[et_pb_section admin_label=”Header – All Pages” global_module=”1221″ transparent_background=”off” background_color=”#1e73be” 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=”||0px|”][et_pb_row global_parent=”1221″ admin_label=”row”][et_pb_column type=”4_4″][et_pb_post_title global_parent=”1221″ admin_label=”Post Title” title=”on” meta=”off” author=”on” date=”on” categories=”on” comments=”on” featured_image=”off” featured_placement=”below” parallax_effect=”on” parallax_method=”on” text_orientation=”left” text_color=”light” text_background=”off” text_bg_color=”rgba(255,255,255,0.9)” module_bg_color=”rgba(255,255,255,0)” title_all_caps=”off” use_border_color=”off” border_color=”#ffffff” border_style=”solid” title_font=”|on|||” title_font_size=”35″ custom_padding=”10px|||”] [/et_pb_post_title][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” global_module=”1228″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” custom_padding=”0px||0px|” padding_mobile=”on” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row global_parent=”1228″ admin_label=”Row” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” gutter_width=”3″ custom_padding=”0px||0px|” padding_mobile=”off” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” parallax_1=”off” parallax_method_1=”off” column_padding_mobile=”on”][et_pb_column type=”4_4″][et_pb_text global_parent=”1228″ admin_label=”Text” background_layout=”light” text_orientation=”left” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [breadcrumb] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://ie.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://ie.frs102.com/members/premium-toolkit/section-23/” type=”big” color=”red”] Return to Section 23 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” 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″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]
Exchanges of goods or services
Extract from FRS 102 – Section 23.6-23.7
23.6 An entity shall not recognise revenue:
(a) when goods or services are exchanged for goods or services that are of a similarnature and value; or
(b) when goods or services are exchanged for dissimilar goods or services but the transaction lacks commercial substance.
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, he 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.
OmniPro comment
Transactions of the above nature is unusual in practice.
Identification of the revenue transaction
Extract from FRS 102 – Section 23.8-23.9
23.8 An entity usually applies the revenue recognition criteria in this section separately to each transaction. However, an entity applies the recognition criteria to the separately identifiable components of a single transaction when necessary to reflect the substance of the transaction. For example, an entity applies the recognition criteria to the separately identifiable components of a single transaction when the selling price of a product includes an identifiable amount for subsequent servicing. Conversely, an entity applies the recognition criteria 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 applies the recognition criteria to two or more transactions together when it sells goods and, at the same time, enters into a separate agreement to repurchase the goods at a later date, thus negating the substantive effect of the transaction.
23.9 Sometimes, as part of a sales transaction, an entity grants its customer a loyalty award that the customer may redeem in the future for free or discounted goods or services. In this case, in accordance with paragraph 23.8, the entity shall account for the award credits as a separately identifiable component of the initial sales transaction. The entity shall allocate the fair value of the consideration received or receivable in respect of the initial sale between the award credits and the other components of the sale. The consideration allocated to the award credits shall be measured by reference to their fair value, ie the amount for which the award credits could be sold separately.
OmniPro comment
The revenue recognition criteria should be applied to each separable component of a single transaction. Each sale must be analysed to assess if elements within the sale can be segregated such that the fair value of the consideration received is split accordingly.
In assessing whether there are separately identifiable components, an entity should consider whether it has in the past sold the individual components separately or plans to do so in the future. However, even if this is not the case, they may also be deemed to be separate components if sold separately in the market place. The example would be where a product included an amount for subsequent servicing, then the entity would apply the revenue recognition criteria to the separable identified components i.e. sale of the product and sale of the servicing element.
Where two or more transactions are linked in such a way that the commercial effect cannot be understood without reference to the transaction as a whole, then the recognition would apply to the transaction as a whole.
In applying the above guidance it should be considered from the point of view of the supplier as opposed to the point of view of the buyer as to the thinking of what the buyer believes they are purchasing i.e. does the customer think they are purchasing a number of different components or just one component.
When assessing this under old GAAP, FRS 5 required concentration on the meaning of operating independently. Operating independently meant that each component represents a separate good or service that can be provided to customers, either as a stand-alone basis or as an optional extra.
Where separate components exist the total consideration receivable should be separated on a relative fair value basis. Note Section 23 does not mandate the use of the relative fair value method so judgement can be used however it is usually considered to be the most appropriate method. Other methods include cost plus a reasonable margin and the residual value. Entities should use which ever method is most appropriate but should apply that method consistently.
Example 8: Identifying separable components and allocating relative fair value
Company A is engaged in the business of both selling software and providing service and support. Company A sells these bundled together or can sell them separately. Company A sold the software and the service and support as a bundled product to a customer for CU20,000. The fair value if the software was sold separately is CU12,000 and the fair value of the servicing and support if sold separately is CU10,000.
As these two types of sales have differing points for recognition of revenue, and given that they are sold independently, means that the sales price of CU20,000 should be allocated between the two components. The price for each component should be determined on a relative fair value basis as follows:
Amount allocated to sale of software =
CU20,000 * CU12,000 = CU10,909
(CU10,000+CU12,000)
Amount allocated to sale of service and support =
CU20,000 * CU10,000 = CU9,091
(CU10,000+CU12,000)
The initial sale would be journaled as follows:
|
|
CU |
CU |
|
Dr Trade Debtors |
20,000 |
|
|
Cr Software Revenue |
|
10,909 |
|
Cr Service and Support Revenue |
|
9,091 |
As the transfer of the software/cd to the customer is when the risks and rewards of ownership pass, the condition for recognition would be met. However as service and support is only recognised over the life of the support contract, the sale should be deferred and released over the life of the support contract assuming work is carried out evenly throughout that period.
Therefore the journal required would be to:
|
|
CU |
CU |
|
Dr Service and Support Revenue |
9,091 |
|
|
Cr Deferred Income |
|
9,091 |
Note if in the example above the fair value of both of the offerings came to exactly CU20,000 then obviously the relative fair value formula would not need to be utilised. In the example above on the recognition of the software element, the cost of sale would be recognised for the software product.
As the cost for the servicing are expensed as incurred it will be met by the release of the deferred income element over the life of the service contract.
Example 9: Identifying separable components and allocating relative fair value – goods
Company A sells franking machines but also provides a service for servicing and maintenance, which can be purchased separately but where a customer purchases these together they get a discount. The cost of purchasing a franking machine on its own is CU2,000 and for purchasing a service and maintenance contract is CU500. Where both are purchased together, the customer is charged CU2,200. Assume a customer has purchased both for CU2,200.
To recognise this sale, the relative fair values will need to be determined.
Amount allocated to sale of franking machine =
CU2,200 * CU2,000 = CU1,760
(CU2,000+CU500)
Amount allocated to sale of servicing & maintenance=
CU2,200 * CU500 = CU440
(CU2,000+CU500)
The initial sale would be journaled as follows:
|
|
CU |
CU |
|
Dr Trade Debtors |
2,200 |
|
|
Cr Goods Revenue |
|
1,760 |
|
Cr Service and Maintenance Revenue |
|
440 |
As the transfer of the machine to the customer is when the risks and rewards of ownership pass, the condition for recognition would be met. However as service and maintenance is only recognised over the life of the contract, the sale should be deferred and released over the life of the support contract assuming work is carried out evenly throughout that period. Therefore the journal required would be to:
|
|
CU |
CU |
|
Dr Service and Maintenance Revenue |
440 |
|
|
Cr Deferred Income |
|
440 |
The cost of sale on the sale of the goods would be recognised at the same time of the recognition of the sale.
Where the method used results in a loss on either one of the separable components, then provision for the loss should be made and where appropriate a cost plus reasonable margin approach should be used.
Example 10: Relative fair value results in a loss
If we take example 9 and assume the cost of producing the franking machine is CU1,200 and the estimated cost of providing the service and maintenance support is CU450.
In this particular instance as a result of using relative fair value this has resulted in a loss of CU10 (CU450-CU440) being shown on the maintenance element. Initially the company should assess if this in fact is the economic reality and if it appears to be, then, the loss should be provided for. The journals to be posted are:
|
|
CU |
CU |
|
Dr Trade Debtor |
2,200 |
|
|
Cr Revenue – Goods |
|
1,760 |
|
Cr Deferred Income – Maintenance |
|
440 |
Being journal to reflect the sale and deferral of income for the maintenance contract
|
|
CU |
CU |
|
Dr Cost of Sales – Cost of Franking Machine |
1,200 |
|
|
Dr Cost of Sales – Loss on Maintenance Contract |
10 |
|
|
Cr Inventory |
|
1,200 |
|
Cr Accrual for Loss on Maintenance Contract |
|
10 |
Being journal to reflect cost of sale and provision for future loss
Example 11: Cost plus a reasonable margin
If the entity felt the loss in example 10 was not economic reality, then they could use another approach such as the cost plus a reasonable margin. Here the company would assess how the profit would be allocated as there is a profit overall on the contract of CU550 (CU2,200-CU1,200-CU450). Based on experience the company believe the profit should be split CU450 to the goods and CU100 to the service contract. In this case the journals would be:
|
|
CU |
CU |
|
Dr Trade Debtor |
2,200 |
|
|
Cr Revenue – Goods (cost of CU1,200 + CU450 profit) |
|
1,650 |
|
Cr Deferred Income – Maintenance (cost of CU450 + CU100 profit) |
|
550 |
Being journal to reflect the sale and deferral of income for the maintenance contract
|
|
CU |
CU |
|
Dr Cost of Sales – Cost of Franking Machine |
1,200 |
|
|
Cr Inventory |
|
1,200 |
Being journal to reflect cost of sale on goods
A linked transaction is where an entity sells raw material parts to a manufacturer who carried out further work on these and where there is an agreement that the same entity will purchase the parts back from the manufacturer at a set price, then no sale should be recognised in the books as this transaction has no substance as the entity still holds the inventory risk and is obliged to buy it back from the manufacturer.
Customer loyalty awards
Section 23.9 specifically refers to loyalty awards and makes it clear that the credits awarded a separable component of the sale and the fair value of that element should be deferred until the credit is redeemed. The fair value of the credits is the amount for which the award credits could be sold.
Where an entity has a history of the proportion of the population that are likely to redeem these points, this proportion can be utilised when deciding the amount to defer. However, where award credits are being issued for the first time, it may be more appropriate to defer the whole amount allocated for the fair value of those award schemes.
Therefore where determining the fair value of the award the following should be considered:
- The percentage of awards expected to be redeemed
- The normal selling price of the initial sale of goods or service when the loyalty award is not available; and
- The normal selling price for the goods or service for which the voucher is being redeemed.
Example 12: Customer loyalty awards (Extracted from FRS 102 – Section 23A.16-23A.17)
An entity sells product A for CU100. Purchasers of product A get an award credit enabling them to buy product B for CU10. The normal selling price of product B is CU18. The entity estimates that 40 per cent of the purchasers of product A will use their award to buy product B at CU10. The normal selling price of product A, after taking into account discounts that are usually offered but that are not available during this promotion, is CU95.
The fair value of the award credit is 40% * [CU18 – CU10] = CU3.20. The entity allocates the total revenue of CU100 between product A and the award credit by reference to their relative fair values of CU95 and CU3.20 respectively. Therefore:
(a) Revenue for product A is CU100 * [CU95 / (CU95 + CU3.20)] = CU96.74
(b) Revenue for product B is CU100 * [CU3.20 / (CU95 + CU3.20)] = CU3.26
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]