background Entity A, an internet entity, provides advertising on its website for a football club. The club promotes A on the players` shirts in return. No cash is exchanged between entity A and the football club. The fair value of advertising that A provide is 50,000. Should management recognise revenue from a barter transaction?

Solution Yes, the medium of the advertising is dissimilar in nature. The exchange will therefore be regarded as a transaction that generates revenue. Entity A will recognise 50,000 as revenue, being the fair value of the services provided to the football club. An entity should measure revenue at the fair value of goods or services received in a barter transaction. However, if the fair value of the goods or services received cannot be measured reliably, the revenue should be measured at the fair value of the goods or services given up [IAS18.9]. This general principle is clarified for barter transactions involving advertising services. The revenue of such transactions should always be recognised at the fair value of services provided, not the fair value of services received and measured in relation to previous non-barter transactions of similar services with a different counter party [SIC-31.5].

Revenue and agency relationships In an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue; instead, revenue is the amount of commission. [IAS 18.8]. The Appendix of IAS 18 helps to determine whether an entity is acting as a principal or as an agent. [IAS 18. IE21]. An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or rendering of services. There are four criteria that, individually or in combination, indicate that an entity is acting as principal: [IAS 18. IE21] -the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer; -the entity has inventory risk before or after the customer order, during shipping or on return; -the entity has latitude in establishing prices, either directly or indirectly, for example by providing additional goods or services; -and the entity bears the customer´ credit risk on the receivable due from the customer. Conversely an entity is acting as agent when it does not have exposure to the significant risks and rewards associated with the sale of goods or rendering of services and this may be evidenced by the © 2014 www.consultasifrs.com

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entity earning a predetermined amount, perhaps a fixed fee per transaction or a stated percentage of customer billings. [IAS 18. IE21]. An entity may make sales to parties that are acting as agents. In order to recognise revenue on the sale of goods the seller must have transferred the significant risks and rewards of ownership to the buyer and must not retain either continuing managerial involvement to the degree usually associated with ownership or effective control over the goods sold. [IAS 18.14(a), (b)]. This may not be the case if the buyer is an agent of the seller. For example, revenue from sales to intermediate parties, such as distributors, dealers or others for resale is generally recognised when the risks and rewards of ownership have passed. When the buyer is acting, in substance, as an agent, the sale is treated as a consignment sale, i.e. no revenue is recognised until the goods are sold to a third party. [IAS 18. IE6, IE2(c)].

Exchanges of goods and services Under IAS 18, when goods or services are exchanged or swapped for goods or services that are of a similar nature and value, the exchange is not regarded as a transaction that generates revenue. The standard notes exchanges of commodities like oil or milk, where suppliers exchange or swap inventories in various locations to fulfil demand on a timely basis in a particular location as examples of this. There are similar reasons behind exchanges of capacity in the telecommunications sector. When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction that generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred [IAS 18.12]. IFRIC 18, which addresses accounting for transfers of assets from customers, provides guidance in situations where an entity receives an item of PP&E from a customer (or cash for the acquisition or construction of such items) that must then be used by the entity either to connect the customer to a network or to provide the customer ongoing access to a supply of goods or services [IFRIC 18.4-6]. These arrangements are relatively common in the utilities and automobile industries.

Exchanges of property plant and equipment and intangible assets Accounting for exchanges of PP& E is dealt with in IAS 16, which takes a different approach to IAS 18 treatment of exchanges of goods and services. IAS 38 deals with exchanges of intangible assets, and includes the same requirements with respect to intangible assets as IAS 16 for exchanges of property, plant and equipment [IAS 38.45-47]. IAS 16 does not contain the distinction between similar and dissimilar assets that still remains in IAS 18 in respect of exchanges of goods and services. Instead, IAS 16 requires PP& E acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets, to be accounted for at fair value, unless: [IAS 16.24]

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(a) the exchange transaction lacks commercial substance, or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired item is measured in this way even if an entity cannot immediately derecognize the asset given up [IAS 16.24]. The fair value of an asset for which there are no comparable market transactions is reliably measurable if: (a) the variability in the range of reasonable fair value estimates is not significant for that asset, or (b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value. [IAS 16.26]. If an entity is able to determine reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident [IAS 16.26]. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up [IAS 16.24]. IAS 16 stipulates that gains arising from the derecognition of PP& E may not be classified as revenue [IAS 16.68] and it is clear that this applies equally to derecognition by way of an exchange, sale and abandonment ; this means that an exchange of PP& E does not result in the recognition of revenue. The sole exception is the sale of certain ex-rental assets, discussed at 6.11.1 below [IAS 16.68A]. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations - lays down additional requirements for assets held for disposal; these requirements include measurement rules that affect the measurement of the amount of the gain on disposal to be recognised.

The Technical summary has been prepared by IFRS Foundation staff and has not been approved by the IASB. For the requirements reference must be made to International Financial Reporting Standard which can be obtained if pay the subscription to IASB – www.ifrs.org The examples included in this application guide have been prepared by ConsultasIFRS team. You are not allowed to copy, forward, edit, translate, modify, use or copy any content.

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