IFRS 15 Revenue accounting examples – Broad and best learned

IFRS 15 Revenue accounting examples

IFRS 15 Revenue accounting examples provides some special examples for IFRS 15 Revenue from contracts with customers:

  • Sales of goods by agents,
  • Concession outlet within a department store, and
  • Excise taxes and duties

IFRS 15 Sales of goods by agents

WebCo operates a website that sells the wine produced by a selection of vineyards.

WebCo enters into a contract with VinyardCo to sell VinyardCo’s wine on line.

WebCo’s website facilitates payments between VinyardCo and the customer.

The sales price is established by VinyardCo and WebCo earns a commission equal to 5% of the sales price.

VinyardCo ships the bottles directly to the customer and insures for loss/damage during shipment.

Legal title is transferred from VinyardCo to WebCo when bottles are leaving VinyardCos warehouse.

The customer returns the bottles to WebCo if they are dissatisfied.

WebCo has the right to return bottles to VinyardCo without penalty if they are returned by the customer.

IFRS 15 Sales of goods by agents

Is WebCo the principal or agent for the sale of wine to the customer?

The rules

IFRS 15.33: “Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services). Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:

  1. using the asset to produce goods or provide services (including public services);IFRS 15 Revenue accounting examples
  2. using the asset to enhance the value of other assets;
  3. using the asset to settle liabilities or reduce expenses;
  4. selling or exchanging the asset;
  5. pledging the asset;
  6. holding the asset.”

IFRS 15.B34A: An entity that is a principal obtains control of any one of the following:

  1. a good or another asset from the other party that it then transfers to the customer.
  2. a right to a service to be performed by the other party, which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf.
  3. a good or service from the other party that it then combines with other goods or services in providing the specified good or service to the customer .”

Consideration

WebCo’s management considers that the following are indicators that it is acting as agent:

  • WebCo only takes legal title once the end customer has committed to and paid for the goods.
  • WebCo does not have the ability to benefit from the goods in other ways, such as redirecting the asset to another customer onward sale.
  • WebCo is reimbursed for corked bottles by VinyardCo in the rare case of a dissatisfied customer.

WebCo also considered indicators that it is acting as principal, including the fact that WebCo takes legal title and that dissatisfied customer return the goods directly to WebCo . However, legal title is only retained by WebCo during a short period of time, and WebCo has a right to return goods to VinyardCo.

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On this basis, WebCo concluded that it is acting as agent and should recognise commission revenue, on a net basis, when the end customer has confirmed the contract with a credit card payment.

VinyardCo should recognise revenue of €100, and simultaneously, a commission charge of €5.

Concession outlet within a department store

A department store contains concession outlets The store provides the concessionaire with serviced space in the store, sales staff, point of sale equipment and stock room spaceIFRS 15 Revenue accounting examples

The department store is in charge of selling the products and receiving the cash from end consumers

The concessionaire pays the department store a fixed contractual fee of 10 000 per annum plus 20 of the outlet’s revenue

The concessionaire determines the stock lines sold and the prices charged to customers, and it has the right to move stock between its concessions in different stores At the end of a season, the concessionaire must take back any unsold stock

How does the department store account for this arrangement?

The rules

IFRS 15.33: “Goods and services are assets, even if only momentarily, when they are received and used (as in the case of many services). Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be obtained directly or indirectly in many ways, such as by:

  1. using the asset to produce goods or provide services (including public services);
  2. using the asset to enhance the value of other assets;
  3. using the asset to settle liabilities or reduce expenses;
  4. selling or exchanging the asset;
  5. pledging the asset;
  6. holding the asset.”

IFRS 15.B34 An entity that is a principal obtains control of any one of the following

  1. a good or another asset from the other party that it then transfers to the customer
  2. a right to a service to be performed by the other party, which gives the entity the ability to direct that party to provide the service to the customer on the entity’s behalf
  3. a good or service from the other party that it then combines with other goods or services in providing the specified good or service to the customer

Consideration

The department store does not, at any point, have control of the goods which are sold. Although the department store transacts with the end customer, it does not set prices or take inventory risk.

Therefore, the department store is acting as agent in selling to the end consumer and is receiving a ‘ in consideration for the service that it is performing for the concessionaire (that is, making space available in the department store and related services).

The department store recognises the ‘ receivable from the concessionaire as revenue, rather than the gross revenue from the sale of the concessionaire’s goods.

Excise taxes and duties

SpiritsCo is a global producer and distributor of branded alcoholic drinks. The products are distributed via a network IFRS 15 Revenue accounting examplesof subsidiaries located in SpiritsCo’s strategic markets. In most countries, SpiritsCo collects excise taxes from its customers and remits them to governmental agencies.

In country 1: SpiritsCo or its local subsidiary has to pay excise duty based on the value as well as on the volume of products that leave a bonded warehouse. The movement of products from the bonded warehouse for customs clearance is the triggering event of the obligation to pay excise duty. SpiritsCo or its local subsidiary can receive a refund of excise duty only if it decides not to sell the products or to re export them.

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In case of payment failure from a customer or i f products are not sold, SpiritsCo or its local subsidiary cannot claim the refund of the excise duty that it has paid. Consequently , the credit risk related to excise duty is borne by SpiritsCo or its local subsidiary.

In addition, SpiritsCo or its local subsidiary has no legal or constructive obligation to reflect any change of the rate of excise duty in the selling price of products. An increase in the rate of excise duty can lead SpiritsCo to increase its selling price, but such increases are a commercial decision and would not be automatic. The tax is not separately presented on the invoice.

In country 2: A state specific excise tax is payable by SpiritsCo based on volume of products sold to, and paid for, by customers . In this country, the SpiritsCo local entity has to collect the tax received from customers and then pay the tax to the local state. The triggering event of the obligation to pay the tax is the shipment of products to the customer, depending on the state where the products are delivered . Any increase of state excise tax would result in the increase of the tax rate that is charged to the customer . State excise tax is separately presented on the invoice . SpiritsCo does not pay excise taxes to the government if the receivables are not collected.

Should SpiritsCo recognise the excise taxes that it collects from its customers gross (that is, as revenue and expense) or net of the amount remitted to a third party (such as governmental agencies)?

The rules

According to IFRS 15.47, the transaction price excludes amounts collected on behalf of third parties (for example, some sales taxes). Management needs to assess each type of tax, on a jurisdiction by jurisdiction basis, to conclude whether to net these amounts against revenue or to recognise them as an operating expense. The intended purpose of the tax, as written into the tax legislation in the particular jurisdiction, should also be considered.

Assessment should be made whether the tax is levied:

  • on the entity and its production: if so, report tax gross (as expense);
  • on the customer and is collected by the entity as an agent on behalf of the government: if so, report tax net (contra-revenue no impact on P&L).

Some indicators to consider

  • Is the entity primarily obligated for the payment of tax? Is the entity obliged to pay the tax even if the customer fails to pay the receivable to the entity?

  • Does the entity bear the inventory and credit risks ? In other words, would excise taxes paid to the governmental agency be refunded to it if the goods are not sold or if receivables are not collected

  • Does the entity have a legal or constructive obligation to change selling prices in order to reflect excise price taxes ?

  • Must the tax be separately identified on the invoice to the external customer ?

  • What triggers the present obligation to pay the tax: production, importation, or sale to customer?

  • What is the basis for calculation of the excise tax: Is the tax based on the quantities produced (indicator for principal), or is it based on selling price (indicator for agent)?

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Consideration

Country 1

The inventory and credit risks related to the excise tax are borne by the SpiritsCo’s local subsidiary. SpiritsCo entity has no obligation to reflect any change of the rate of excise duty in the selling price of products . The entity bears the excise duty and makes the decision whether to pass the tax on to the customer. T he tax is not separately identified on the invoice to the customer.

These considerations indicate that SpiritsCo entity is acting as principal and the excise tax is similar to a cost of production. Excise duty is levied on SpiritsCo local subsidiaries and therefore should not be deducted from the transaction price.

Country 2

The state excise tax is separately identified on the invoice to the customer, any increase of the tax would result in an increase of the tax rate that is charged to the customer, and SpiritsCo does not hold the credit risk.

These considerations indicate that the state excise tax is levied on the customer. The SpiritsCo local entity is likely to be acting as agent in collecting the tax on behalf of a governmental agency/state commission. As a result, the tax that is collected on the invoice should be deducted from the transaction price, and no related expense should be recognised . The accounting treatment of the collection and payment of the tax should only impact balance sheet accounts.

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