Rev Rec & Contruction Contracts-IAS 11 IAS 18-KPMG-P45

Revenue Recognition &
Construction Contracts
IAS 11, IAS 18
Presenter: Aleem Ullah Azim
IFRS Baseline 2013 Revenue Recognition 4
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Revenue vs income
Income is an increase in
economic benefits other
than contributions from
shareholders
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Revenue is income that
arises in the ordinary
course of activities
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Overall approach: Step 1
Separate components
IAS 11, IAS 18
Sale of goods
Construction
contracts
Rendering of
services
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Relative fair values; or
Fair value of undelivered components
Sale of goods
Construction
contracts
Rendering of
services
Effective control
/ significant R&R
passed on
continuous
basis
Can outcome be
estimated
reliably?
Rendering of
services
Construction
contracts
To extent of
recoverable
expenses
recognised
no
By reference to
stage of
completion
yes
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Sale of goods
Effective control
/ significant R&R
passed in their
entirety
Upon
completion,
upon / after
delivery
R&R = risks and rewards
A question for you: Components (3)
Customer buys a D-900 robot
Customer also buys the post-sales maintenance pack
(3 years)
Customer also pays a fee to activate the D-900, which
is non-refundable
How many components does this contract have?
Identifying separate components
Component has
stand-alone
value to the
customer
Vendor sells the item on a
stand-alone basis or
customer could resell it
Customer derives value
that is not dependent on
receiving other
components
o
r
Fair value of
component can
be measured
reliably
&
Criteria for
combining /
segmenting
construction
contracts
Discussed later in the module
A question for you: Allocation (2)
Customer buys a D-900 and post-sales maintenance
pack for L$ 1,200
Lila-Droid sells the D-900 on its own for L$ 1,000, and
the maintenance pack on its own for L$ 500
Customer also pays a L$ 100 activation fee
How much revenue should be allocated to the D-900?
Maximum use of observable data
Cost-plus-margin method is a last resort
Recognising revenue: Common criteria
Probable future
economic
benefits
Revenue can be
measured
reliably
Costs are
identifiable and
can be measured
reliably
Recognising revenue: The types
Construction
contracts
Sale of goods
Rendering of
services
Sale of goods
Should not maintain effective control or
have managerial involvement to the extent
normally associated with ownership
Bill and hold
Significant risks and rewards of ownership
have passed to the customer
Installation
Consignment sales
Warranties
Right of return
Bill and hold: Strict recognition criteria
Customer specifically
acknowledges the deferred
delivery instructions
Item is on hand, identified and
ready for delivery to the customer
when the sale is recognised
Probable that delivery will be made
The usual payment terms apply
A question for you: Consignment sales
Lila-Droid delivers 600 of the latest D-900s to retailer
Shop-Until-You-Drop
Shop-Until-You-Drop will pay Lila-Droid as robots are
sold, on a monthly basis
Robots not sold by the end of the season will be
returned to Lila-Droid
When should Lila-Droid recognise revenue and why?
A question for you: Installation
The D-900 cannot work until she is integrated with the
customers Home Management System
The installation requires a specialist engineer from
Lila-Droid
Can revenue be recognised prior to installation?
A question for you: Warranties (1)
Lila-Droid will repair any faults that occur in the first
12 months
This warranty is part of the standard sales contract
Can revenue be recognised while the warranty is
outstanding?
A question for you: Warranties (2)
Lila-Droid will repair any faults that occur in the first
36 months
This is a special extended warranty that the customer
chose it is not standard
How should revenue be recognised?
A question for you: Rights of return
Lila-Droid sells 1,000 D-900s in the month of September
Customers may return robots no questions asked
within 10 days if they keep the receipt
Historically the rate of return has been 2%
How should revenue be recognised?
Construction
contracts
Sale of goods
Rendering of
services
Specific IFRICs
What is a construction contract?
Specifically negotiated for the construction of an asset / combination of
assets that are closely interrelated / interdependent in terms of design,
technology, function or ultimate purpose / use
Not limited to buildings
In our view, includes complete assets and components if they are complex
custom-designed items
Fixed price Cost plus
Segmenting and combining contracts
Each segment functions on a
stand-alone basis and:
Separate proposals submitted
for each component
Each component subject to
separate negotiation and
could be accepted / rejected
Costs / revenue for each
component can be identified
Segment contract
Do not function on a stand-
alone basis and:
Negotiated as part of a single
package
Effectively part of a single
project with an overall profit
margin
Performed concurrently or in
continuous sequence
Combine contracts
Recognising revenue
Expected loss recognised
immediately
Outcome of contract can be
estimated reliably
Recognise revenue to extent
of recoverable costs incurred
no
Output measures:
Surveys of work performed
Physical proportion complete
Stage of completion can be
measured reliably
yes
Input measure:
Contract costs incurred to total
estimated contract costs
Contract revenue and contract costs
Comprises:
Initial amounts agreed
Variations, claims, incentive
payments
Reduced by penalties for late
delivery
Contract revenue
From date of securing contract:
Directly related costs
Costs attributable to contract
activity in general that can be
allocated on systematic and
rational basis
Other costs chargeable to the
customer
Contract costs
Which of these are valid contract costs?
Material
Labour
General / administration
Design
Overheads
Insurance
Amortisation
Depreciation
Pre-contract costs
A question for you: Stage of completion (1)
Lila-Build contracted with Customer to build a
customised state-of-the-art warehouse
Customer agrees to pay L$ 1.8m on completion and an
additional L$ 0.2m a year later if there are no defects
In this period Lila-Build has incurred costs of L$ 0.5m
and expects to incur L$ 0.3m more
How should revenue and costs be recognised?
Last period Lila-Build had incurred costs of L$ 0.5m and
expected to incur L$ 0.3m more
Lila-Build has now incurred costs of L$ 0.7m, but
expects total costs to be L$ 1m
The price has not changed: Customer will pay
L$ 1.8m on completion and an additional L$ 0.2m a
year later if there are no defects
How should revenue and costs be recognised
in this period?
Construction
contracts
Sale of goods
Rendering of
services
Service contracts: Revenue recognition
In our view, expected loss
recognised immediately
Outcome of contract can be
estimated reliably
Recognise revenue to extent
of recoverable costs incurred
no
Output measures:
Surveys of work performed
Physical proportion complete
Stage of completion can be
measured reliably
yes
Input measure:
Contract costs incurred to total
estimated contract costs
Lila-Droid contracts with Customer to maintain its fleet
of aging robots for the next 2 years
Customer pays L$ 2,400 in total
Lila-Droid estimates that the performance effort will be
spread evenly over the 2-year period
How should the stage of completion be measured?
Lila-Droid contracts with Customer to maintain its fleet
of new robots for the next 2 years
Customer pays L$ 2,400 in total
Lila-Droid estimates that the performance effort will be
more weighted towards the second year
How should the stage of completion be measured?
Construction
contracts
Sale of goods
Rendering of
services
Agenda
The basics
Identify components
Allocate consideration
Recognise revenue
Disclosure
The closing
Disclosure
Accounting policies
Breakdown by type
J udgements and estimates
Which statements are true?
Revenue relates to the ordinary activities of an entity
Gains on the sale of property, plant and equipment
can be classified as revenue
The classification of items as income vs revenue is an accounting
policy choice, to be applied consistently
Income is a subset of revenue
Which statements are true?
A deliverable has stand-alone value if a vendor sells that item
separately or the customer could resell it
A deliverable has stand-alone value if the customer receives value
from it independent of other deliverables
A deliverable has stand-alone value if it is identified in the contract
A deliverable has stand-alone value only if there is a market
available on which the item is bought and sold regularly
Which tests apply to all revenue types?
The significant risks and rewards of ownership
have transferred to the customer
Revenue can be measured reliably
Future economic benefits are probable
Costs can be measured reliably
1) Revenue is a subset of income
2) Revenue relates to ordinary
activities
3) Look for stand-alone value in
identifying components
4) Allocate consideration having
regard to fair values
5) Revenue recognised when risks
and rewards passed (sale of
goods)
Thank you

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