IFRS revenue: definition and purpose

Revenue, according to IFRS, is formed under the influence of a variety of factors. Even small deviations from the fundamental principles entail errors in reporting. There are certain revenue recognition criteria in IFRS. Next, we will consider the basic rules for its accounting, as well as some points that should be treated more carefully when translating domestic documentation into international reporting.

Definition

What revenue in accordance with IFRS 18? Revenue - This is the gross income of economic benefits in the reporting period. It arises in the ordinary course of business of the company and leads to an increase in the amount of capital not related to the contributions of participants. It does not include funds received from third parties (for example, VAT). A similar provision applies within the framework of agency relations. Gross receipts in the name (or on behalf of) the principal do not lead to an increase in capital and do not act as revenue. IFRSHowever, it includes commissions. Meanwhile, in practice, the difference between net and gross profit is far from always obvious. Determine the status of the company-recipient of funds (agent or principal) should be independently, based on the actual situation.

fair value

By IFRS, revenue determined, as a rule, by agreement between the acquirer (user of the asset) and the supplier. This means that the valuation is carried out at the fair value of the compensation that the entity has received or plans to receive. In this case, the amounts of wholesale (trade) discounts provided by the company are included. Fair value is the amount by which an asset can be exchanged or an obligation settled between willing parties, knowledgeable, counterparties that are independent of each other.

Difficulties

By IFRS, revenue it is determined quite simply, since it is presented in monetary terms. In such cases, it is the amount that the company received or plans to receive. Difficulties arise when the receipt of funds is delayed. Such a situation, for example, is caused by installment payment. In this case, the current amount will be less than the nominal amount of payment. This is due to the fact that the actual payment includes deductions for financing. IFRS Standard "Revenue" in this regard, introduces a requirement to discount future earnings using a temporary rate. It is worth saying that domestic PBUs do not allow this option. In this regard, enterprises selling goods by installments need to make adjustments when translating statements into documentation according to the rules IFRS 18. Revenue, among other things, should be reduced by the amount of discounts for operational payments. They are evaluated at the time of implementation. An example of such a situation can be a 5% reduction in the cost of a product, provided that the payment is paid within a week instead of the usual 2 months.

Transaction identification

Revenue recognition in IFRS carried out for each agreement individually. However, for its correct reflection in the reporting, the established signs have to be applied to individual elements of the transaction. in this case, an analysis of the economic content of the agreement should be carried out to determine whether its components need to be combined or segmented. Suppose that an identifiable price for further maintenance is included in the sale price. It must be transferred to the following periods. According to IAS 18, revenue will be shown at the time period in which the service is provided.

Example

Often multicomponent transactions are concluded in the field of telecommunications. For example, an enterprise sells a product that includes a telephone and some additional services (free minutes, Internet access, etc.). As determined in such cases revenue? IFRS prescribes the use of conditions for separately identifiable elements of the transaction. Profit from the sale of the device is usually determined at the time of the conclusion of the agreement. As for revenue for subsequent services, they are allocated for future periods and are recognized as revenue over the entire service period.

Specific cases

In practice, situations arise when the criteria provided for in IFRS apply simultaneously to several transactions. For example, if the agreements are related to each other in such a way that it is impossible to accurately understand the commercial result without evaluating them together. An example is the situation when a company sells products and simultaneously concludes a separate transaction on the subsequent repurchase of an asset. In this case, it is necessary to analyze the content of the agreement on the merits. If the seller provides ownership to the acquirer, but at the same time retains the risk and benefit of ownership of these assets, then there is a financing agreement in which no revenue arises. In domestic PBU there are no indications on this score. Such transactions are reflected in practice in strict accordance with the legal form. Very often because of this, when translating domestic reporting into international experts, significant adjustments have to be made.

Sales Rules

By IFRS (IAS 18), revenue from the sale is determined while observing the following conditions:

1. By providing goods, the seller transfers both the risks and benefits associated with owning the asset.
2. The acquirer takes control of the product.
3. The amount of profit and expenses can be reliably estimated.
4. The likelihood of an enterprise receiving economic benefits is high.

Transmission of benefits and risks

This condition is considered the most significant of all that sets IFRS (IAS 18). Revenue may be reflected while maintaining ownership of the goods. However, this is permitted only in certain cases. For example, if such conservation is used as an interim measure. If in this case the seller transfers the substantial benefits and risks associated with owning the asset, then the transaction may be considered as a sale. Of course, in this situation the company reflects revenue. IFRS suggests that, as a rule, the transfer of benefits and risks coincides with the transfer of ownership (ownership), but at the same time assumes that such a course of events is far from always possible. In practice, there are transactions in which this occurs at different times. It follows that the moment of transfer of ownership does not act as a criterion for recognition of revenue. Domestic PBUs do not provide for the analysis of significant benefits and risks associated with the possession of goods. As Regulation 9/99 indicates, an enterprise can recognize revenue only upon transfer of ownership of the product.

Provision of services

As pointed new IFRS, revenue reflected on the basis of the degree of completion of the transaction by the reporting date, if its results can be reliably evaluated. Simply put, the percent completion method is used. The assessment is considered reliable if the profit, expenses, level of completion of the transaction can be determined reliably. At the same time, there must be a high probability of economic benefits. And if the results are not measurable, as then reflected revenue? IFRS provides for the possibility of determining it only within the framework of the reflected reimbursable costs.For example, in the initial stages of a transaction it happens that its result cannot be reliably evaluated. But at the same time, there is a possibility that the company will cover the expenses incurred by agreement. In this case, it may be reflected. revenue. IFRS Accounting profit is not provided for. If it is not possible to reliably evaluate the results of the transaction, and the probability of covering costs tends to zero, the costs incurred are recorded as expenses. Revenues are not recognized. When the uncertainties that prevented a reliable assessment of the outcome of the transaction are resolved, the enterprise reflects indicators based on the degree of completion of the agreement.

Customer encouragement

It is considered an integral element of various activities. The company uses incentive programs to create an incentive for the consumer to purchase products of its own production and turn to its services. The popular measures are the accrual of “points”, “air miles”, due to which the client in the future can receive the goods for free or at a discount. When considering accounting for such incentives, reference should be made to IFRIC 13. According to it, bonus units should be reflected as a separately identifiable element of the transaction on which they are based. Compensation relates to them based on fair value. It is determined either on the basis of market information, or is an estimated quantity. Rewards attributed to bonus units are carried forward to future periods as long as it is probable that the consumer will present a claim. For example, it can be a calendar number of termination of the program or the moment at which the probability of redemption of accumulated points is minimal.

Content and Form

It should be said that, despite some similarities between the principles of PBU and IFRS Revenue, New Standard requires significant adjustments to domestic reporting in the process of its transformation. The main discrepancies are related to the following circumstances. First of all, as one of the mandatory principles of IFRS, but not always used in PBU, the advantage of economic content over the legal form appears. According to international rules, the nature of operations is consistent with how it is presented from a legal point of view. According to RAS, events, as a rule, are reflected strictly in legal form, without reflecting their economic essence. IFRS, in addition, are based on the accrual basis and do not provide for a mandatory requirement to document the revenue received. Another situation in domestic rules. According to PBU, the company must necessarily have supporting documentation. Such a requirement often prevents companies from reflecting all operations that fall on a particular period.

IAS 15: Revenue from Contracts with Customers

The main point is that the company should reflect revenues showing the transfer of the promised products or services to consumers in the proper amount. To implement this rule, the company needs to perform several actions. By IFRS, revenue from contracts with customersis reflected after:

1. Customer deal definitions.
2. Establishment of an obligation in an agreement.
3. Determining the price of an operation.
4. Establishment of transaction value in relation to the obligation.

Agreement Terms

The contract involves the participation of two or more parties in order to create real obligations and rights. Any agreement should:

1. Be approved and binding on participants.
2. Determine the rights of the parties.
3. Set payment rules.
4. Be commercial in nature.

The agreement may contain additional conditions under which the products will be transferred (services rendered). In some cases, the company may combine the contract and accounts into a single document.In this case, the procedure for reflecting the amended agreement should be provided.

Performance obligations

They represent a promise to transfer services or goods to a customer. If the agreement provides for the provision of more than one product, each of them is considered as an independent obligation to fulfill, if the products themselves or groups are different in the same way of transfer and substance. A similar rule applies to services.

Operation price

It represents the estimated amount that the company expects to receive in exchange for its goods or services, with the exception of funds received on behalf of a third party. When determining the price, the following factors are taken into account:

1. Variable condition. It consists in the following. If the amount provided by the agreement is a variable, you need to determine the payment included in the price, either as the expected value, or as the most probable value. The choice depends on the method used by the enterprise in forecasting.
2. Limitations in the assessment of variables. A company partially or fully includes a variable in the transaction price only when it is probable that its fluctuations will not affect the change in recorded income.
3. The presence of an essential element of financing. The company needs to adjust the promised payment caused by changes in the time value of money if the terms of payment agreed by the parties provide (implicitly or explicitly) the company or consumer with a significant advantage in the transfer of services or products. In assessing the contract for the presence of an essential element of financing, various factors must be taken into account. Evaluation of such a component is considered inappropriate if the period between payment and transfer of services / products is less than a year.
4. Cashless condition. If the customer offers this method of payment, it is necessary to evaluate this condition at fair value. If this is not possible, an indirect analysis on the market of those services or goods that are offered as payment under the contract is carried out.
5. Assessment of likely payments to the consumer. If it is possible to provide the client with cash or other reimbursement (coupon, loan, etc.) that may be presented to the company with a demand for repayment, then they are reflected as transactions that reduce the price, or as payment for a single product (or and in a different status).

Cost of transaction in relation to liability

First of all, the company must establish the selling price for each product (service) based on market (independent) indicators. In the absence of the latter, an independent assessment is carried out. In some cases, a discount or a variable in relation to only one obligation is included in the transaction cost. Then you need to indicate that the company allocates the corresponding indicator not for all debts, but only for one or several. The company needs to determine the liability for any changes in the value of the transaction subsequently in the same way as when making a transaction. Amounts allocated for debt repayment are recognized as an increase or decrease in income in the period when the price has changed.

IFRS 15: Revenue

It is reflected at the time the obligation is fulfilled. The company recognizes revenue by providing the customer with the required product or service. They will be deemed transferred when the consumer gains control over them for a long time. For each obligation, it should be determined whether there has been a performance in that order. If the debt is not recognized repaid for a period of time, it is considered as performed at a particular time. The company transfers control over the product / service for an extended period. Therefore, she fulfills the obligation.Revenue is recognized subject to a number of conditions:

1. The client simultaneously with the fulfillment of the obligation by the company receives benefits and uses them.
2. The actions of the company form or increase the assets that are controlled by the consumer.
3. The company’s activity does not create an object for its own alternative use and has a practicable right to receive payment for work completed before the present moment.

Moment of time

To determine a company, the following (but not the only) criteria for transferring control (control) of a product / service to a client should be considered:

1. The company has the right to receive payment.
2. The acquirer has obtained ownership.
3. The company transferred the actual ownership of the product.
4. The acquirer has significant benefits and risks associated with the possession of a product / service.
5. The consumer has taken the asset.

Agreement Costs

Additional costs are the expected costs that will be recovered. Their company is recognized as an asset. In such status they are reflected if:

1. Directly relate to the existing (or specific proposed agreement).
2. Increase / create resources that the company will use to pay off obligations in the future.
3. It is assumed that they will recover.

Additional costs are those costs that would not have arisen for the enterprise if it had not concluded a deal. In practice, a company may reflect them as costs if their depreciation period is less than a year. When accounting for transaction costs, whenever possible, the provisions of other sections of IFRS should be applied.