Goods and services

IFRS 15 Retail – the finest perfect examples

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IFRS 15 Retail revenue – finest perfect examples

Retail is the process of selling consumer goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand identified through a supply chain. The term “retailer” is typically applied where a service provider fills the small orders of many individuals, who are end-users, rather than large orders of a small number of wholesale, corporate or government clientele. (Source: Wikipedia)

So what is the IFRS 15 guidance for retail?

Here are the cases covering the most significant accounting topics for retail in IFRS 15.

Case – Customer incentives Buy three, get coupon for one free

Death By Chocolate Ltd, a high street chain, is offering a promotion whereby a customer who purchases three boxes of chocolates at €20 per box in a single transaction in a store receives an offer for one free box of chocolates if the customer fills out a request form and mails it to them before a set expiration date.

Death By Chocolate estimates, based on recent experience with similar promotions, that 80% of the customers will complete the mail in rebate required to receive the free box of chocolates.

How is a ‘buy three, get one free’ transaction accounted for and presented by Death By Chocolate?

The rules

IFRS 15.22 states: “At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:IFRS 15 Retail

  1. a good or service (or a bundle of goods or services) that is distinct; or
  2. a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer (see paragraph 23).”

IFRS 15.26 provides examples of distinct goods and services, including “granting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs B39-B43)”.

IFRS 15.B40: “If , in a contract, an entity grants a customer the option to acquire additional goods or services, that option gives rise to a performance obligation in the contract only if the option provides a material right to the customer that it would not receive without entering into that contract (for example, a discount that is incremental to the range of discounts typically given for those goods or services to that class of customer in that geographical area or market).

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IFRS 15 Real estate Revenue complete and accurate recognition

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IFRS 15 Real estate

Under IFRS 15 real estate entities recognize revenue over the construction period if certain conditions are met.

Key points

  • An entity must judge whether the different elements of a contract can be separated from each other based on the distinct criteria. A more complex judgment exists for real estate developers that provide services or deliver common properties or amenities in addition to the property being sold.
  • Contract modifications are common in the real estate development industry. Contract modifications might needIFRS 15 Real estate to be accounted for as a new contract, or combined and accounted for together with an existing contract.
  • Real estate managers may structure their arrangements such that services and fees are in different contracts. These contracts may meet the requirements to be accounted for as a combined contract when applying IFRS 15.
  • Real estate management entities are often entitled to several different fees. IFRS 15 will require a manager to consider whether the services should be viewed as a single performance obligation, or whether some of these services are ‘distinct’ and should therefore be treated as separate performance obligations.
  • Variable consideration for entities in the real estate industry may come in the form of claims, awards and incentive payments, discounts, rebates, refunds, credits, price concessions, performance bonuses, penalties or other similar items.
  • Real estate developers will need to consider whether they meet any of the three criteria necessary for recognition of revenue over time.

IFRS 15 core principle

The core principle of IFRS 15 is that revenue reflects the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

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Example accounting policies

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Example accounting policies

Get the requirements for properly disclosing the accounting policies to provide the users of your financial statements with useful financial data, in the common language prescribed in the world’s most widely used standards for financial reporting, the IFRS Standards. First there is a section providing guidance on what the requirements are, followed by a comprehensive example, easy to tailor to the specific needs of your company.Example accounting policies

Example accounting policies guidance

Whether to disclose an accounting policy

1. In deciding whether a particular accounting policy should be disclosed, management considers whether disclosure would assist users in understanding how transactions, other events and conditions are reflected in the reported financial performance and financial position. Disclosure of particular accounting policies is especially useful to users where those policies are selected from alternatives allowed in IFRS. [IAS 1.119]

2. Some IFRSs specifically require disclosure of particular accounting policies, including choices made by management between different policies they allow. For example, IAS 16 Property, Plant and Equipment requires disclosure of the measurement bases used for classes of property, plant and equipment and IFRS 3 Business Combinations requires disclosure of the measurement basis used for non-controlling interest acquired during the period.

3. In this guidance, policies are disclosed that are specific to the entity and relevant for an understanding of individual line items in the financial statements, together with the notes for those line items. Other, more general policies are disclosed in the note 25 in the example below. Where permitted by local requirements, entities could consider moving these non-entity-specific policies into an Appendix.

Change in accounting policy – new and revised accounting standards

4. Where an entity has changed any of its accounting policies, either as a result of a new or revised accounting standard or voluntarily, it must explain the change in its notes. Additional disclosures are required where a policy is changed retrospectively, see note 26 for further information. [IAS 8.28]

5. New or revised accounting standards and interpretations only need to be disclosed if they resulted in a change in accounting policy which had an impact in the current year or could impact on future periods. There is no need to disclose pronouncements that did not have any impact on the entity’s accounting policies and amounts recognised in the financial statements. [IAS 8.28]

6. For the purpose of this edition, it is assumed that RePort Co. PLC did not have to make any changes to its accounting policies, as it is not affected by the interest rate benchmark reforms, and the other amendments summarised in Appendix D are only clarifications that did not require any changes. However, this assumption will not necessarily apply to all entities. Where there has been a change in policy, this will need to be explained, see note 26 for further information.

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The Statement of Cash Flows

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Statement of Cash Flows

IAS 7.10 requires an entity to analyse its cash inflows and outflows into three categories:

  • Operating;
  • Investing; and
  • Financing.

IAS 7.6 defines these as follows:

‘Operating activities are the principal revenue producing activities of the entity and other activities that are not investing or financing activities.’

‘Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.’

‘Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.’

1. Operating activities

It is often assumed that this category includes only those cash flows that arise from an entity’s principal revenue producing activities.

However, because cash flows arising from operating activities represents a residual category, which includes any cashStatement of cash flows flows that do not qualify to be recorded within either investing or financing activities, these can include cash flows that may initially not appear to be ‘operating’ in nature.

For example, the acquisition of land would typically be viewed as an investing activity, as land is a long-term asset. However, this classification is dependent on the nature of the entity’s operations and business practices. For example, an entity that acquires land regularly to develop residential housing to be sold would classify land acquisitions as an operating activity, as such cash flows relate to its principal revenue producing activities and therefore meet the definition of an operating cash flow.

2. Investing activities

An entity’s investing activities typically include the purchase and disposal of its intangible assets, property, plant and equipment, and interests in other entities that are not held for trading purposes. However, in an entity’s consolidated financial statements, cash flows from investing activities do not include those arising from changes in ownership interest of subsidiaries that do not result in a change in control, which are classified as arising from financing activities.

It should be noted that cash flows related to the sale of leased assets (when the entity is the lessor) may be classified as operating or investing activities depending on the specific facts and circumstances.

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Non-refundable upfront fees

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Non-refundable upfront fees

In short – Some contracts include non-refundable upfront fees that are paid at or near contract inception – e.g. joining fees for health club membership, activation fees for telecommunication contracts and set-up fees for outsourcing contracts. The standard provides guidance on determining the timing of recognition for these fees.

An entity assesses whether the non-refundable upfront fee relates to the transfer of a promised good or service to the customer. (IFRS 15.B40, B48–B51)

In many cases, even though a non-refundable upfront fee relates to an activity that the entity is required to undertake to fulfil the contract, that activity does not result in the transfer of a promised good or service to the customer. Instead, it is an administrative task. For further discussion on identifying performance obligations, use this link.

If the activity does not result in the transfer of a promised good or service to the customer, then the upfront fee is an advance payment for performance obligations to be satisfied in the future and is recognised as revenue when those future goods or services are provided.

If the upfront fee gives rise to a material right for future goods or services, then the entity attributes all of it to the goods and services to be transferred, including the material right associated with the upfront payment. For further discussion on allocating the transaction price and customer options, use this link and this link, respectively.

The non-refundable upfront fee results in a contract that includes a customer option that is a material right if it would probably impact the customer’s decision on whether to exercise the option to continue buying the entity’s product or service (e.g. to renew a membership or service contract or order an additional product). (IFRS 15.BC387)

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IFRS 10 Principal versus agent considerations – Best complete read

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Principal versus agent considerations

– Certain decision-makers may be obligated to exercise their decision powers on behalf of other parties and do not exercise their decision powers for their own benefit. IFRS 10 regards such decision-makers as ‘agents’ that are engaged to act on behalf of another party (the ‘principal’).

A principal may delegate some of its power over the investee to the agent, but the agent does not control the investee when it exercises that power on behalf of the principal (IFRS 10.B58).

Power normally resides with the principal rather than the agent (IFRS 10.B59). There may be multiple principals, in which case each of the principals should assess whether it has power over the … Read more

Transfer pricing – IAS 12 Best complete read

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Transfer pricing
 for
transactions between related parties

A transfer price is the price charged between related parties (e.g., a parent company and its controlled foreign corporation) in an inter-company transaction. Although inter-company transactions are eliminated when consolidating the financial results of controlled foreign corporations and their domestic parents, for preparation of individual tax returns each entity (or a tax consolidation unit of more than one entity in the group in one and the same tax jurisdiction) prepares stand-alone (or a tax consolidation unit) tax returns.

See also:

IAS 24 Related parties narrative IFRS 15 Revenue narrative IAS 12 Income tax narrative

Transfer prices directly affect the allocation of group-wide taxable income across national tax jurisdictions. Hence, a group’s transfer-pricing policies can directly affect its after-tax income to the extent that tax rates differ across national jurisdictions.

Arm’s length transaction principle

Most OECD countries rely upon the OECD TP Guidelines for Multinational Enterprises and Tax Administrations, that were originally released in 1995 and subsequently updated in 2017 (OECD TP Guidelines). The OECD TP Guidelines reaffirmed the OECD’s commitment to the arm’s length transaction principle.

In fact, the arm’s length transaction principle is considered “the closest approximation of the workings of the open market in cases where goods and services are transferred between associated enterprises.” The arm’s length principle implies that transfer prices between related parties should be set as though the entities were operating at arm’s length (i.e. were independent enterprises).

The application of the arm’s length transaction principle is generally based on a comparison of all the relevant conditions in a controlled transaction with the conditions in an uncontrolled transaction (i.e. a transaction between independent enterprises).

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Revenue definition

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Revenue definition

Revenue is defined in IFRS 15 as: ‘Income arising in the course of an entity’s ordinary activities‘.

IFRS 15 establishes a single and comprehensive framework which sets out how much revenue is to be recognised, and when. The core principle is that a vendor should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services.

The application of the core principle in IFRS 15 is carried out in five steps:

revenue definition

The five-step model is applied to individual contracts. However, as a practical expedient, IFRS 15 permits an entity to apply the model to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the effects would not differ materially from applying it to individual contracts.

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