2. CAPITULO RECONOCIMIENTO INGRESOS POLITICA GRUPO (2)

Compass Group PLC
Accounting Policies and Procedures Manual
March 2020 Version 6.0
This document is confidential to Compass Group PLC and should not be made available to anyone outside the Group without the
prior written consent of Group Finance, Chertsey. It is the property of Compass Group and must be returned on request. This
document will be kept up to date in the HFM repository where the definitive version of it can be found. The latest version of this
document can be also requested on the Group's intranet.
1. Revenue recognition
Approval Version control
Approved by: Karen Witts, Chief Financial Officer March 2020 Version 6.0 of policy issued
Key points
Key features of the Group’s revenue recognition policies are summarised below. The
amount and timing of recognition of the majority of the Group’s revenue have not
changed as a result of IFRS 15. The main differences compared with Compass’
previous revenue recognition policies are identified below.
Revenue (or turnover or sales) should be allocated to all the performance

obligations within a contact (whether or not they are priced separately within the
contract) and recognised as those performance obligations are satisfied, either
over time or at a point in time.
Potential increases in the consideration receivable under a contract should not be
recognised until its receipt is highly probable not to reverse (>75%).
Potential decreases in the consideration under a contract should be recognised
when the revenue is no longer highly probable i.e. when it is considered more
likely than not (>50%) that the revenue will be decreased.
Amounts payable to a client must be analysed to determine whether the payment
should be treated as an expense (e.g. concession rentals) or a revenue deduction
(e.g. some signing on bonuses) or a client commitment (see Chapter 5 Client
commitments/investments).
Certain costs incurred to acquire a contract (e.g. sales commission relating to a
contract award or renewal) should be deferred and amortised over the contract
term.
In very rare circumstances and only with the written pre-approval of Group
Finance, some costs incurred in mobilising a contract may be deferred and
amortised over the contract period (see Chapter 4 Contract Mobilisation and Start
Up costs).
Revenue should be recorded net of any trade discounts and settlement discounts.
Where extended settlement periods are offered to clients (usually greater than
one year) the revenue recognised should be the discounted value of the cash to
be received, with the discount being shown as interest income over the period of
the settlement.
1.1 Disclosed accounting policy

Revenue represents income derived from contracts for the provision of food
and support services by the Group to customers in exchange for consideration
in the normal course of business. The Group’s revenue is comprised of
revenues under its contracts with clients. Clients engage the Group to provide
food and support services at their locations. Depending on the type of client
and service, we are paid either by our client and/or directly by the consumers
to whom we have been provided access by our client, such as the client's
employees, visitors, pupils, patients and spectators.
Compass Group PLC – Accounting policies and procedures manual version 6.0, March 2020
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Revenue recognition, page 2 of 27 1
Performance obligations
The Company recognises revenue when its performance obligations are

satisfied. Performance obligations are satisfied as control of the goods and
services is transferred to the client and/or consumers. In certain cases, clients
engage us to provide food and support services in a single multi service
contract. We recognise revenue for each separate performance obligation in
respect of food and support services as these are provided. There is little
judgement involved in determining if a performance obligation has been
satisfied.
At contract inception, the contract is assessed to identify each promise to

transfer either a distinct good or service or a series of distinct goods or
services that are substantially the same and have the same pattern of transfer
to the customer. Goods and services are distinct and accounted for as separate
performance obligations in the contract if the customer can benefit from them
either on their own or together with other resources that are readily available
to the customer and they are separately identifiable in the contract.
Performance obligations are usually clearly identified within contracts and
revenue is recognised for each separate performance obligation. Generally,
where the Group has the obligation to its clients to make available the
provision of foodservice for a predetermined period, its performance obligation
represents a series of services delivered over time. There are also contracts
under which the Group sells products directly to consumers and these
performance obligations represent a transfer of a good at a point in time.•
Transaction price
The transaction price is the amount of consideration to which the Group

expects to be entitled in exchange for transferring the promised goods and
services to the customer, excluding value added tax and similar sales taxes.
For example, the transaction price may be based on a price per meal, which
may vary with volume, or could be based on costs incurred plus an agreed
management fee.
The Group makes a variety of ongoing payments to clients, such as

commissions, concession rentals, reimbursement of utility costs, performance
penalties, fixed or variable paybacks and discounts. These are assessed for
treatment as consideration paid to customers and where they are not in
exchange for a distinct good or service they are recognised as a reduction of
the transaction price. In addition, the Group may make a cash payment to a
client typically at the start of a contract which is not an investment in service
assets and does not generate or enhance the Group's resources. Such
payments are reported as prepayments and, as they are considered not to be
in exchange for a distinct good or service, they are charged to the income
statement as a deduction to revenue recognised over the contract term rather
than as an operating cost.
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• Timing of revenue recognition
Revenue is recognised as performance obligations are satisfied as control of
the goods and services is transferred to the customer. For each performance
obligation within a contract, the Group determines whether it is satisfied over
time or at a point in time.
The Group has determined that most of its performance obligations are
satisfied over time as the client simultaneously receives and consumes the
benefits provided by the Group as the food service and/or support service are
rendered at the client site. In these circumstances, revenue is recognised at
the amount which the Group has the right to invoice, where that amount
corresponds directly with the value to the customer of the Group’s
performance completed to date. Where the Group is contracted to sell directly
to consumers, for example in a retail café concession, the performance
obligation is satisfied at a point in time, namely when the products are sold to
the consumer. The nature, amount, timing and uncertainty of revenue and
cash flows for performance obligations within a contract that are satisfied over
time and at a point in time are considered to be similar and they are affected
by the same economic factors.
1.2 Default policy and process for exceptions
1.2.1 Default policy
Revenue (or turnover or sales) should be recognised as Compass’ performance
obligations to the client are satisfied.
1.2.2 Consultation and authorisation process for exceptions

Revenue recognition is a matter of applying the principles outlined in this
section. Where a commercial situation is particularly complicated Group
Finance, Chertsey should be consulted.
1.3 KFC references

• KFC 4 - detailed review of business performance – completeness of revenue,
level of accrued income
• KFC 5 – client contracts are reviewed
• KFC 6 – Services are not provided without a signed and current client contract
• KFC 7 – review of key actions taken to recover trade receivables and to bill
accrued income
• KFC 16 – balance sheet account reconciliations are performed monthly
1.4 IFRS references

IFRS 15 “Revenue from Contracts with Customers”
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1.5 Summary of IFRS requirements
1.5.1 What is revenue?
Revenue is defined as ‘income arising from an entity’s ordinary operating

activities’. It is earned by fulfilling the performance obligations set out in
contracts with clients and is measured at the amount the Group expects to
receive in exchange.
Income earned for other exchange transactions such as the sale of fixed assets,
investments or businesses, does not normally give rise to revenue but to
“other income”.
Note: Although an individual statutory entity’s principal activities may indicate

that amounts should be recognised as revenue, in some cases, these activities
are merely incidental to the Group’s activities as whole. In such circumstances,
the income is shown as a reduction in cost of sales or as other operating
income (rather than revenue), i.e. a different treatment may be appropriate
from a Group perspective.
1.5.2 When should revenue be recognised?
Revenue should be recognised as performance obligations are satisfied based

on the following 5 Step Model. Revenue recognition is not dependant on when
client invoices are approved or sent out, though usually these coincide.
5 Step Model
1. Identify the contract(s) with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when a performance obligation is satisfied
1.5.3 STEP 1: Identify the contract
Revenue should only be recognised if a contract exists. For this purpose, a

contract only exists if it has been approved by all parties and is legally
enforceable, sets out in sufficient detail the goods and services to be provided,
the rights of the parties’ in respect of those goods and services and the
payment terms (normally in writing).
Combination of contracts
Two or more contracts entered into at or near the same time with the same
client may need to be combined and accounted for as a single contract. It is
necessary to consider whether the contracts were negotiated as a package, if
the amount of consideration per contract is dependent on the other, or if the
goods/services are a single performance obligation. In most instances,
contracts are negotiated and priced on a stand-alone basis and therefore do
not need to be combined. Group Finance, Chertsey must be consulted
before contracts are combined for accounting purposes.
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Contract Modifications
A contract modification is a change in the scope and/or price of a contract that
is approved by the parties of the contract. If it is determined that the
modification substantially creates new, or changes existing, enforceable rights
and obligations of the parties of the contract, and impacts the future
profitability of the contract, it may be deemed a separate contract. This would
apply if the scope of the contract increases because of additional distinct
goods/services and the price of the contract increases by the stand-alone
selling price of the additional goods/services. It is not expected that this will
lead to a change in the Group’s accounting for revenue when contracts are
modified but if questions arise around contract modifications Group Finance,
Chertsey should be consulted.
Refer to Chapter 5.6.4 (examples 7 & 8). regarding subsequent investments

in client contracts.
1.5.4 STEP 2: Identify Performance Obligations
Performance obligations are usually clearly identified within Compass’ contracts.
Separate performance obligations may exist within a single contract, for

example a single contract may include obligations to provide food service in a
staff restaurant, run a separate café and provide vending services. These are
separate performance obligations and must be accounted for as such.
Example: Identify Separate Performance Obligations
Multi-Service Contract
The Group enters into a contract with a hospital to provide food and support services. The services
to be provided are as follows:
- Operate the hospital cafeteria to provide food to hospital employees
- Operate a coffee shop available to visitors and patients
- Prepare and deliver meals to patients’ rooms
- Provide and stock vending machines throughout the hospital
- Clean patient rooms and hospital common areas
Accounting treatment
Each of the above services would be considered separate performance obligations because they
are distinct (meaning: The Group could offer any of these services to the client on their own
independent of each other). Revenue shall be allocated to each of these performance obligations
on a relative stand-alone selling price basis, which in most cases will be the same as the
transaction price specified in the contract.
For the avoidance of doubt, performance obligations do not include activities

that must be undertaken to fulfil a contract unless those activities transfer a
good or service to a customer. For example, a services provider may need to
perform various administrative tasks to set up or mobilise a contract. The
performance of those tasks does not transfer a service to the customer as the
tasks are performed. Therefore, those setup activities are not a performance
obligation, therefore it is no appropriate to allocate revenue to these.
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1.5.5 STEP 3: Determine the transaction price
The transaction price is the amount of consideration to which the Group

expects to be entitled in exchange for transferring promised goods or services
to a client (or consumer), excluding amounts collected on behalf of third
parties (for example, some sales taxes). The consideration promised may
include fixed amounts, variable amounts, or both.
When determining the transaction price, the effects of all of the following have
to be considered:
(a) variable consideration;
(b) coupons, discounts, buy 1 get 1 free, loyalty programs
(c) consideration payable to a client – fixed and variable payments to

clients
(d) cost of participation in a client’s supply chain finance scheme
(e) reimbursement of mobilisation costs
(a) Variable Consideration

Potential increases in consideration receivable from a client or consumer under
a contract should not be recognised until its receipt is highly probable not to
reverse i.e. over 75% likely. Potential decreases in the consideration
receivable should be recognised when it the revenue no longer highly probable.
When it is considered more likely than not (>50%) that the revenue will be
decreased and that the full amount will not be recovered, the revenue should
be adjusted.
In summary, variable consideration should only be recognised when Compass

is comfortable that there is only an insignificant change of a material reversal
in the consideration. The estimate of variable consideration shall be based off
either the expected value or the most likely amount.
The expected value is the sum of probability-weighted amounts. This is most

appropriate when there are a range of possible outcomes.
The most likely amount is the single most likely amount of possible
consideration amounts. This is most appropriate when there are two or more
specific possible outcomes (i.e. not a range).
Example: Variable Consideration
KPI bonus - Expected Value

Within a B&I foodservice contract, the Group has a management fee with a KPI bonus contingent
on both financial and non-financial targets. The possible KPI bonus receivable ranges between
£50,000(min) and £150,000(max). Management estimates based on historical trends and future
forecasts that the probability of reaching the KPI targets are as follows: £50,000 – 60%,
£100,000 – 30%, £150,000 – 10%.
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The KPI bonus can be recognised when it is highly probable not to reverse. In this scenario, there
is a range of variable outcomes so the expected value is the best approach to estimating variable
consideration. Using the estimates of management, the calculation for the KPI bonus estimated to
be receivable is £75,000 (50,000*60% + 100,000*30% + 150,000*10%).
KPI bonus - Most Likely Amount

The Group has a management fee contract with a KPI bonus of £100,000 if annual revenues reach
£1,000,000. If revenues do not reach £1,000,000 Group is not entitled to receive any of the KPI
bonus. Revenues in the prior year were £950,000 and historical trends lead management to expect
revenue increases of at least 10% and to be confident (>75%) of hitting the £1,000,000 revenue
target.
The KPI bonus can be recognised when it is highly probable not to reverse. In this scenario the
Group will either receive a KPI bonus of £0 or £100,000 and therefore the most likely amount is
the best approach to estimating variable consideration. Based on historical trends, management
expects to hit the revenue target of £1,000,000 and estimates the KPI receivable to be £100,000.
It would be appropriate to accrue for the £100,000 throughout the year monthly as revenue is
earned.
Where there is a highly probable risk that there will be a material reversal in
the amount of cumulative revenue recognized, it will be necessary to account
for an adjustment to the transaction price specified in the contractual
arrangement will be necessary to arrive at the amount of revenue to be
recognised.
Subsequent adjustments to a debtor balance that result from changes in the

time value of money and credit risk (for example a bad debt provision) should
not be included within revenue, but should be treated as an expense.
(b) Coupons, Discounts, Buy _ Get 1 Free, and Loyalty Programs
As noted above, the transaction price is the amount of consideration to which

an entity expects to be entitled to receive from the client or consumer. When a
coupon or other type of discount is given to the customer the amount of the
discount should be reflected as a reduction in the transaction price (revenue).
Promises to provide discounts to a customer in the future may represent an

additional performance obligation which would create a liability to be held on
the balance sheet until the discounted good/service is provided.
If the promise to provide discounted or free goods/services is given as a part

of a contract or sales transaction, then revenue from that contract or sales
transaction should be allocated to those future goods/services based on the
relative stand-alone selling price basis. An example of this would be if a
coupon is provided to a customer for a future sales transaction if they spend a
particular amount of money on goods/service.
If the customer is merely given a coupon, regardless of whether they purchase

a good/service, then no current liability exists. The discount would be
recognized as a reduction of revenue when used.
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Loyalty programs where the customer earns points as they purchase
goods/services which can be redeemed in the future for discounted
goods/services would also give rise to a separate performance obligation
requiring a deferral of revenue.
Example: Coupons, Discount, Buy 4 Get 1, and Loyalty Programs
1. Coupons
The Group has opened a coffee shop on a client’s site. To promote the shop the Group passes out
coupons to all the client’s employees for a £1 discount off a coffee purchase. The coupons can be
used at any time during the first month of opening.
The coupon is not tied to any sales transaction and therefore would not be considered a
performance obligation. No transaction should be recorded upon issuing the coupon. Once the
coupon is redeemed it should be reflected as a reduction of revenue. For example, if a coffee is
normally sold for £5 but the consumer presents a £1 coupon the revenue from the sale would only
be £4.
2. Discounts
The Group has opened a coffee shop on a client’s site. To drive sales the Group passes out
coupons to any consumer who spends more than £15 for £5 off their next meal. The discount is for
a one-time use and a balance cannot be carried forward. Consumer A spends £15 on lunch and
earns the £5 discount. The consumer then uses the £5 discount on lunch the following day.
The discount is tied to a specific sales transaction and therefore constitutes a performance
obligation. The probability of the voucher being redeemed must be considered; in this scenario, it
is expected that 100% of the voucher will be redeemed therefore the transaction price (£15)
needs to be allocated between the voucher and the lunches provided to the consumer using the
full relative standalone selling prices. Using the relative stand-alone selling price lunch #1 would
be valued at £11.25 calculated by stand-alone selling price/total selling price*transaction price
(£15/£20)*£15 and lunch #2 valued at £3.75 (£5/20)*£15. Entries would be as follows:
Dr Cash £15.00
Cr Revenue £11.25
Cr Deferred Revenue Liability £3.75
To record transaction of Lunch #1
Dr Cash £5.00
Dr Deferred Revenue Liability £3.75
Cr Revenue £8.75
To record the transaction of Lunch #2 assuming a selling price of £10
3. Buy 4 Get 1 Free

The Group would like to incentivise consumers to purchase more coffee by offering a free coffee
every time they buy 4 coffees. This is tracked by a card the customer swipes each time they
purchase a coffee. The standard coffee costs £1.25. The free coffee offers are expected to be
redeemed in full.
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The free coffee is tied to a series of sales transactions and therefore is a performance obligation.
The transaction price of £5 (4 coffees x £1.25) needs to be allocated between the 5 coffees
provided to the consumer. The transaction price of each coffee would be £1 (£5/5 coffees). Entries
would be as follows:
Dr Cash £1.25
Cr Revenue £1.00
Cr Deferred Revenue Liability £0.25
To record the individual sales of the first four coffees
Dr Deferred Revenue Liability £1.00

Cr Revenue £1.00
To record the sale of the fifth coffee
4. Customer Loyalty
The Group would like to incentivise consumers to purchase more in the coffee shop. A loyalty
program is offered where consumers earn points by making purchases which can be redeemed for
future purchases. Every £10 a customer spends, they earn 1 point. Once a customer earns 10
points they can redeem their points for £10 to be spent on a one-time purchase. The Group
expects 97% of points earned to be redeemed based on historical experience. During Year 1,
consumers purchase £100,000 worth of goods/services and therefore earn 10,000 points.
The loyalty points are issued as a part of a sales transaction and therefore would be considered a
separate performance obligation. The transaction price tied to the loyalty points should be deferred.
Similarly, to the Discounts example 2 above, it would be appropriate to use the relative selling
price basis to determine the value of the points. On this basis, the value of the points issued and
expected to be redeemed 9,700 (10,000 * 97%) would be £8,842 ((9,700/109,700)*£100,000).
At each reporting period, the value of the outstanding points should be calculated to determine the
appropriate deferred liability.
(c)Consideration Payable to a Client – Fixed and Variable payments to

clients
Consideration payable to a client includes cash amounts that Compass pays, or
expects to pay, to the client. These payments should be treated as a discount
and therefore a reduction of the transaction price (revenue) unless the
payment to the client is:
• In exchange for a distinct good/service, AND
• At fair value / arm’s length price, AND
• Tied to revenues, expenses, profit, etc. from a consumer unit (versus a

client unit) OR
• Is a reimbursement of a cost incurred by the client and recharged on a

one for one basis to Compass
The Group makes a number of fixed and variable payments to clients including
the following: client commissions, vending commissions, concession rentals,
gain share percentages, fixed paybacks, bonus/penalty based on KPIs,
reimbursement of utility or labour costs. The following flow-chart should be
used to determine correct accounting treatment.
The analysis contained in the flow chart includes references to client and
consumer revenues.
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The Group generates revenues under its contracts from its Clients and from
Consumers. It is important to distinguish between client and consumer
revenue in order to establish how much revenue should be recognised, in
contracts where Compass makes fixed or variable payments back to the client.
The distinction is also relevant in the assessment of client investments (see
section 5.6).
The term Client Revenue is used to describe consideration received from

clients. Client Revenue Business Units (“Client Units”) are used to define
business units within contracts where Compass invoices the client for all or
part of the service provided at a business unit. In some cases, it is clear cut:
for example, the client may be fully funding the provision of food service for its
employees in a fixed fee or cost plus contract i.e. free meals are provided to
the employees, and the client pays Compass for all of the services provided.
The term Consumer Revenue is used to describe consideration received from

consumers and or third parties. Consumer Revenue Business Units
(“Consumer Units”) are business units within contracts defined when the fair
value of its services, typically foodservices, are fully paid by the consumer or
third party i.e. from someone other than the client. An example of a fully
consumer revenue business unit would be where Compass is contracted by the
owner of a sports stadium to provide foodservice to visitors at the site. In this
example, the business unit is a part of a typical P&L contract, whereby
Compass sets the selling prices to the consumers, manages the costs on the
contract and it is the consumers who are paying for the total fair value of the
foodservice at the venue. The client is not underwriting the profitability on the
business unit via a subsidy and all revenue is generated from consumers.
There are also many contracts which have both client and consumer/third
party revenue. It is necessary to review each business unit within a contract
and determine whether they are a Client Unit or a Consumer Unit. For instance:
• A contract may have fully client subsidised restaurant foodservice

business unit in addition to a coffee shop business unit which is non-
subsidised and where sales are paid for directly by the consumer. The
revenue stream from the coffee shop represents consumer revenue and
the restaurant represents client revenue.
• Many business units are partly subsidised by the client, whereby the
cost of the meal to the consumers is lower due to the client subsidy.
This is common in cost plus and management fee contracts: whilst it is
the consumer who is paying for the meal price at the till, the meal price
is partly subsidised by the cost + margin or subsidy that is invoiced to
the client. The consumer is not paying ‘fair value’ for the meal, the
client is providing the margin and therefore the contract or relevant
business unit in the contract represents client revenue.
In the vast majority of cases, where a business unit has an element of

client subsidy i.e. is part or fully subsidised, it will be deemed to
represent client revenue. Group Finance, Chertsey, should be consulted if
there is doubt over the correct accounting treatment to be followed.
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KEY JUDGEMENTS
Is the payment to reimburse the Client for a third-

party expense or pass-through cost (e.g. a utility bill)
1 NO YES Expense
Does the payment meet the definition of a loan, lease

prepayment, investment in PPE, CFA or intangible per
Section 5.6? Refer to guidance in section 5.6
NO YES
Is the payment clearly in return for a distinct good or

2 service from the Client (e.g. concession rental being a Discount (Revenue Deduction)
right to occupy and operate from a space)?
YES NO
Is Compass contractually entitled to generate

Consumer revenues at the Client site? Discount (Revenue Deduction)
3
YES NO
Payments must be apportioned

between those determined with
Is the payment determined with reference only to reference to Client and
Consumer revenues? Consumer revenues.
YES NO The proportion attributable to
Client revenues must be treated
as a deduction from revenue.
The proportion attributable to

Expense
Consumer revenues should be
treated as an expense.
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Notes re Key Judgements
1. Where the payment is to reimburse the client for a cost at an arm’s length
price, such as use of water or electricity at the client site, it represents a
cost that should be recorded as an expense in the income statement.
2. Where the payment is made for the right to occupy and operate from a
space at a client’s site, an assessment should be made to identify if the
arrangement contains a lease per Section 21.5.1. A key point in this
assessment is to what extent Compass directs the use of the assets
concerned, rather than the client. Compass could be deemed to direct the
use of the facilities, for example where the Group has the ability to operate
or control the facilities and benefits more than an insignificant amount from
the output. Factors such as who has control over what type of output i.e.
foodservice is provided and how much is produced should be considered.
Group Finance should be consulted where guidance is required to make this
assessment.
3. In consumer revenue contracts, ongoing payments to the client are not in

nature a ‘payment to a customer’ as the payment is not made due to
the client acting in the capacity of customer; it is made in the context
of the client acting as a third party to the arrangement between Compass
and the consumer. As such, the payment should not be treated as a
deduction from revenue. The payment is considered to be for obtaining the
right to generate profit from significant consumer revenues at the client
site.
4.
Example: Fixed and Variable Payments to Clients
1. Cost reimbursement – utility bill

The Group has a contract with a client in which it operates out of the client’s kitchen providing food
service to the client’s employees. The client charges the Group for both water and electricity based
on actual usage. There is no mark-up on the costs (i.e. the client is not charging a profit).
The payment to the client would be considered a cost to reimburse the client for a third-party
expense. This is a one-for-one cost recharge based on actual usage of the Group. This payment
should be expensed.
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2. Cost reimbursement – labour recharge

The Group has a contract with a client to provide foodservice at a hospital and records revenue on
a patient day rate basis. The contract represents client revenue as the hospital is responsible for
paying the patient day rate to Compass. In providing this service, Compass manages hospital
employees and is recharged at fair value the cost of this labour for which Compass raises a credit
note.
The payment to the client would be considered a cost to reimburse the client for an expense at
arm’s length price. This is a one-for-one cost based on actual usage of the Group. This payment
should be expensed.
3. Concession Rentals
The Group has a contract with a client in which it operates out of the client’s arena at a concession
stand. The client charges the Group for a monthly concession rental fee. This contract is a P&L
contract and is considered a consumer unit.
The payment for the concession rental is considered a distinct good or service, and the Group has
the right to generate consumer revenues and therefore the monthly fee should be accounted for as
an expense.
4. Vending Commissions
The Group has a contract with a client in which it offers vending services to the client’s employees.
The employees are solely responsible for the payment of the goods at the machines. The Group
collects revenues from the employees and passes back 5% of revenues to the client in the form of
vending commissions.
The vending commission should be expensed as the payment is for a good/service, namely the
right to occupy and operate from the space at which Compass has the right to generate consumer
revenues.
5. KPI Penalty
The Group has a management fee contract in which can earn a bonus or owe a penalty based on
financial and non-financial KPIs. At the end of the most recent client year it was determined that
the Group owed the client £100,000 due to not meeting the designated KPIs.
The KPI penalty should be treated as a deduction of revenue due to the fact that it is not in return
for a distinct good or service and furthermore the Group is only generating client revenues i.e. at a
minimum, the contract is partly subsidised by the client via the management fee.
6. Guaranteed Cost Savings

The Group has a management fee contract in which the client pays a fixed annual management
fee plus any net costs (revenue less expenses) incurred by the Group. The Group has signed an
amendment with the client instituting a guaranteed cost savings payment to the client.
The Guaranteed Costs Savings should be treated as a deduction of revenue due to the fact that
the payments are not in return for a distinct good or service. For further clarity, even if it was
determined that the payment to the client was in return for a distinct good or service it would still
be treated as a deduction of revenue due to the fact that the Group is only generating client
revenues.
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7. Client Commissions
The Group has successfully tendered for a new contract and has agreed to pay the client an
amount equivalent to 15% of turnover at the sites it operates on behalf of the client. This contract
is made up of one unit with client revenues only. This arrangement is entirely contingent with no
minimum guaranteed amount. The Group has agreed to pay five years’ worth of estimated sales
commissions to the client at the beginning of the contract.
The payment should be recognised as a prepayment. The Group should write down the initial
prepayment over the five year period it relates to as a deduction of revenue and book any
difference with the amount of actual sales commission incurred as a deduction in revenue as it
arises.
Assume 15% of estimated turnover is £6,000,000:
Dr Prepayment £6,000,000
Cr Cash £6,000,000
To record the cash payment of the estimated commissions payment
Monthly Entry:
Dr Revenue £100,000
Cr Prepayment £100,000
To record monthly write-down of the prepayment
Note: If actual commissions are higher than the prepayment additional entries will be necessary
to reduce revenue by the amount of actual commissions owed to the client.
(d)Cost of participating in client’s supply chain finance scheme

Compass may elect or be expected to join a client’s supply chain finance
scheme, whereby the ownership of the consideration payable to Compass is
transferred from the client to a bank. The effect is that Compass will be paid a
lower, discounted amount. It is important to assess the primary economic
objective of the participation in the scheme in order to correctly account for
the ‘discount’, as detailed in Section 22.6.9 Working Capital Programmes.
Where the primary economic objective is a commercial one rather than a
funding arrangement, the discount should be recorded as a reduction in
revenue. Guidance should be sought from Group Finance Chertsey in
assessing the correct accounting for such arrangements.
(e) Mobilisation cost reimbursement

Section 4.6.2 details the considerations for recognition of the reimbursement
of mobilisation costs by the client.
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1.5.6 STEP 4: Allocate the transaction price
The transaction price for individual performance obligations in Compass’

contracts are usually specified and are usually at fair value. Therefore, it is
usually not necessary to reallocate revenue.
There are, however, instances when the Group agrees to provide additional
services at no additional cost to the client as a part of the client contract. An
example would be where hospitality services are built into the cost of the other
services provided within the contract. In this example, hospitality credits (free
service) are provided to the client at the client’s request. Even though the
services are considered free from the client’s perspective, it represents a
separate performance obligation of the Group and therefore revenue should be
allocated.
Revenue should be allocated on a relative stand-alone selling price basis. It

may be necessary to estimate the stand-alone selling price of a good/service
provided. Suitable methods for estimating, by order of precedence, are:
1. the adjusted market assessment, OR if not possible
2. the expected cost plus margin
A combination of these methods may also need to be used. Group Finance,

Chertsey, should be consulted if estimates using any of these approaches is
believed to be necessary.
Example: Allocation of Revenue to Performance Obligations
Hospitality Credits
The Group enters into a management fee contract. The management fee is £15,000 a year for 5
years. As a sales incentive the Group contractually offers a £1,200 hospitality credit to be provided
over the 5 year contract at the client’s request. If the client does not use all of the credit by the
end of the contract the client will forfeit the remaining balance.
The Group is deemed to have two performance obligations, foodservice and hospitality services.
Revenue will need to be allocated to each performance obligation and recognized as satisfied.
£1,200 is deemed the fair value of the hospitality services provided to the client, which when
added to the £15,000 management fee, gives a total basis for allocation of £16,200. The
allocation of the transaction price to the two performance obligation is therefore:
15,000/16,200 x £15,000 consideration receivable = £13,888 for foodservice
1,200/16,200 x £15,000 consideration receivable = £1,112 for hospitality services
The following entries should be recorded to allocate revenue to the hospitality performance
obligation:
Dr Revenue £18
Cr Deferred Revenue £18
Monthly entry to defer the revenue allocated to the hospitality credits i.e. 1,112/60 (5 years x 12
months)
Dr Deferred Revenue £600

Cr Revenue £600
To recognize revenue in the period the hospitality service obligation is satisfied e.g. a large
amount of hospitality service has been provided at the end of year 1 of the contract
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Note: There may be instances where part or all of the hospitality credit is unused at the end of the
contract. Unless the credit carries over to a future contract, the remaining deferred revenue shall
be recognized as revenue in the final contract period as it is deemed earned. Assume in the
example above £50 remains unused in deferred revenue.
Dr Deferred Revenue £50

Cr Revenue £50
To recognize revenue for the unused portion of the hospitality credit
1.5.7 STEP 5: Recognise revenues as performance obligations are satisfied
The majority of Compass’ performance obligations to its clients (i.e. Client

Revenues) in routine catering and support services contracts will be satisfied
over time on the basis that they are routine, recurring services “in which the
receipt and simultaneous consumption by the customer of the benefits of the
entity’s performance can be readily identified”. The performance obligation is
the provision of catering services to the client and/or the client’s customers
and reflects a ‘stand ready obligation’ delivered over recurring time periods,
typically daily. There is variability in revenue based on demand, usually the
variable consideration is allocated to distinct time periods based on the actual
number of meals served. In these circumstances, revenue will in most cases
be recognised in accordance with the amount which Compass is entitled to
invoice. This may be with reference to an output measure, such as the
number of meals provided at the agreed price in a P&L or fixed price contract,
or with reference to an input measure, such as the costs incurred by Compass
plus a margin in a cost plus contract.
Consumer Revenues arise from the sale of goods to consumers and Compass’
performance obligations will be satisfied at a point in time (i.e. when the
product is purchased by the consumer). As noted above, there may be some
potential complexity if Compass grants to consumers the right to acquire
additional goods for free or at a significant discount (e.g. loyalty programmes).
In these circumstances, it may be necessary to defer some of the revenue
received on the initial sale.
There may be contracts with unusual features. For example, Compass may
undertake to construct an asset for a client or maintain a building for a fixed
price. In these circumstances it will be necessary to give careful consideration
to the manner in which Compass fulfils its performance obligations and how
revenue should be recognised.
Example: Performance Obligation Satisfied
Food Service
The Group is contracted with a sports and leisure client to provide food service to consumers at
sporting events in a coliseum. The contract is considered a profit and loss contract where the
Group bears all costs to provide the service to the consumers and retains the revenue from the
goods sold to consumers.
This would be an example of a contract where the performance obligation (providing food to the
consumers) is satisfied at a point in time. As the Group provides the food to the consumers it
earns the revenue from the sale.
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Cleaning Services
The Group is contracted with a hospital to provide cleaning services on a daily basis throughout
the year. This would include the common areas of the hospital as well as the patient rooms. The
client will pay £120,000 a year for these services.
This would be an example of a contract where the performance obligation (providing cleaning
services to the client) is satisfied over time consistently. The Group should recognize revenue of
£10,000 a month for the services provided.
1.5.8 Payments in advance
Revenue is earned through the satisfaction of performance obligations to a

client. It cannot be recognised at the point the payment is received from the
consumer if that is in advance of the point where it is earned and, therefore,
revenue recognition does not follow the receipt of cash from a client or
consumer. A liability in the amount of advanced consideration received is
recognized representing the entity’s obligation to transfer the goods or services
in the future. Some situations within the Group where the issue of payments in
advance occur are:
 Contracts with stage payments such as design and build contracts

(section 1.6.6);
 Sale of luncheon vouchers (section 1.6.7); and
 Sale of electronic payment cards (section 1.6.7)
1.5.9 Acting as principal or agent

There are sometimes situations where it is not clear if the Group should
recognise the gross revenue and costs of a transaction (acting as principal) or
whether a commission or margin on the net of the selling price less costs
should be recognised (acting as agent). An example of this situation is when
the Group subcontracts services to be provided to the client or at the client site.
The following issues should be considered when deciding whether the Group is
the principal or agent in a transaction:
 What are the specified goods or services to be provided to the

client/consumer; and
 Does the Group control each specified good or service before that good
or service is transferred to the client/consumer?
The Group is the principal if it controls the specified good or service before that
good or service is transferred to a client. Note, Compass does not necessarily
control a specified good if it obtains legal title only momentarily before legal
title is transferred to the client or consumer.
Indicators that the Group controls the specified good or service before it is
transferred to the client (and therefore is the principal), include, but are not
limited to, the following:
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• The Group is primarily responsible for fulfilling the promise to
provide the specified good or service.
• The Group has inventory risk of the specified good or service.
• The Group has discretion in establishing pricing.
Example 1: Group acts as Principal
Subcontractor Arrangement: Tea Franchise

The Group has contracted with a tea shop to operate a shop on a client premises. The Group is
responsible for staffing the tea shop and bears risk of inventory loss. The Group has agreed to pay
a license fee of £15,000 upon signing the contract and a royalty fee of 5% of gross sales.
The Group is deemed the principal in this arrangement as, based on the indicators, it does control
the goods prior to being transferred to the consumer. Based on this analysis, the Group should
recognize revenues obtained and cost incurred gross in their respective sections of the Income
Statement. The license fee should be set-up as a prepayment and amortized as an expense over
the term of the franchise agreement.
Example 2: Group acts as Agent
Subcontractor Arrangement: Sushi Vendor

The Group has arranged for a sushi vendor to provide sushi products to consumers at a university
client’s campus. The sushi vendor will provide the personnel to staff the sushi bar and will supply
all of its own ingredients. If any of the sushi goes unsold or spoils, the sushi vendor will bear the
cost. The sushi vendor also has the right to set the price to the consumer. The Group will retain
25% of all gross sales from the sushi bar.
The Group is deemed the agent in this arrangement as, based on the indicators, it does not control
the goods prior to being transferred to the consumer. Based on this analysis, the Group should net
any revenues obtained with costs incurred, recognizing only the 25% income retained.
1.6 Application guidance

This section considers the application of the above guidance to the following
types of contracts:
1.6.1 management fee (or cost plus) contracts including managed volume
contracts
1.6.2 fixed price contracts
1.6.3 profit and loss contracts
1.6.4 concession contracts
1.6.5 vending revenue
1.6.6 design and build contracts
1.6.7 luncheon vouchers
53
1.6.8 agent or principal?
─ purchasing for third parties
─ support services contracts
1.6.1 Management fee contracts (cost plus)

The Group provides the agreed services, and invoices the client an amount
based on costs incurred, which the Group is contractually allowed to recharge,
plus a management fee. The management fee may be a fixed amount or may
be variable, for example based on volume.
There is sometimes an issue of agency versus principal (substance over form)

to be determined before the correct accounting for these contracts can be
decided. It is important to identify what is the performance obligation that
Compass has to the client under the contract and then consider whether the
Group acts as principal or agent. More commonly, the Group acts as
principal and takes on the risks of employing staff, purchasing food and
incurring overheads involved in running the contract. In this case the Group
recognises revenue equivalent to the total costs incurred plus the management
fee.
In practical terms, usually a client invoice is prepared monthly from which the
revenue derived from the in unit consumer and received through the tills is
deducted. In contracts where the client partly subsidises the foodservice, as
opposed to a full subsidy, the client invoice therefore covers the client subsidy
and the Group’s management fee and together with the in unit consumer
revenue forms the Group’s total revenue. Where the amount received through
the tills exceeds the amount that Compass is entitled to bill onto the client,
being the billable costs plus management fee, the excess is owed back to the
client and should not be recognised as revenue.
Receipts from consumers at the unit are therefore recognised as revenue as

they are received as they reflect the provision of foodservice by the Group. In
some circumstances the contract will state that the receipts are to be retained
by the client, but Compass still collects the cash at the till from consumers and
in these instances the cash received should be recorded as a payment in
advance. The recognition of revenue in these cases will be the same, namely
as the foodservice is provided, however the cash will be held as a payment in
advance until the client invoice is raised and agreed as settled, as shown in the
examples below:
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Example: Group acts as principal
Management fee contracts (1)

The Group has a management fee contract whereby it can invoice the client a management fee
based upon a 10% mark up on all normal unit costs. All normal unit costs such as food,
consumables, overheads and staff costs are also recharged to the client. The contract also
includes the provision of a cafeteria. The Group retains consumer receipts, and those received
from the restaurant foodservice are deducted them from the client invoice. The client is invoices
at the end of every month. The overall effect is that the Group recognises revenue from the
restaurant foodservice equivalent to all normal in unit costs plus a 10% mark up.
“Normal” costs in this context are the expected running costs of the contract and have been
agreed in advance with the client.
The Group has two separate performance obligations; provision of restaurant foodservice and a
cafeteria, andshould recognise revenue on the following basis:
 Sales made in the cafeteria to consumers are recognised as revenue as they are made.
The revenue is recorded net of sales tax. This represents revenue recognised at a point in
time.
 The Group also recognises all food, consumable and other variable costs as revenue in
line with when these variable costs are incurred (usually when supplied to the
client/consumer). This is invoiced to the client at the end of every month plus a 10%
mark up. This represents revenue recognised over time based on an input measure.
 Fixed overhead and staff costs plus 10% mark up are recognised as revenue on a
straight-line basis over the financial year. This is invoiced to the client at the end of every
month. This represents revenue recognised over time based on an input measure.
Any abnormal costs incurred by the Group such as industrial action leading to one-off staff costs or
wastage from over ordering, are not rechargeable under the terms of the contract, and therefore
must not be recorded as revenue.
Management fee contracts (2)

As above, although the client is entitled to retain cash received from the consumers that is banked
by the Group. The client is invoiced a higher amount and the consumer receipts are netted off
against this invoice as partial settlement. The cash receipts are at all times held by the Group.
In this situation the recognition of revenue should not change. The cash from consumers should
be treated as an advance payment on behalf of the client, and at the month end when the client is
invoiced the advance payment credit in the accounts should be offset against the invoice value in
trade debtors.
The accounting entries for the cash received from consumers are:
Dr Cash £5
Cr Payments in advance £5
Dr Accrued income £5
Cr Revenue £5
At the time the purchase is made by a consumer in the canteen.
Dr Trade Debtors £5
Cr Accrued income £5
Invoice issued to client at month end.
Dr Payments in advance £5
Cr Trade debtors £5
The cash received from the consumer is offset against the invoice to the client.*
*The above entries ignore the recharge of overheads and staff costs to the client, and the 10%
management fee that the Group applies to all of these costs.
55
Revenue derived from recharging costs under this type of contract should not
be netted off against those costs in the accounts. This would not give an
accurate picture of the revenue the Group earns or the costs it incurs.
Managed volume contracts
In managed volume contracts the Group operates a similar arrangement to a

management fee contract but does not take on the risks associated with
employing the staff, purchasing the food or incurring overheads. In these
situations, the Group is acting as agent and therefore it is the management
fee only element of the contract that is recognised as revenue by the Group.
Example: Group acting as agent
Managed volume ~ Group as agent (1)

The Group has a contract where it provides the management of the catering facilities at a client
site. All the food and consumables are purchased and paid for directly by the client. The Group
receives a fee for providing the management of the client’s foodservice activities.
The Group’s revenue in this case is the fee it receives. Its performance obligation to the client is
the management of the facilities and it is acting as agent for the client, who contracts directly with
the suppliers. It would be inappropriate to gross up revenue and cost of sales to reflect the costs
of the food and consumables, as they are neither invoiced by, nor a cost to, the Group. Managed
volume (as opposed to a self-operated contract) can be monitored for operating purposes, but
should not be reflected in financial reporting.
Managed volume ~ Group as agent & principal (2)

The Group does not employ the labour used within the contract and this cost is retained by the
client. The risks associated with employment are attributable to the client. All food, consumable
and overhead costs are incurred by the Group and are recharged to the client along with the
management fee.
This is a hybrid principal AND agency situation for the Group and there are two separate
performance obligations, namely the provision and management of food, consumables and
overhead costs and the provision and management of labour. In terms of the provision and
management of food, consumables and labour, Compass is acting as principal and the revenue
recognised should be equivalent to the cost of normal food, consumable and overheads plus the
management fee. The cost of labour does not form part of the client invoice, as Compass is acting
as agent in relation to this performance obligation.
Managed volume ~ Group as principal (3)

The client employs the labour used within the contract and then invoices the Group. The risks
associated with employment are attributable to the Group. All food, consumable and overhead
costs are incurred by the Group and are recharged to the client along with the management fee.
The labour cost is also incurred by the Group through the client invoice, and a charge for labour is
included in the Group’s invoice to the client. This may not equal the cost for labour invoiced from
the client in situations where an abnormal labour cost was incurred.
The revenue recognised by the Group should be the cost of normal food, consumable, labour and
overheads plus the management fee.
This type of situation is uncommon in the Group and occurs in the UK in some PFI healthcare
contracts.
56
1.6.2 Fixed price contracts
In fixed price ‘lump sum’ contracts, the client pays a fixed amount for an
agreed range of services provided over a fixed period of time. Compass ir
providing a stand-ready service obligation and revenue recognition should
follow the performance of the services by the Group, typically allocated on a
straight line basis over the relative time periods. These are more common in
Support Services and are mostly client revenue contracts.
More commonly, fixed price contracts may have a fixed price per unit, often
including tiered revenue clauses depending on the volume of demand from the
client. Revenue should be accrued for in line with these tiered volume levels
based on the forecast volume for the relevant period. Any excess of revenue
over invoiced amounts would be carried on the balance sheet as accrued
income, but would have to be revised as forecast levels change. Revenue is
recognised over time based on an output measure, namely the number of
meals and the price per meal may vary dependent on volume.
1.6.3 Profit and loss contracts

The Group has control of the offer and pricing in these types of contracts.
Typically, revenue is derived from the consumers and should be recognised as
sales are made. Contracts are often consumer revenue contracts. In this
scenario, Compass is satisfying its performance obligations at a point in time,
i.e. as the sale is made to the consumer.
1.6.4 Concession contracts

Similar to 1.6.3 above, although the Group has to pay a revenue-based fee to
the client. Again, revenue should be recognised as sales to consumers are
made. The revenue-based fee should be recognised as an expense assuming
the unit is a consumer unit.
1.6.5 Vending revenue

Vending machine revenue is recognised as sales are made from the machines.
Often the client is paid a revenue-based fee. As with the concession contracts,
this revenue-based fee should be recognized as an expense assuming the unit
is a consumer unit.
Often the logistical problems of visiting every vending machine and recording
sales at the period end make it difficult to accurately report all revenue in the
correct period. Group policy is that reported revenue should be the most
accurate possible estimate that management can make at the reporting date.
1.6.6 Design and build contracts

No design and build contract of any size may be entered into without
prior Group approval. In such contracts, it may be necessary to “unbundle”
separate performance obligations and recognise revenue as these performance
obligations are satisfied using an output or input method.
Firstly, it is important to consider are there distinct performance obligations to

the client, for example is the design phase distinct to the build and operate
phase. For example, where Compass undertakes the design and provides the
specialised plans to the client, it may be appropriate to recognise revenue for
this service at the point in time that the plans are delivered. An element of the
overall transaction price may therefore need to be allocated to the distinct
phases.
57
Secondly, it is important to establish what method is being used to recognise
the revenue in relation to each distinct performance obligation. This may be
using either:
• Output methods recognise revenue based on the value to the consumer

of goods/services transferred relative to the remaining goods/services
promised under the contract.
• Input methods recognise revenue on the basis of the inputs (labour

hours expended, resources consumed, or time elapsed) relative to the
total expected inputs to satisfy the performance obligation.
Instances that involve transferring a good or service over time in which

revenue needs to be recognised based on progress are rare for the Group. If a
contract is entered into in which it is believed that revenue should be
recognised based on input/output methods Group Finance, Chertsey should
be consulted.
Payments received in advance should be accounted for as deferred income.

Revenue recognition should be separated from the receipt of cash.
If at any stage the forecast outcome of a contract is that it will make a loss,
this loss must be accrued for immediately.
58
Example: Design and build contracts

The Group is contracted to build a site to service an oil refinery, based on plans already
established by the client. The site is to contain accommodation and canteen facilities.
The Group has agreed a price of £2,000,000 for the site, comprising the accommodation block and
the canteen site (each valued at £1,000,000 in the contract). The accommodation block will be
built first and will take four months, followed by the canteen site taking a further four months.
The client is to pay the Group in three instalments of £250,000 up front, £500,000 after
completion of the first performance obligation, and £1,250,000 at completion of the contract.
The contract can be split into two performance obligations, because each build out is a separate
piece of work with a value in its own right. The commercial substance of the contract is that it
consists of two distinct parts with their own value and each capable of being completed by
separate parties. Therefore, the revenue from the first performance obligation (completing the
accommodation block) can be recognised separately to the second obligation. The revenue
recognition is not impacted by the timing of the cash receipts. The recognition of revenue is using
an output measure over time, as the build has a value to the client, before it is 100% complete.
An assessment should be made of the stage of completion of each performance obligation at the
relevant reporting date. For example, if the build of the accommodation block is 90% complete at
the reporting date, the revenue should be recognised accordingly
The accounting entries for the contract revenue are:
Dr Cash £250,000
Cr Deferred income £250,000
For the up front receipt.
Dr Accrued income £150,000

Cr Revenue £900,000
Dr Cash £500,000
Dr Deferred income £250,000
For the recognition of 90% of the transaction price of the first performance obligation, and receipt
of the second performance obligation payment.
Dr Accrued income £100,000
Cr Revenue £100,000
For the recognition of the remaining 10% of the transaction price of the first performance
obligation.
Dr Cash £1,250,000
Cr Revenue £1,000,000
Cr Accrued income £250,000
For the completion of the second performance obligation, and the final payment from the client.
Where it is not possible to identify separate performance obligations within the

overall contract, and it is believed that
 the activity falls into two or more financial years; and
 the revenue and profit from the contract (or group of contracts if the
business is involved in more than one) has a material effect on the
Group’s accounts,
Group Finance, Chertsey should be consulted as to the possibility of

accounting for these contracts as long-term contracts.
59
1.6.7 Luncheon vouchers and electronic payment cards
Where the Group sells luncheon vouchers or allows customers to pay for
electronic credit on a card in advance, the revenue recognition treatment does
not follow the receipt of the cash.
The revenue that can be recognised at the point of the receipt of cash is the
cash received less the fair value of the voucher or credit purchased. This fair
value is the value the voucher or electronic credit can be redeemed for in a
future purchase. An assessment should be made up front of the amount of
revenue that can be recognised on the sale of the vouchers, taking into
consideration the liability owed back to any third party/retailer.
In some common situations where the Group issues vouchers, the accounting
treatment would be:
Examples: Vouchers
1 Vouchers/electronic credits are sold in advance and can be redeemed in a Compass
operated restaurant at face value; revenue should not be recognised until the consumer
has purchased goods from the restaurant, and used their vouchers/credits as
consideration.
Dr Cash £10
Cr Deferred income £10
For the initial cash receipt
Dr Deferred income £10

Cr Revenue £10
For the purchase by the customer
2 Vouchers are sold that are redeemable at Group owned units or third party sites that
accept these vouchers; there is a commission earned by the Group, as the vouchers are
not redeemed at full face value by the retailer. The Group should recognise this
commission at the point of sale, but also recognise a liability due on redemption of the
voucher.
Dr Cash £10
Cr Revenue £1
Cr Accruals £9
This is also a situation where the Group is acting as an agent (see section 1.5.9 above)
and therefore should not recognise the gross amount of the sale as revenue, or the cost
to the retailer as a cost of sale. When the retailer is reimbursed the accounting entry
is:
Dr Accruals £9
Cr Cash £9
If the voucher is redeemed in one of the Group’s operations the accounting entry is:
Dr Accruals £9
Cr Revenue £9
The amount of outstanding vouchers and credits at the year end should be reviewed.
An estimate based upon historical trends of the amount of vouchers or credits that will
not be redeemed should be made and this can be taken to revenue, net of any
remaining reimbursement or liabiility to the third party. For example, in the two
situations above, historically 10% of vouchers are never redeemed. Therefore, at the
year end if the vouchers were still outstanding the following entry would be made:
Dr Deferred income/accruals £1
Cr Revenue £1
On expiry of the vouchers, the remaining unused credit should also be taken to
revenue. The exception for this is if the Group has a practice of honouring expired
vouchers, in which case the deferred income should be retained as a creditor.
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1.6.8 Agent or principal?
The Group has various instances where questions of principal versus agent
arise and Section 1.5.9 details the key points to consider in order to assess the
correct accounting treatment. Arrangements requiring assessment include
managed volume contracts (see section 1.6.1 above), prepaid vouchers
redeemable at third party sites (see section 1.6.7 above) purchasing for third
parties, facilities management, and retail sales (such as lottery tickets and
mobile phone cards).
Purchasing for third parties
In some cases, the Group uses its purchasing operations to provide services to
third parties. Depending on the nature of the contract with the third party and
with the Group’s supplier, the Group can be acting as principal or agent.
Examples: Purchasing for third parties

1 The Group utilises its expertise to negotiate purchasing arrangements for a third party
foodservice company. The Group purchases the items in its own name from the
supplier, thus benefiting from its existing volume purchase discount arrangements. It
then invoices these costs to its third party client, at the discounted price plus a margin
(in effect, a commission).
The Group is acting as principal in this transaction. It contracts directly with the
supplier, pays for the goods and re-invoices them to its client. In doing so, it controls
the goods prior to being transferred to the client. This can be further proven by the fact
that if the goods were to spoil while in the Groups’ possession, the client would not be
responsible for payment of those goods to the Group. The Group would need to
purchase additional goods to provide to the client.
The Group should recognise the full amount billed to its client as revenue, with the
payments to the supplier being treated as a cost of sale.
2 The Group utilises its expertise to negotiate purchasing arrangements for a third party
foodservice company. The Group’s involvement is limited to arranging the terms of the
purchase. The purchase contract is directly between the third party and the supplier.
The Group invoices the third party a commission for the negotiation services performed.
The Group is acting as agent for the third party in this transaction. It does not contract
directly with the supplier, nor is it involved in the payments for the goods purchased.
The Group should only recognise the commission it invoices to the client as revenue.
61
Support services contracts
Example: Support services contracts

The Group enters into a contract to manage the support services supplied to a client by third party
sub-contractors.
The Group will order the goods or service from the sub-contractor for the client and will manage
the delivery of those services to the client by determining the level of service provided and
supervising the delivery of that service. The sub-contractor contract remains with the client. The
sub-contractor will invoice the client but these invoices will be processed and paid by the Group.
The Group will raise sales invoices to pass such charges and costs onto the client along with any
direct costs and a management fee based on the savings achieved.
The following factors are relevant in assessing the accounting treatment:
• The Group will pay the sub-contractor invoices and then raise invoices to the client to
include pre-agreed amounts in respect of Group staff and sub-contractor charges plus an
additional amount for management fees which vary dependent on service levels. As the
Group manages and directs the levels and types of staffing from the sub-contractor but
can only invoice a pre-agreed amount, it must manage the risk of exposures to increased
costs (or be more efficient to still achieve the same service levels).
• The Group will suffer the credit risk on invoices to clients.
• The Group has the management relationship with the client and hence will be able
significantly to influence the sub-contractor and supplier relationships (even though legal
contracts may not initially transfer).
• Physically, cash will move between the client and the Group, not directly to the sub-
contractor.
• If the sub-contractor does not perform, the Group will receive complaints and will need to
manage the situation.
• The client will deem the Group to be the principal in the arrangement.
The Group is in control of the services provided by the sub-contractor as we manage the delivery
and set the price of the services charged to the client therefore is acting as the principal in the
transaction. Reported revenue should be based on the gross amount receivable.
Performance bonuses under support service contracts
In some cases, there may be performance bonuses due under support services
contracts for things such as the achievement of health and safety targets.
These bonuses should be recognised as earned, with consideration given to the
type of target and the time period it is relevant to.
Example: Performance bonuses under support service contracts

The Group enters into a support services contract at a hospital to provide cleaning, maintenance
and porterage services. Every quarter there is a performance bonus paid out if the Group achieves
specified health and safety objectives.
The performance bonus should only be recognised as revenue at the end of each quarter.
62

2. CAPITULO RECONOCIMIENTO INGRESOS POLITICA GRUPO (2)

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2. CAPITULO RECONOCIMIENTO INGRESOS POLITICA GRUPO (2)

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Compass Group PLC

Accounting Policies and Procedures Manual

March 2020 Version 6.0

Revenue (or turnover or sales) should be allocated to all the performance

1.1 Disclosed accounting policy

The Company recognises revenue when its performance obligations are

At contract inception, the contract is assessed to identify each promise to

The transaction price is the amount of consideration to which the Group

The Group makes a variety of ongoing payments to clients, such as

1.2.2 Consultation and authorisation process for exceptions

1.3 KFC references

• KFC 5 – client contracts are reviewed

• KFC 16 – balance sheet account reconciliations are performed monthly

1.4 IFRS references

Revenue is defined as ‘income arising from an entity’s ordinary operating

Note: Although an individual statutory entity’s principal activities may indicate

1.5.2 When should revenue be recognised?

Revenue should be recognised as performance obligations are satisfied based

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations

5. Recognise revenue when a performance obligation is satisfied

1.5.3 STEP 1: Identify the contract

Revenue should only be recognised if a contract exists. For this purpose, a

Refer to Chapter 5.6.4 (examples 7 & 8). regarding subsequent investments

1.5.4 STEP 2: Identify Performance Obligations

Performance obligations are usually clearly identified within Compass’ contracts.

Separate performance obligations may exist within a single contract, for

Example: Identify Separate Performance Obligations

- Operate the hospital cafeteria to provide food to hospital employees

- Operate a coffee shop available to visitors and patients

- Prepare and deliver meals to patients’ rooms

- Provide and stock vending machines throughout the hospital

- Clean patient rooms and hospital common areas

For the avoidance of doubt, performance obligations do not include activities

The transaction price is the amount of consideration to which the Group

(a) variable consideration;

(b) coupons, discounts, buy 1 get 1 free, loyalty programs

(c) consideration payable to a client – fixed and variable payments to

(d) cost of participation in a client’s supply chain finance scheme

(e) reimbursement of mobilisation costs

(a) Variable Consideration

In summary, variable consideration should only be recognised when Compass

The expected value is the sum of probability-weighted amounts. This is most

Example: Variable Consideration

KPI bonus - Expected Value

KPI bonus - Most Likely Amount

Subsequent adjustments to a debtor balance that result from changes in the

(b) Coupons, Discounts, Buy _ Get 1 Free, and Loyalty Programs

As noted above, the transaction price is the amount of consideration to which

Promises to provide discounts to a customer in the future may represent an

If the promise to provide discounted or free goods/services is given as a part

If the customer is merely given a coupon, regardless of whether they purchase

Example: Coupons, Discount, Buy 4 Get 1, and Loyalty Programs

3. Buy 4 Get 1 Free

Dr Deferred Revenue Liability £1.00

(c)Consideration Payable to a Client – Fixed and Variable payments to

• In exchange for a distinct good/service, AND

• At fair value / arm’s length price, AND

• Tied to revenues, expenses, profit, etc. from a consumer unit (versus a

• Is a reimbursement of a cost incurred by the client and recharged on a

The term Client Revenue is used to describe consideration received from

The term Consumer Revenue is used to describe consideration received from