Revenue

IFRS 18 Presentation and Disclosure in Financial Statements – Best read

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IFRS 18 Presentation and Disclosure in Financial Statements

The IASB’s newly issued standard IFRS 18 mainly deals with the presentation of the income statement, balance sheet and certain footnotes. At the same time, certain aspects of the cash flow statement are modified. IFRS 18 does not change the recognition and measurement of the components of financial statements; therefore, the amounts reported as shareholders’ equity and net income are both unchanged. However, it will have a significant impact on the presentation and disaggregation of what is reported (primarily in the income statement and footnotes), including what subtotals companies must provide and how these are defined.

There are five main areas where we think the new standard will help investors as users of IFRS Financial Statements:IFRS 18 Presentation and Disclosure in Financial Statements

Operating–Investing–Financing classification

IFRS 18 aims to establishes a structured statement of profit or loss by implementing the following measures:

  • It introduces three defined categories for income and expenses: operating, investing, and financing.
    • Operating – income/expenses resulting from the company’s main business operations.
    • Investing – income/expenses from:
      • investments in associates, joint ventures and unconsolidated subsidiaries;
      • cash and cash equivalents;
      • assets that generate a return individually and largely independently (e.g. rental income from investment properties).
    • Financing – consisting of:
      • income/expenses from liabilities related to raising finance only (e.g. interest expense on borrowings); and
      • interest income/expenses and effects of changes in interest rates from other liabilities (e.g. interest expense on lease liabilities).
  • It mandates to present new defined totals and subtotals, including operating profit, thereby enhancing the clarity and consistency of financial reporting.

Entities primarily engaged in investing in assets or providing finance to customers are subject to specific categorisation requirements. This entails that additional income and expense items, which would typically be classified as investing or financing activities, are instead categorised under operating activities. Consequently, operating profit reflects the outcomes of an entity’s core business operations. Identifying the main business activity involves exercising judgment based on factual circumstances.

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Scope 1 emissions – Best read

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Scope 1 emissions

Scope 1 emissions are emissions from sources owned or controlled by a reporting entity. For example, emissions from equipment, a vehicle or production processes that are owned or controlled by the reporting entity are considered Scope 1 emissions. These emissions include all direct emissions within the entity’s inventory boundary.

The combination of organizational and operational boundaries make up a reporting entity’s inventory boundary, which is also called the reporting boundary. Refer to Organizational boundaries for information on organizational boundaries and Operational boundaries for information on operational boundaries.

The GHG Protocol is designed to avoid double counting GHG emissions. That is, two or more reporting entities should never account for the same emissions as Scope 1 emissions. For example, emissions from the generation of heat, electricity or stream that is sold to another entity are not subtracted from Scope 1 emissions but are reported as Scope 2 emissions by the entity that purchases the related energy.

Theoretically, if every entity and individual throughout the world reported their GHG emissions using the same organizational boundary (e.g., equity share, financial control or operational control approach), the total of all Scope 1 emissions would equal the total GHGs emitted throughout the world.

Types of Scope 1 emissions

The GHG Protocol describes four types of Scope 1 emissions: stationary combustion, mobile combustion, process emissions and fugitive emissions. The type of emissions that are included in Scope 1 will vary based on the industry and business model of the reporting entity.

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Metrics in use for ESG Reporting- 1 Best and complete read

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Metrics in use for ESG Reporting

Here is a list of Metrics in use for ESG Reporting that companies can use to start communicating on the ESG issues. The metrics have been divided into four categories:

Each category contains recommended disclosure metrics (both qualitative and quantitative) that have been marked either as minimum disclosures (relevant to all companies) or additional disclosures (that might not be relevant to all companies).

The selection of recommended disclosure metrics has been informed by relevant regulatory initiatives i.e. the CSRD and the ESRS as well as the Warsaw Stock Exchange corporate governance code. Moreover, to address increasing investors’ data needs, they have been also aligned with the mandatory PAI indicators for corporate investments required by the SFDR (see mapping in the Appendix – Relevance of the Guidelines to investors). References have been added below each section to other frameworks and resources that companies may also consider (Appendix – Alignment with EU regulations and other frameworks).

It should be emphasized that the Guidelines do not provide an exhaustive list of indicators and topics. Rather they aim to offer less advanced companies a minimum set of carefully selected disclosure metrics that will help them to prepare for the upcoming requirements stemming from the CSRD and the ESRS and better respond to investors’ ESG data needs. Companies in scope of the CSRD should use the ESRS to prepare their disclosures on material sustainability topics.

Metrics in use for ESG Reporting – General information

General information metrics provide essential context to understand the company business activities and value creation model, it’s material ESG impacts, risks and opportunities, and how it is managing them.

General information

What should be disclosed:

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M 1

Business model
  • Short description of the company business model and value chain.
  • Whether the company is active in the following sectors: fossil fuel (coal, oil and gas), controversial weapons along with related revenues.

Companies may consider including the following characteristics when describing their business model: economic activities; products and services offered; markets of operation, company size (in terms of workforce, business locations, revenue, etc.)

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M 2

Sustainability integration
  • Whether and how sustainability matters are integrated in the company strategy and business model.
  • Resilience of the company strategy and business model(s) to material sustainability risks.
  • Policies and actions adopted to manage material sustainability matters.
  • Targets related to management of sustainability matters.

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M 3

Sustainability governance
  • Governance bodies roles and responsibilities with regard to sustainability matters (e.g. in relation to risk management, target setting, sustainability disclosure).
  • Whether governance bodies are informed about sustainability matters, and how they are addressed by administrative and/or management bodies.
  • Whether incentive schemes are offered to members of governance bodies that are linked to sustainability matters.

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M 4

Material impacts, Risk and Opportunities
  • The processes used to identify material impacts, risks and opportunities.
  • Sustainability due diligence process.
  • Outcome of the materiality assessment (identified material impacts, risks and opportunities).
  • How material impacts, risks and opportunities interact with the company strategy and business model.

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M 5

Stakeholder engagement
  • Description of the company main stakeholders, and how the company engages with them.
  • How the interests and views of stakeholders are taken into account by the undertaking’s strategy and business model.

Metrics in use for ESG Reporting- Environmental disclosures

Environmental metrics cover issues that arise from or impact the natural environment.

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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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IFRS 2022 update – IFRS 16 Lease Liability in a Sale and Leaseback – Best read

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IFRS 2022 update – IFRS 16 Lease Liability in a Sale and Leaseback

Effective for annual periods beginning on or after 1 January 2024.

Key requirements

On 22 September 2022, the International Accounting Standards Board (the IASB or Board) issued Lease Liability in a Sale and Leaseback (Amendments to IFRS 16) (the amendment). The amendment to IFRS 16 Leases specifies the requirements that a seller-lessee uses in measuring the lease liability arising in a sale and leaseback transaction, to ensure the seller-lessee does not recognise any amount of the gain or loss that relates to the right of use it retains.

A sale and leaseback transaction involves the transfer of an asset by an entity (the seller-lessee) to another entity (the buyer-lessor) and the leaseback of the same asset by the seller-lessee.

The amendment is intended to improve the requirements for sale and leaseback transactions in IFRS 16. It does not change the accounting for leases unrelated to sale and leaseback transactions.IFRS 16 Lease Liability in a Sale and Leaseback

Background

In a sale and leaseback transaction, the seller-lessee assesses whether the transfer of the asset satisfies the requirements in IFRS 15 Revenue from Contracts with Customers to be accounted for as a sale. If it is accounted for as a sale, paragraph 100(a) of IFRS 16 requires the seller-lessee to measure the right-of-use asset arising from the leaseback at the proportion of the previous carrying amount of the asset that relates to the right of use retained by the seller-lessee.

However, IFRS 16 did not specify the measurement of the liability that arises in a sale and leaseback transaction. This has been addressed in the amendment.

Amendment to IFRS 16

After the commencement date in a sale and leaseback transaction, the seller-lessee applies paragraphs 29 to 35 of IFRS 16 to the right-of-use asset arising from the leaseback and paragraphs 36 to 46 of IFRS 16 to the lease liability arising from the leaseback. In applying paragraphs 36 to 46, the seller-lessee determines ‘lease payments’ or ‘revised lease payments’ in such a way that the seller-lessee would not recognise any amount of the gain or loss that relates to the right of use retained by the seller-lessee. Applying these requirements does not prevent the seller-lessee from recognising, in profit or loss, any gain or loss relating to the partial or full termination of a lease, as required by paragraph 46(a) of IFRS 16.

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IFRS 15 Pre-Contract Establishment Date activities – Important to know

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Pre-Contract Establishment Date activities

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Partially Satisfied Performance Obligations Before the Identification of a Contract

Entities sometimes begin activities on a specific anticipated contract with their customer before (1) the parties have agreed to all of the contract terms or (2) the contract meets the criteria in step 1 (see Step 1 Identify the contract) of IFRS 15. The IASB staff refer to the date on which the contract meets the step 1 criteria as the “contract establishment date” (CED) and refer to activities performed before the CED as “pre-CED activities.”

TRG Update — Pre-CED Activities

The FASB and IASB staffs noted that stakeholders have identified two issues with respect to pre-CED activities:

  • How to recognize revenue from pre-CED activities.
  • How to account for certain fulfillment costs incurred before the CED.

The TRG discussed these issues in March 2015.

TRG members generally agreed with the staffs’ conclusion that once the criteria in step 1 have been met, entities should recognize revenue for pre-CED activities on a cumulative catch-up basis (i.e., record revenue as of the CED for all satisfied or partially satisfied performance obligations) rather than prospectively because cumulative catch-up is more consistent with the new revenue standard’s core principle.

The two Q&A below demonstrates the application of the TRG’s general agreement.

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Focus definition or best trends in IFRS reporting based on IAS 1

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Focus definition or Trends in IFRS reporting

To demonstrate what companies could do to improve the readability of their financial report and make it easier for users to find the information they need, here are some thoughts for changing your financial report. In particular:

  • Information is organised to clearly tell the story of financial performance and make critical information more prominent and easier to find.
  • Additional information is included where it is important for an understanding of the performance of the company.

For example, include a summary of significant transactions and events as the first note to the financial statements even though this is not a required disclosure.

Accounting policies that are significant and specific to the entity are disclosed along with other relevant information, in the section ‘How did we arrive at these numbers?’ While other accounting policies are listed in note 25, this is for completeness purposes. Entities should consider their own individual circumstances and only include policies that are relevant to their financial statements.

The structure of financial reports should reflect the particular circumstances of the company and the likely priorities of its report readers. There is no ‘one size fits all’ approach and companies should engage with their investors to determine what would be most relevant to them. The structure used in this publication is not meant to be used as a template, but to provide you with possible ideas. It will not necessarily be suitable for all companies.

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Revenue recognition when or as

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Revenue recognition when or as
the entity satisfies a performance obligation

The obligation to purchase and sell electricity under a PPA generally will be viewed as a single performance obligation that is satisfied over time (when). A power and utilities entity will be required to measure its progress towards complete satisfaction of its performance obligation to deliver electricity. The objective, when measuring progress, is to depict the seller’s performance in transferring control of the electricity to the customer.

Arrangements to sell other commodities, including natural gas and physical capacity, over a contractual term, could be viewed as a single performance obligation. More judgement might be required to determine if such arrangements meet the definition of a performance obligation satisfied over time.

Different pricing conventions

Some types of sales contract are not impacted by price or volume variability but they do have different fixed pricing conventions (for example, prices per unit might be stated, but they might change over the life of the contract). Under a particular arrangement, the price per unit might step up over time, to reflect expected costs to produce or an expectation of increased market pricing over time. Alternatively, the prices might be different to reflect seasonal or time of day pricing (such as peak versus off-peak).

A contract with stated, but changing, prices for a fixed quantity delivered does not contain variable consideration, because the transaction price for the contract is known at inception and does not change. It is important for the power and utility entity to understand what is giving rise to the pricing convention. For example, the escalations might be intended to reflect the expected market price of power in the future periods which a customer would expect to pay.

The total transaction price should be recognised as revenue over time by measuring progress towards complete satisfaction of the performance obligation. The seller applies a permissible form of the ‘output’ or ‘input’ method.

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Electricity revenue recognition example

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Electricity revenue recognition example

Application of the five-step model

Facts: Bundle Seller Co (‘Seller’) and Bundle Buyer Co (‘Buyer’) executed an agreement for the purchase and sale of 1oMW of electricity per hour and the associated renewable energy credits (‘RECs’) (one REC for each MWh) at a fixed bundled price (‘the agreement’ or ‘the PPA’). The contract term begins on 1 January 20X1 and ends on 31 December 20X4, and the fixed bundled price during each of those respective years is $200, $205, $210 and $215.

The increase in the bundled price represents the increase in the forward price of electricity and RECs over the term of Electricity revenue recognition examplethe agreement as of the acquisition date. Control, including title to and risk of loss related to the electricity, will pass and transfer on delivery at a single point on the electricity grid. Control, including title to and risk of loss related to RECs, will pass and transfer when the associated electricity is delivered.

Seller and other market participants frequently execute contracts for the purchase and sale of electricity and RECs on a stand-alone basis.

Seller concluded that this arrangement does not contain a lease (that is, no property, plant or equipment is explicitly or implicitly identified). The electricity element of this arrangement qualifies for the ‘own use’ exception and thus is not accounted for as a derivative. The REC element has no net settlement characteristics. As such, each element of this agreement is within the scope of IFRS 15.

Electricity revenue recognition – IFRS 15 step-by-step

Step 1 – Identify the contract with a customer

This agreement, including each of its elements (that is, electricity and RECs), is within the scope of the standard, and collection of the contract consideration is considered probable.

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