Indian Accounting Standard 18

Slide 13.
ACTG 6580
Chapter 13 -
REVENUE RECOGNITION
(IAS18)
Alan Melville, International Financial Reporting, 3rd Edition, © Pearson Education Limited 2011
Slide 13.2
Executive summary
► General:
► Under both IFRS and US GAAP, revenue is not recognized until it is both realized
(realizable) and earned.
► The preponderance of the accounting guidance on revenue recognition for IFRS is
contained in IAS 18 and IAS 11. Under US GAAP, there is a large volume of
guidance on revenue recognition, including numerous industry standards. Although
IAS 18 and IAS 11 contain the IFRS general guidance for revenue recognition,
there is a lack of specific guidance in relation to industry-specific issues and
multiple-element arrangements.
► Revenue recognition at the time of sale: under IFRS, there is no specific requirement
that persuasive evidence of a sale must exist before revenue is recognized as there is
under US GAAP.
► Revenue recognition at the time of service: IFRS allows the use of the percentage-of-
completion model for service contracts. This model is prohibited for service contracts
under US GAAP.
Slide 13.3
Executive summary
► Departures from recognition at the time of sale (sales with right of
return): IFRS generally allows revenue recognition at the time of sale
as long as the seller can reliably estimate the amount of future
returns.
► US GAAP, in addition to the requirement to be able to reasonably
estimate returns, has more detailed guidance. This guidance
includes, among other conditions, that the buyer’s payment is not
contingent on the buyer reselling the product and that the buyer has
economic substance apart from the seller.
Slide 13.4
Executive summary
► Accounting for multiple elements:
► IFRS does not include specific guidance for determining when a contract should
be separated into multiple units of accounting. US GAAP does provide detailed
guidance. IFRS specifies that the allocation of revenue be based on relative fair
values, whereas US GAAP specifies that the allocation be done on relative
selling price.
► IFRS may allow contingent consideration to be included when allocating total
revenue to the components of a transaction. However, when such
circumstances are encountered, it should be viewed with a great deal of
skepticism, with a thorough review of the facts and circumstances in order to
reach an appropriate conclusion.
► Under US GAAP, contingent consideration is not recognized until the contingency
is resolved.
Slide 13.5
Progress on convergence
• The Boards are currently conducting a joint project to develop concepts for revenue
recognition and a standard based on those concepts.
• The Boards issued an Exposure Draft (ED), Revenue from Contracts with
Customers, in June 2010 that describes a model to determine the appropriate
amount, timing and uncertainty of revenue recognition consisting of the following
steps:
1) Identify the contracts(s) with the customer
2) Identify the separate performance obligations in the contract
3) Determine the transaction price
4) Allocate the transaction price to the separate performance obligations
5) Recognize revenue when each performance obligation is satisfied.
► 986 ED public comments were received by October 22, 2010. In June 2011, the Boards
decided to issue a new ED for public comment because they made significant changes
to the proposal during re-deliberations. The new ED is expected to be issued by the end
of September, 2011, with a 120 day comment period.
► The industries most likely to be impacted by the proposed guidance are software,
entertainment, telecommunications, real estate, retail (depending on right of return) and
construction.
Slide 13.6
Definition of Revenue (IAS18)

IAS18 defines revenue as "the gross inflow of
economic benefits during the period arising in the
course of the ordinary activities of an entity when those
inflows result in increases in equity, other than
increases relating to contributions from equity
participants". This definition makes it clear that:
• revenue arises from ordinary activities such as the
sale of goods or services;
• revenue excludes borrowings;
• revenue excludes amounts contributed by
shareholders.
Slide 13.7
Measurement of Revenue
IAS18 states that revenue should be measured "at the fair
value of the consideration received or receivable".
• If the consideration for a sale transaction takes the form
of cash, the amount of revenue is generally equal to the
amount of cash receivable, net of any trade discounts.
• If goods are sold or services rendered in return for other
goods or services, the amount of revenue is the fair
value of the goods or services received.
• If the consideration for a sale is not receivable until
some time after the date of the sale transaction, the fair
value of the consideration is determined by discounting
future receipts to their present value.
Slide 13.8
Revenue recognition general guidelines
US GAAP IFRS
Revenue is not recognized until it is both
realized (or realizable) and earned. Similar
Revenue should be recognized when the

risks and rights associated with the goods Similar
or services provided are transferred and the
earnings process is complete.
Revenues must be reliably measured to Similar

qualify for recognition.
Revenue is measured at the fair value of

the consideration received or receivable.
Similar
Slide 13.9
Revenue recognition general

guidelines
US GAAP IFRS
► There is a ► Although IAS 18 and IAS 11 contain general guidance for
large volume revenue recognition, there is a lack of specific guidance in
of guidance relation to industry-specific issues and multiple-element
on revenue arrangements.
recognition,
► As IFRS does not include as much guidance on specific
including
transactions or events as US GAAP, some companies may
numerous
choose to take advantage of the hierarchy set out in IAS 8,
industry
paragraph 11. This guidance allows companies to use other
standards.
GAAP (e.g., US GAAP) to the extent it would not contradict
guidance contained in IFRS. However, it is important to
understand that the IAS 8 hierarchy does not require
companies to refer to US GAAP.
► Based on the parameters for adopting IFRS, it is possible that
a transaction or event will be accounted for differently under
IFRS than when a company uses US GAAP.
Slide 13.10
Revenue recognition at time of sale
US GAAP IFRS
Four revenue recognition criteria:
Four revenue recognition 1. The entity has transferred to the buyer the
criteria: significant risks and rewards of ownership of
the goods.
1. Delivery has occurred.
2. The entity does not retain continuing
2. Persuasive evidence of an managerial involvement to the degree usually
arrangement exists. associated with ownership or effective control
3. The seller’s price to the over the goods sold.
buyer is fixed or 3. The amount of revenue and the costs
determinable. associated with the transaction can be
4. Collectibility is reasonably measured reliably.
assured. 4. It is probable that the economic benefits
associated with the transaction will flow to the
entity.
Slide 13.11
Revenue recognition at time of service
US GAAP IFRS
With respect to service contracts, the

specific-performance method is allowed.
Generally, under this approach,
performance consists of the execution of a
single act and revenue is recognized when
that act takes place. In addition, if the
Similar
services are performed by an indeterminate
number of acts over a specified period of
time, revenue can be recognized on a
straight-line basis.
Slide 13.12
Revenue recognition at time of service
US GAAP IFRS
► Costs with respect to service ► Costs with respect to service
contracts are expensed as contracts may be expensed as
incurred. The percentage-of- incurred depending on a
completion model is prohibited company’s policy for
by US GAAP under ASC 605- recognizing revenue for
35. service contracts, but they
could be deferred if the
company is using the
percentage-of-completion
method.
Slide 13.13
Comparison of general revenue

recognition
US GAAP IFRS Difference
Delivery has occurred Risks and rewards have Under IFRS, might be
or services have been transferred to the buyer. able to demonstrate
rendered. transfer of risks and
No continuing managerial rewards without delivery
involvement. (bill and hold).
Persuasive evidence of None. US GAAP contains
an arrangement exists. criteria that IFRS does
not.
Price is fixed or Revenues and costs can No significant
determinable. be reliably measured. differences.
Collectibility is Probably that economic No significant
reasonably assured. benefits will flow to the differences.
entity.
Slide 13.14
Revenue recognition when rendering

services example
Example 1 – revenue recognition when rendering services
Advisco, a strategic advisory firm, contracted with Temple
Manufacturing Company (Temple) on January 1, 2010, to
provide services to help compare Temple’s business to peer
groups, determine leading practices and develop strategic
alternatives for performance improvements.
The services provided by Advisco will include subscription
offerings that provide a mix of on-demand leading practice
research, advisor access, benchmarking and business
transformation services over a period of 18 months for a fixed
fee of $180,000.
Advisco is unable to specify the type and number of items that
will be delivered to Temple through its services as of January 1,
2010. However, based on past experience, Advisco can make
reasonable estimates of the costs that will be incurred to fulfill its
contractual obligations and each stage of completion. Advisco
estimates that it will cost $144,000 to complete its obligations
under this contract.
Slide 13.15

services example
Example 1 (continued):
Costs incurred and progress toward completion by quarter (in dollars).
March June
31, 30, Sept. Dec. 31, March June 30,
2010 2010 30, 2010 2010 31, 2011 2011
Costs
$7,200 $28,800 $50,400 $ 36,000 $ 14,400 $ 7,200
incurred
Cumulative
costs $7,200 $36,000 $86,400 $122,400 $136,800 $144,000
incurred
Cumulative
percentage 5% 25% 60% 85% 95% 100%
complete
Slide 13.16

services example
Using US GAAP:
► Assuming all other revenue recognition criteria have been met for the year ended
December 31, 2010, how much will Advisco record as revenue related to its
arrangement with Temple (SAB 104)?
► Assuming all other revenue recognition criteria have been met, how much revenue
should Advisco record through the end of the project in 2011?
Using IFRS:
► Assuming all other revenue recognition criteria have been met for the year ended
December 31, 2010, how much will Advisco record as revenue related to its
arrangement with Temple?
► Assuming all other revenue recognition criteria have been met, how much revenue
should Advisco record through the end of the project in 2011?
Slide 13.17

services example
Example 1 solution:
US GAAP:
► Advisco should record revenue of $120,000 ($180,000 x 12 months /18 months)

based on the straight-line method of recognizing revenue.
Under US GAAP (as stated by the SEC staff in SAB 104), service revenue should be
recognized on a straight-line basis, unless evidence suggests that revenue is earned
or obligations are fulfilled in a different pattern. Consistent with this view, since
Advisco is not able to determine a pattern of performance (other than by applying a
percentage-of-completion model, which is prohibited by US GAAP for service
contracts), revenue should be recognized on a straight-line basis over the service
period.
► Advisco should record revenue of $60,000 ($180,000 x 6 months /18 months) or the
remaining portion of the contracted amount.
Slide 13.18

services example
Example 1 solution (continued)
IFRS:
► Advisco should record revenue of $153,000 ($180,000 x 85%), or

85% of the total revenue, based on the stage of completion of the
transaction (or percentage-of-completion method).
Unlike US GAAP, IAS 18 allows companies to account for service

contracts using a stage/percentage-of-completion model, provided
the stage/percentage-of-completion can be reasonably estimated,
which is the case in this example.
► Advisco should record revenue of $27,000 ($180,000 x 15%), or the

remaining portion of the contracted amount, based on the stage of
completion of the transaction (or percentage-of-completion method).
Slide 13.19
Expensing costs when rendering services

example
Example 2 – expensing costs when rendering services
Andy’s Consulting Company (ACC) just won a three-year
consulting contract with ABC Inc. Management expects this
contract will result in $2.0 million in profits. Based on past
experience, Andy’s management is able to reasonably
estimate the stage of completion as of each year-end, as
shown below (all amounts are in millions):
Costs
Year incurred Percentage complete
One $ 4.0 30%
Two 3.5 70%
Three 2.5 100%
$10.0
► What cost will be expensed each year under US GAAP and

IFRS, assuming ACC wants to defer costs as long as
possible?
Slide 13.20
Expensing costs when rendering services

example
Example 2 solution:
US
Year GAAP IFRS
One $ 4.0 $ 3.0
Two 3.5 4.0
Three 2.5 3.0
$10.0 $10.0
Under US GAAP, costs must be expensed as incurred.

Under IFRS, ACC has the option to expense the costs as incurred or
defer costs using the stage of completion. The stage of completion would
be used for IFRS since it results in deferring costs of $1.0 million in year
one and $500,000 in year two. At the end of year three, the cumulative
costs expensed would be the same.
Slide 13.21
Departures from recognition at time of

sale
Sales with buyback agreements
US GAAP IFRS
A sale with a buyback

arrangement generally does not IAS 18, appendix paragraph 5, states:
result in the recognition of “For a sale and repurchase agreement on
revenue. an asset other than a financial asset, the
terms of the agreement need to be
analyzed to ascertain whether, in
substance, the seller has transferred the
risks and rewards of ownership to the
buyer and hence revenue is recognized.
When the seller has retained the risks
and rewards of ownership, even though
legal title has been transferred, the
transaction is a financing arrangement
and does not give rise to revenue.”
Slide 13.22

sale
Sales with right of return
US GAAP IFRS
Focuses on the need to reliably
estimate future returns before revenue
can be recorded for sales with a right of
return. Similar. IAS 18 allows revenue
recognition at the time of the sale as
ASC 605-15-25-1 includes the ability of long as the seller can reliably estimate
the seller to be able to reasonably the amount of future returns.
estimate future returns as one of the six
criteria for revenue recognition.
Slide 13.23

sale
Sales with right of return
US GAAP IFRS
► In addition to the criterion that future returns can be ► Only specifies the
reasonably estimated, there are five other criteria criteria that future
for recognition: returns can be
reasonably estimated.
1. The selling price is fixed or determinable.
2. The buyer’s payment is not contingent on the
buyer reselling the product.
3. The buyer has the risks of ownership.
4. The buyer has economic substance apart from
the seller.
5. The seller does not have significant obligations
related to the buyer reselling the product.
Slide 13.24
Revenue recognition when right of return

exists example
Example 3 – revenue recognition when a right of return exists
Identify for which of the following situations, if any, it would be inappropriate to recognize
revenue under US GAAP. Also, identify for which situations it would be inappropriate to
recognize revenue under IFRS. Provide an explanation of your answers.
► Company A introduced a new product that had sales of $1.0 million in the first month.
Total returns in the first month were $200,000.
► Company B wanted to sell its product in Mexico. It contacted a local businesswoman in
Mexico City and established a joint venture. Company B provided the initial financing
and the businesswoman agreed to broker the product to local companies. In the first
month, Company B sold $2.0 million of product to the joint venture to cover anticipated
sales. Assume that Company B properly concluded that this is not a consignment sale.
Company B has extensive experience selling its product and believes it can reliably
estimate future returns.
► Company C has a long history of selling small motors to Company D. Company D
mounts these motors on its lawn mowers and sells the completed lawn mowers to
hardware stores. When Company D receives payment from the hardware stores it pays
Company C for the motors. Company D has the right to return any unused motors at the
end of the year. Historically, these returns have averaged 2% of sales.
Slide 13.25
Revenue recognition when right of return

exists example
Example 3 solution:
• Company A — Because this is a new product, it is unlikely Company A could reliably
estimate future returns. Therefore revenue should not be recorded currently under
either US GAAP or IFRS.
• Company B — Under US GAAP, the requirement that the buyer has economic
substance separate from the seller does not appear to have been met so no revenue
should be currently recorded. It is possible that under IFRS the conclusion might be
to record the revenue since Company B can reliably estimate returns. The question
that would need to be addressed is whether sales returns in Mexico will follow the
same pattern as historical experience.
• Company C — It appears the buyer’s payment is dependent on the buyer selling the
lawn mower. Therefore under US GAAP it would appear that revenue should not be
currently recognized. Under IFRS at first glance it would appear that the revenue
would be recorded because it is probable that the economic benefits from the sale of
the motors will flow to the seller and the returns can be reliably determined. One of
the specific criteria for revenue recognition under IAS 18 is that Company C has
transferred to the buyer the significant risks and rewards of ownership of the goods.
However since the payment for the motors is only made if Company D is able to sell
its lawn mowers, it appears significant risk of ownership has been retained by
Company C and, therefore, revenue should not be recognized.
Slide 13.26
Revenue recognition after delivery
US GAAP IFRS
When there is no reasonable

Similar
method for estimating collectibility,
income should not be recognized
Similar, although IFRS refers to
until cash is collected. the installment method only as it
relates to the discounting of
receivables when considering
the time value of money. IFRS
Only allows the use of the does not refer to the cost-
installment method or the cost- recovery method; however, IAS
18.18 states in part “revenue is
recovery method in limited recognized only when it is
circumstances. probable that the economic
benefits associated with the
transaction will flow to the entity.
In some cases, this may not be
probable until the consideration
is received.”
Slide 13.27
Accounting for multiple elements

Background – US GAAP
► ASC 605-25 provides guidance about multiple deliverable transactions:
► How to separate deliverables into units of accounting.
► How to allocate consideration to the units of accounting.
► ASC 605-25 does not address when revenue should be recognized for deliverables
determined to be a separate unit of accounting. The applicable revenue recognition
guidance (such as SAB 104 or other guidance) should be used to determine when
revenue is recognized related to each separate unit of accounting.
► For a deliverable to qualify as a separate unit of accounting, the following criteria must
be met:
► The delivered item(s) has value to the customer on a stand-alone basis.
► If a general right of return exists relative to the delivered item, delivery or
performance of the undelivered item(s) is considered probable and substantially in
the control of the vendor.
Slide 13.28

► How to allocate considerations to units of accounting:
► Consideration generally should be allocated to the separate units of accounting
based on their relative selling prices (ASC 605-25-25-2).
► The best evidence of selling price vendor-specific objective evidence (VSOE),
which is the price of a deliverable when it is regularly sold on a stand-alone basis.
If VSOE does not exist, then third-party evidence of selling price should be used. If
neither of these exist, then the entity should use the best estimate of selling price
(ASC 605-25-30-2).
► Deliverables in an arrangement that meet the separation criteria in ASC 605-25-25-5
must be treated as a separate unit of accounting for purposes of revenue recognition.
Deliverables in an arrangement that do not meet the separation criteria must be
combined into one unit of accounting. The appropriate revenue recognition literature
then should be applied to each unit of accounting.
Slide 13.29

► Although ASC 605-25-25 is silent as to what revenue recognition method

should be applied to a combined unit of accounting, there is a rebuttable
presumption that the revenue recognition model applicable to the final
deliverable included in the arrangement is the model that should be followed
for the combined unit of accounting.
► The final deliverable model dictates that revenue is recognized only once
the last item has been delivered, or over a performance period if the last
deliverable is a service, assuming the other revenue recognition criteria
have been met.
► This presumption may be overcome in certain circumstances.
► Any contingent consideration is not included in the allocable arrangement
consideration and is not recognized until the contingency is resolved.
Slide 13.30

Background – IFRS
► IAS 18.13 states that the recognition criteria usually are applied separately to each
transaction.
► It goes on to say that “in certain circumstances, it is necessary to apply the
recognition criteria to the separately identifiable components of a single transaction
to reflect the substance of the transaction.”
► This means that transactions have to be analyzed in accordance with their economic
substance in order to determine whether they should be combined or segmented for
revenue recognition purposes. The basic revenue recognition criteria are then
applied to each component to determine when to record revenue.
► IAS 18, Appendix A.11 provides guidance on servicing fees included in the price of the
product:
► “When the selling price of a product includes an identifiable amount for subsequent
servicing (for example, after sales support and product enhancement on the sale of
software), that amount is deferred and recognized as revenue over the period during
which the service is performed. The amount deferred is that which will cover the
expected costs of the services under the agreement, together with a reasonable
profit on those services.”
Slide 13.31
US GAAP IFRS
Contracts executed concurrently or Similar: Parts of

in close proximity are presumed to contracts are considered
be one overall arrangement. together when they are
linked in such a way that
the whole commercial
effect cannot be
understood without
reference to the series
of transactions as a
whole.
Slide 13.32
Accounting for multiple

elements
US GAAP IFRS
► Provides detailed ► Does not provide detailed

hierarchical guidance for guidance.
determining when a
contract should be
separated into multiple
units of accounting.
Slide 13.33
US GAAP IFRS
► The total revenue is ► The total revenues are allocated to the components
allocated to the units based on their relative fair value. IAS 18.7 contains the
of account based on following definition: “Fair value is the amount for which
their relative selling an asset could be exchanged, or a liability settled,
prices. The best between knowledgeable, willing parties in an arm’s
evidence of selling length transaction.”
price is VSOE. If
► IFRS does not specify the method to determine fair
VSOE does not exist,
value. However, IFRIC 13 provides guidance for
then third-party
measuring fair value for award credits that are being
evidence of selling
utilized in practice for multiple elements allocation,
price should be used.
such as: (a) costs plus a reasonable profit margin,
If neither of these
(b) third-party evidence and (c) VSOE (essentially
exist, then the entity
the price for which the vendor has sold the goods on
should use the best
a stand-alone basis). From a practical standpoint,
estimate of selling
the use of these factors achieves the same results
price. as under US GAAP.
Slide 13.34
US GAAP IFRS
► ASC 605-25-30-5 restricts the amount ► Contingent amounts may be included
of revenue recognized, with respect to when allocating total revenues to the
any component, to the amount that is components of the transaction.
not contingent on the delivery of However, IAS 18.18 indicates that
additional items or other specific revenue is recognized only if it is
performance criteria. Contingent probable that economic benefits of a
consideration is not recognized until the transaction will flow to an entity and, in
contingency is resolved. some cases, it may not be probable
until an uncertainty is resolved.
Therefore, when circumstances are
encountered where contingent
consideration is being allowed, it should
be viewed with a great deal of
skepticism and a thorough review of the
facts and circumstances should be
made in order to reach an appropriate
conclusion.
Slide 13.35
Accounting for multiple elements example

Example 4 – accounting for multiple elements
On January 1, 2010, Robots Inc. (Robots) sold Wings Company (Wings) its packaging
machine and other services for $500,000. The sales arrangement includes the packaging
machine, installation services, training on the machine for a period of 18 months and three
years of maintenance services.
The maintenance agreement is not separately priced and is not within the scope of
paragraphs 1 through 6 of ASC 605-20-25 which deals with Accounting for Separately
Priced Extended Warranty and Product Maintenance Contracts. The packaging machine is
never sold without the related installation services; however, it is sold exclusive of training
and maintenance services. In addition to being included in the original sales of the
packaging machine, training contracts are sold on a stand-alone basis and maintenance
contracts are sold on a stand-alone basis as renewals of existing contracts. The installation
services do not have any stand-alone value as they are never sold separately and no other
vendors provide these services.
Based on vendor-specific objective evidence, the selling

price of the packaging machine, including installation
services, is $420,000, the selling price of the training
sessions is $60,000 and the selling price of three years of
maintenance services is $120,000.
Slide 13.36
The packaging machine was installed at Wings and operational on June 30, 2010, at
which time the training services commenced. The training sessions are held weekly at
Wings for the entire 18-month period. In addition, per the contract, the maintenance
service period starts upon the completion of the installation (i.e., June 30, 2010).
Management of Robots wants to report as much revenue as possible on the contract with
Wings in 2010 so they earn their bonuses.
► Under US GAAP and IFRS, answer the following three questions:

1. How many units of accounting are included in this arrangement?
2. If there is more than one accounting unit, how should the $500,000
arrangement fee be allocated to the accounting units?
3. How much revenue for each accounting unit should be recorded as of
December 31 of each year?
► How much total revenue would be reported in 2010 under IFRS compared to US
GAAP?
Slide 13.37

Example 4 solution:
US GAAP:
1. There should be three units of accounting. Robots applies the separation criteria of
ASC 605-25 and determines that the packaging machine and installation services
represent one unit of accounting (installation does not have stand-alone value to the
customer) , the training sessions represent a second unit of accounting and the
maintenance services represent a third unit of accounting.
2. The $500,000 arrangement fee should be allocated to the different units of accounting
based on their selling price (VSOE). The allocation would be as follows:
Percent
VSOE Allocated
of Allocated
(fair arrangement
relative discount
value) consideration
fair value
Packaging
machine and
$420,000 70% $ (70,000) $350,000
installation
services
Training 60,000 10% (10,000) 50,000
Maintenance 120,000 20% (20,000) 100,000
Total $600,000 $(100,000) $500,000
Slide 13.38

Example 4 solution (continued):
3. Under the proportional-performance method, the outputs are used to measure the
proportional performance of the contract. Therefore, based on the timing of the
installation and commencement of the training and maintenance contracts, the
following illustrates when the units of accounting should be recognized into revenue
for each year ended December 31:
2010 2011 2012 2013

Packaging machine and
$350,000
installation
Training (1) 16,667 $33,333
Maintenance (2) 16,667 33,333 $33,333 $16,667
(1) The training session began weekly starting once the installation was complete (June
30, 2010) for 18 months; therefore, six months of training has lapsed by year-end (6
months/18 months * $50,000 = $16,667). The remaining sessions are completed by
the end of 2011 and the remaining revenue related to the session would be
recognized.
(2) The maintenance program coincides with the completion of the installation and runs
for three years; therefore, at Dec. 31, 2010, six months of the contract had run its
course and the remaining amounts are recognized for the remaining three-year
period. [2010 - (6/36) x $100,000 = $16,667; 2011 and 2012 - (12/36) x $100,000 =
$33,333; 2013 - (6/36) x $100,000 = $16,667]
Slide 13.39
Example 4 solution (continued):
IFRS:
The solution under IFRS is the same as for US GAAP. However, it should be noted that
the standards under US GAAP are explicit and structured for determining allocation of
multiple elements, while there is very limited guidance under IFRS. Likewise, IFRS does
not provide guidance on how to determine fair value other than some analogous guidance
contained in IFRIC 13, which is being used in practice for multiple element arrangements
overall. The guidance in IFRIC suggests that some measures to determine fair value
include: the amount for which items may be sold separately (selling price), amounts paid to
third parties plus a reasonable profit margin (cost plus profit margin = selling price) or an
estimated amount. This guidance is very similar to US GAAP with the end result being the
same. However, students should be cautioned that a thorough analysis needs to be made
for multiple-element arrangements under IFRS due to a lack of specific guidance, but
generally there are no differences in accounting under either US GAAP or IFRS (excluding
multiple-element arrangements for software).
Slide 13.40
Contingent revenue in multiple-element

arrangements example
Example 5 – contingent revenue in multiple-element arrangements
Plumbing Supplies, Inc. (PSI) has agreed to sell a bathtub for delivery on December 15,
2010, and a kitchen sink for delivery on January 15, 2011, to a general contractor. The
total purchase price is $1,100. If these items were purchased separately, they would cost
$600 each. The cost to PSI for the bathtub and kitchen sink is the same. The general
contractor is under pressure to complete construction on time. For this reason, the
general contractor has agreed to pay an additional $100, representing the full cost, if both
items are delivered on a timely basis. PSI has a
superior shipping department, and there have been no late
deliveries in the last three years. The general contractor has
agreed to pay $600 for prompt delivery on each delivery date.
► Assuming prompt delivery and payment by the general

contractor, how much revenue should PSI record in
December and January under US GAAP and IFRS?
Slide 13.41
Contingent revenue in multiple-element

arrangements example
Example 5 solution:
US GAAP: None of the contingent consideration (the $100 potential revenue reduction)
can be recorded until the contingency is fully resolved. Thus the amount to be allocated is
$1,200 - $100 = $1,100. Therefore, revenue of $550 would be recorded in December
and $650 in January ($550 allocated plus the $100 contingent amount).
IFRS: It is possible that two different answers may be reached under IFRS.
1. The same answer as determined for US GAAP. The logic in arriving at the same
answer as US GAAP is that IAS 18.18 states “Revenue is recognized only when it is
probable that the economic benefits associated with the transaction will flow to the
entity. In some cases, this may not be probable until the consideration is received or
until an uncertainty is removed.” Accordingly, until the second item is received, which
doesn’t occur until after year-end, a contingency exists and a strict reading of the
guidance would indicate that revenue would not be recognized.
2. The relative fair value of each delivery is $600 since the contingency is very remote.
Thus, $600 could be recorded in both December and January.
Likewise, since the IFRS guidance is not definitive for all cases, if the answer in 2. above
is used, it would be necessary to thoroughly review the facts and circumstances. In
practice, this situation should and would raise the skepticism of accountants to make
sure the appropriate conclusion was reached.
Slide 13.42
Interest, Royalties and Dividends

• Interest. Interest is recognized on the accruals
basis, using an interest rate which takes into
account all of the amounts to be paid and
received over the life of the financial instrument
concerned.
• Royalties. Royalties are recognized on the
accruals basis.
• Dividends. Dividends are recognized when the
shareholder's right to receive the payment is
established.
Slide 13.43
Main Disclosure Requirements of

IAS18
IAS18 requires that entities should disclose:
• The accounting policies adopted for the recognition
of revenue, including the methods adopted to
determine the stage of completion of transactions
involving the rendering of services
• The amount of each significant category of revenue
recognized during the accounting period
• The amount of revenue arising from exchanges of
goods or services included in each significant
category of revenue.

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Slide 13.

Definition of Revenue (IAS18)

Revenue recognition general guidelines

Revenue should be recognized when the

Revenues must be reliably measured to Similar

Revenue is measured at the fair value of

Revenue recognition general

Revenue recognition at time of sale

Revenue recognition at time of service

With respect to service contracts, the

Revenue recognition at time of service

Comparison of general revenue

Revenue recognition when rendering

Revenue recognition when rendering

Revenue recognition when rendering

Revenue recognition when rendering

► Advisco should record revenue of $120,000 ($180,000 x 12 months /18 months)

Revenue recognition when rendering

► Advisco should record revenue of $153,000 ($180,000 x 85%), or

Unlike US GAAP, IAS 18 allows companies to account for service

► Advisco should record revenue of $27,000 ($180,000 x 15%), or the

Expensing costs when rendering services

► What cost will be expensed each year under US GAAP and

Expensing costs when rendering services

Under US GAAP, costs must be expensed as incurred.

Departures from recognition at time of

A sale with a buyback

Departures from recognition at time of

Departures from recognition at time of

Revenue recognition when right of return

Revenue recognition when right of return

Revenue recognition after delivery

When there is no reasonable

Accounting for multiple elements

Accounting for multiple elements

Accounting for multiple elements

► Although ASC 605-25-25 is silent as to what revenue recognition method

Accounting for multiple elements

Accounting for multiple elements

Contracts executed concurrently or Similar: Parts of

Accounting for multiple

► Provides detailed ► Does not provide detailed

Accounting for multiple elements

Accounting for multiple elements

Accounting for multiple elements example

Based on vendor-specific objective evidence, the selling

Accounting for multiple elements example

► Under US GAAP and IFRS, answer the following three questions:

Accounting for multiple elements example

Accounting for multiple elements example

2010 2011 2012 2013

Accounting for multiple elements example

Example 4 solution (continued):

Contingent revenue in multiple-element

► Assuming prompt delivery and payment by the general

Contingent revenue in multiple-element

Interest, Royalties and Dividends

Main Disclosure Requirements of

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