IFRS Revenue Recognition

IFRS vs. ASPE Revenue Recognition

  • Chapter 4 focuses on IFRS revenue recognition.
  • ASPE (Accounting Standards for Private Enterprises) is straightforward but will be briefly covered.
  • IFRS is a multiple-course question, but relatively simple.
  • Revenue recognition under ASPE (ASC 605) vs. IFRS (IFRS 15):
    • Under ASPE, revenue is recognized when earned and delivered.
    • IFRS is based on estimates, especially for long-term projects.

Delivery Timeframe and Revenue Recognition

  • ASPE is suitable for short timeframes (e.g., Amazon, Tmall – weeks to a month).
  • For projects like construction (e.g., Douglas College, Langley Skytrain), which take years, IFRS is relevant.
  • Under ASPE, revenue recognition occurs upon delivery, which doesn't suit long-term projects.

Expenses

  • Expenses are straightforward: suppliers must be paid to ensure continued supply of materials (e.g., cement, concrete).
  • Revenue determination is easier under ASPE, where delivery triggers recognition.

Estimates and Faithful Representation Under IFRS

  • IFRS relies on estimates, requiring faithful representation (as per Chapter 2).
  • Changes in estimates must be reliable.
  • Example: Evergrande case in China; Ice Water House penalized for failing to verify Evergrande's project completion estimates.
  • Auditors must verify the validity and assessment of estimates.
  • Scenario: If a project is truly 30% complete but inflated to 40% for revenue recognition:
    • Total revenue is 10,000,000.
    • Correct revenue: 0.30 \times 10,000,000 = 3,000,000.
    • Inflated revenue: 0.40 \times 10,000,000 = 4,000,000.
    • Evergrande overinflated completion percentages, leading to issues.

Revenue Recognition and Verification

  • Revenue recognition is based on the percentage of project completion.
  • Verification of this percentage is crucial.

Five-Step IFRS Revenue Recognition Process

  • IFRS uses a five-step process for revenue recognition.
  • ASPE focuses on actual costs and payment.
  • Long-term contracts can be profitable or onerous.
  • Profitable contracts: make money in all years or overall; year 1 make money, year 2 lose money, but overall profitable.
  • Onerous contracts: losing money overall, even if making money in some early periods

Recognizing Revenue

  • Textbook from Chapter 4 onwards focuses on the term "recognize", particularly for revenue recognition.
  • Value creation occurs throughout the sales process (relevant in marketing).
  • Product Warranties:
    • Standard warranty (e.g., iPhone's one-year warranty) is part of the product; revenue is recognized upon delivery.
    • Extended warranty (e.g., AppleCare) is a separate performance obligation; revenue recognition differs.

Multiple Obligations

  • Construction projects have multiple obligations (e.g., 25% completion, then 40%, then full completion).
  • The question is how to report revenue across these stages.
  • Simple scenarios (e.g., selling food) allow revenue recognition at the point of sale.
  • Service examples: service revenue recognised as the work is done.
  • Digital products e.g. music downloads allow revenue to be recognised upon delivery.

Complex, Custom Projects and Five-Step Process

  • For companies like Boeing building custom aircraft for United Airlines or Saudi Arabia, revenue recognition is complex.
  • Boeing might take five years to build a plane.
  • The five-step process helps determine how revenue is recognized.
  • This process is specific to IFRS.

Five-Step Process

  1. Identify the contract.
  2. Identify the performance obligations.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations.
  5. Recognize revenue when (or as) each performance obligation is satisfied.
  • Example: A project worth 300,000,000 requires careful allocation of revenue recognition based on obligation fulfillment.
  • Simple car dealership situations don't need this complex process.