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| Old GAAP | FRS 102 | Further Comment On Differences |
| Turnover | Revenue (S.23) | |
| Turnover is the revenue resulting from exchange transactions under which a seller supplies to customers the goods or services that it is in the business to provide – that is, as part of its operating activities.
Old GAAP spreads the guidance on revenue recognition over different sections but provides no guidance on recognition of revenue relating to interest, royalties and dividends. |
‘Turnover’ is defined as the amounts derived from the provision of goods and services falling within the entity’s ordinary activities, after deduction of:
i. trade discounts; ii. settlement discounts; iii. value added tax; iv. volume rebates allowed by the entity; v. any other taxes based on the amounts so derived.
‘Revenue’ is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity where those inflows result in increases in equity, other than increases relating to contributions from equity participants. It is referred to by a variety of names, including sales, fees, interest, dividends, royalties and rent. |
Although Section 23 is more specific, the definitions are similar so there should be no differences on transition other than those mentioned below.
The overall scope of the guidance across the different sections is equivalent. Even though there was no specific standard providing guidance on the recognition of revenue for interest, royalties and dividends under old GAAP, the method applied under old GAAP is consistent with the new guidance under FRS 102, therefore no differences are expected. |
| Turnover is recognised when an entity obtains the right to consideration in exchange for its performance.
|
Revenue recognition criteria include the probability that the economic benefits associated with the transaction will flow to the entity and that the revenue and costs can be measured reliably. Revenue is recognised when:
· the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; · the amount of revenue can be measured reliably; · it is probable that the economic benefits associated with the transaction will flow to the entity; and · the costs incurred or to be incurred in respect of the transaction can be measured reliably. |
This is similar to old GAAP so it is unlikely that differences will arise. When reviewing contracts an entity should assess if it has retained any continuing managerial involvement to the degree usually associated with ownership or control over the goods sold. |
| SSAP 9, when accounting for construction type contracts, defined contract revenue and profit, with costs being the derived amount.
|
Section 23 defines contract costs and revenue which are recognised and these determine the profit (profit being the derived amount). | Section 23 does not seek to achieve a uniform profit margin in a contract that is not a cost plus contract which is what old GAAP achieved as any unrecognised costs were accrued or alternatively deferred so as to get to the required profit margin.
In reality the method adopted under FRS 102 should provide the same answer, as the percentage of completion method is applied under both GAAPs. Entities should review if this change would create a difference. See example attached on how revenue and costs to be posted are deferred. (Example 91A – Proportion Of Cost Basis). |
| Old GAAP was less prescriptive with regard to what contract costs should include. Therefore, an entity may have included selling costs in some instances which is not the case under FRS 102.
|
Section 23 makes it clear that contract costs include direct costs attributable to contract activity, and any costs specifically chargeable to the customer, it excludes selling costs.
|
Given that selling costs cannot be included within contract costs when determining the percentage of completion, where selling costs are material and have been included under old GAAP, then an adjustment will be required to exclude these costs and re-determine the stage of completion and hence the revenue to recognise on transition or since transition.
However, in most cases the selling costs are likely to be immaterial to the overall total costs (especially in construction contracts) so no adjustment is likely to be required. However, a calculation should be performed. |
| Old GAAP requires the work in progress balance for long term contracts to be disclosed.
|
Section 23 does not require disclosure of the work in progress balance for long term contracts instead this is included within debtor/creditors within ‘Amounts due from/to customers for contract work’. Normal inventory items which are not put into use are still included within inventory. | This is a disclosure difference. There is no longer a requirement to show work in progress relating to long term contracts within inventory instead this is shown in the debtors/creditors note (short term WIP still disclosed in inventory). This will mean a reclassification from inventory to work in progress. |
| FRS 5 provides detailed guidance on when an entity is acting as an agent or principal.
|
Section 23 does not provide detailed guidance on when an entity is acting as an agent or principal.
|
Although not provided in Section 23, under the hierarchy in Section 10, IFRS will be consulted when determining whether a principal versus agent relationship exists. The guidance included within IFRS is very similar to the concepts included in old GAAP so as a result it is unlikely there will be differences on transition. |
| Interest income should be recognised under the constant rate of return method. | Interest income should be recognised under the effective interest method (Section 23.29). | The effective interest method charges any financing element and transaction fees received including the interest on the investment/loan to the profit and loss over the life of the loan/deposit balance.
Where interest income is material to the entity a review should be performed to determine the effect of using the effective interest rate as opposed to the constant rate of return. |
| No detailed guidance on how transactions which are lacking in substance should be accounted for.
|
More detailed guidance is provided in Section 23.6 and 23.7 on how transactions which are lacking in substance should be accounted for. Where it lacks substance no revenue is recognised.
An entity shall not recognise revenue: a. when goods or services are exchanged for goods or services that are of a similar nature and value; or b. when goods or services are exchanged for dissimilar goods or services but the transaction lacks commercial substance (Section 23.6). 23.7 An entity shall recognise revenue when goods are sold or services are exchanged for dissimilar goods or services in a transaction that has commercial substance. In that case, the entity shall measure the transaction: a. at the fair value of the goods or services received adjusted by the amount of any cash or cash equivalents transferred; b. if the amount under (a) cannot be measured reliably, then at the fair value of the goods or services given up adjusted by the amount of any cash or cash equivalents transferred; or c. if the fair value of neither the goods or services received nor the goods or services given up can be measured reliably, then at the carrying amount of the goods or services given up adjusted by the amount of any cash or cash equivalents transferred (Section 23.7). |
It is unlikely that differences will arise in this area as the concepts within Section 23.6 are similar to what was applied in practice under old GAAP.
Entities should assess if any such transactions have been entered into since transition to determine if an adjustment is required.
|
| FRS 5 dealt with loyalty programmes and award credits but provided little guidance. Therefore, entities have different practices in deferring revenue. FRS 5 did dictate that the adjusted fair value for the voucher should be used and this should be deferred.
Under old GAAP where fair value was not significant then the award was treated as an inducement and no revenue was deferred. |
Award credits should be measured at its relative fair value and that they be accounted for as a separately identifiable component of the initial sales transaction and the amount deferred. | Practice varied on the way in which award credits were accounted for under FRS 5 whereas under Section 23, it is made clear how such a transaction should be accounted.
On transition a review should be carried out to assess whether this guidance was applied under old GAAP. If not an adjustment may be required on transition where material. See attached an example of transition journals required for loyalty schemes (Example 92 – Customer Loyalty). See attached an example for accounting for loyalty schemes generally for reference (Example 93 – Customer Loyalty Awards (Extracted From FRS 102 – Section 23A.16-23A.17)). |
| No detailed guidance provided on the construction of real estate. | Detailed guidance provided on the construction of real estate. | The accounting is likely to be similar to the way it was accounted under old GAAP. |
| Detailed guidance provided on accounting for variations in contracts.
|
No guidance provided on accounting for variations in contracts. | Although no guidance provided, it is likely that the guidance given in old GAAP will be utilised or alternatively IFRS (under the hierarchy in Section 10). Where this guidance is used no differences are expected. |
| SSAP 9 refers to a long term contract as having a length of usually greater than 1 year but can also be less than a year where a contract straddles an accounting period. | A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.
|
The definition of a construction contract is similar under both GAAPs however FRS 102 does not define the length of a construction contract. The definition included within old GAAP is likely to be appropriate so as a result there is unlikely to be adjustments as a result of the non-inclusion of the length of a contract. |
| No guidance provided in relation to grouping etc under old GAAP. | Section 23 allows for contracts to be separated or grouped provided that certain criteria are met.
|
In reality there should be no major differences on transition as the principles in old GAAP would have given the same result. |
| When present valuing deferred consideration, the rate of interest to use was not dictated. For revenue generally the constant rate of interest should be used. | Section 11 – financial instruments requires trade debtors to be carried at amortised cost. Therefore, where there is a financing element included in a sale, Section 11 requires the sale to be recognised excluding the financing element. The financial element is released to the profit and loss over the life of the financing arrangement.
This is also consistent with the requirement to show revenue at fair value using the imputed rate of return. Section 23.5 states ‘When the inflow of cash or cash equivalents is deferred, and the arrangement constitutes in effect a financing transaction, the fair value of the consideration is the present value of all future receipts determined using an imputed rate of interest. A financing transaction arises when, for example, an entity provides interest-free credit to the buyer or accepts a note receivable bearing a below-market interest rate from the buyer as consideration for the sale of goods. The imputed rate of interest is the more clearly determinable of either: a. the prevailing rate for a similar instrument of an issuer with a similar credit rating; or b. a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services. An entity shall recognise the difference between the present value of all future receipts and the nominal amount of the consideration as interest revenue in accordance with paragraphs 23.28 and 23.29 and Section 11. |
In reality old GAAP required the financing element to be excluded.
Where such a financing arrangement exists/existed and the financing element was not excluded under old GAAP, a transition adjustment will be required. See attached an example illustrating the journals required on transition where a financing arrangement exists (Example 94 – Sale With Unusual Credit Terms). |
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