IFRS Made Easy E-Book

Steven M. Bragg

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 367

Veröffentlichungsjahr: 2010

Beschreibung

The definitive guide to all things IFRS IFRS Made Easy provides complete, easy-to-navigate coverage of all International Financial Reporting Standards (IFRSs) with concise explanations and hundreds of supporting examples. This reference tool goes anywhere you go-to a client's office, on a business trip, or to an important lunch meeting, with on-the-spot answers to any questions that arise. * Practical, plain -language explanation of the international financial accounting and reporting standards * Summarizes International Financial Reporting Standards * Liberally sprinkled with definitions and examples * Notes applicable IFRS source documents Written for every company struggling with the impact of convergence, IFRS Made Easy clearly explains how IFRS will impact your company, how you will need to account for various specific items, and more. This book is filled with practical techniques and rules of thumb for understanding the day-to-day IFRS issues every accountant, controller or CFO is sure to face-and puts all the answers you need at your fingertips.

Leseprobe

Contents

Cover

Title Page

Copyright

Preface

About the Author

Free On-Line Resources by Steve Bragg

Part I: Revenue and Expenses

Chapter 1: Revenue Recognition

Introduction

Revenue Recognition Rules

Impact of Goods Ownership on Revenue Recognition

Advertising Barter Transactions

Construction Contract Revenue Recognition

Customer Loyalty Program Revenue Recognition

Franchise Fee Revenue Recognition

Professional Services Revenue Recognition

Services Revenue Recognition

Disclosures

Chapter 2: Employee Benefits

Introduction

Types of Employee Benefits

Definitions

Short-Term Employee Benefits

Accounting for Short-Term Employee Benefits

Accounting for a Short-Term Compensated Absence

Accounting for a Profit Sharing or Bonus Plan

Accounting for a Multi-Employer Plan

Accounting for a Defined Contribution Plan

Accounting for a Defined Benefit Plan

Accounting for Actuarial Gains and Losses

Accounting for the Return on Plan Assets

Accounting for Past Service Cost

Accounting for Plan Assets

Accounting for Curtailments and Settlements

Defined Benefit Plan Amounts Appearing in Profit or Loss

Discount Rate Used in Actuarial Assumptions

Present Value Method Used for Defined Benefit Plan Calculations

Attributing Benefit to Periods of Service

Accounting for Other Long-Term Employee Benefits

Accounting for Termination Benefits

Disclosures for a Defined Benefit Plan

Chapter 3: Share-Based Payments

Introduction

Share-Based Payments Settled With Equity

Share-Based Payments Settled With Cash

Share-Based Payments Settled With Cash Alternatives?

Determining the Fair Value of an Equity Instrument

The Impact of Vesting on Service Recognition

Modification of the Terms of a Share-Based Payment

Other Share-Based Payment Issues

Disclosures

Chapter 4: Income Taxes

Introduction

Income Tax Terminology

Tax Planning

Tax Assets and Liabilities

Initial Creation of a Temporary Difference

Taxable Temporary Differences

Taxable Temporary Differences Related to Goodwill

Deductible Temporary Differences

Unused Tax Losses and Unused Tax Credits

The Tax Effects of a Business Combination

The Tax Impact of Investments in Other Entities

Other Tax Issues

Offsetting of Tax Assets and Liabilities

Disclosures

Part II: Assets and Liabilities

Chapter 5: Financial Instruments

Introduction

Definitions

Initial Accounting for a Financial Asset or Liability

Subsequent Accounting for a Financial Asset or Liability

Derecognition of a Financial Asset or Liability

The Effective Interest Method

How to Derive the Fair Value of a Financial Asset or Liability

Accounting for a Change in Carrying Cost

Accounting for a Fair Value Change in a Financial Asset

Accounting for Financial Asset Impairment

Qualifying for a Hedging Relationship

Accounting for a Fair Value Hedge

Accounting for a Cash Flow Hedge

Accounting for a Net Investment Hedge

Designating a Non-Financial Item as a Hedged Item

Disclosures in the Statement of Financial Position–Financial Instruments

Disclosures in the Statement of Comprehensive Income–Financial Instruments

Disclosures–Hedging

Disclosures–Fair Value

Disclosures–Financial Instrument Risks

Chapter 6: Interests in Joint Ventures

Introduction

Significant Influence

Types of Joint Ventures

Accounting for a Jointly Controlled Operation

Accounting for Loss of Control in a Joint Venture

Accounting for a Non-Monetary Contribution to a Joint Venture

Accounting for Transactions Between a Venturer and a Joint Venture

Accounting for Jointly Controlled Assets

Disclosures

Chapter 7: Investments in Associates

Introduction

Qualification as an Investment in an Associate

Accounting for an Investment in an Associate

Related Reporting Issues

When to Stop Using the Equity Method

Upstream and Downstream Transactions With an Associate

Disclosures

Chapter 8: Inventory

Introduction

Definitions

Costs to Include in Inventory

Inventory Measurement Systems

Allocation of Overhead Costs to Inventory

Writing Down the Value of Inventory

Allocating Production Costs to Byproducts

Disclosures

Chapter 9: Property, Plant, and Equipment

Introduction

Definitions

Costs to Include in PP&E

Costs Not to Include in PP&E

The Inclusion of Borrowing Costs in PP&E

The Residual Value of an Asset

Accounting for an Asset Exchange

Subsequent PP&E Measurements

Accounting for Asset Revaluations

Assets Not Subject to Depreciation

The Depreciation Time Period

Types of Depreciation Methods

Depreciating Revalued Items

Accounting for a Derecognized Asset

Disclosures

Chapter 10: Intangible Assets

Introduction

Recognition of Intangible Assets

Recognition of Acquired Intangible Assets

Recognition of Intangible Assets Acquired in a Business Combination

Website Development Costs

Research and Development Expenditures

Subsequent Recognition of Intangible Assets

Recognition of Intangible Asset Revaluations

Determining the Useful Life of an Intangible Asset

Intangible Asset Amortization

Disclosures

Chapter 11: Asset Impairment

Introduction

Definitions

Applicable Assets

The Impairment Test

Impairment Test Source Information: Fair Value less Costs to Sell

Impairment Test Source Information: Recoverable Value

Impairment Test Source Information: Cash Flow Projections

Reuse of Prior Period Impairment Calculations

Reversal of an Impairment Loss

Goodwill Impairment Testing

Reversal of a Goodwill Impairment Loss

Disclosures for Asset Classes

Disclosures for Recognized or Reversed Impairment Losses

Disclosures for Estimations of Recoverable Amounts

Disclosures for Allocated Goodwill or Intangible Assets

Chapter 12: Provisions and Contingencies

Introduction

Definitions

Accounting for a Contingent Liability

Accounting for a Provision

Measurement of a Provision

Accounting for a Provision Reimbursement

Provisions for Onerous Contracts

The Impact of Future Events on a Provision

Restructuring Provisions

Provision Adjustments

Accounting for a Contingent Asset

Disclosures

Part III: The Financial Statements

Chapter 13: Financial Statements Presentation

Introduction

Definitions

Contents of the Financial Statements

Contents of the Statement of Financial Position

Contents of the Statement of Comprehensive Income

Contents of the Statement of Changes in Equity

Contents of the Statement of Cash Flows

Disclosures–General

Disclosures–Comparative Information

Chapter 14: Consolidated and Separate Financial Statements

Introduction

Definitions

When to Use Consolidation

The Financial Statement Consolidation Process

Consolidating a Special Purpose Entity

Reporting Changes if there is a Loss of Control

Disclosures

Chapter 15: Related Party Disclosures

Introduction

Definition of a Related Party

Disclosures

Chapter 16: Events after the Reporting Period

Introduction

Accounting for Adjusting Events After the Reporting Period

Accounting for Non-Adjusting Events After the Reporting Period

Accounting for Dividends Declared After the Reporting Period

Accounting for a Going Concern Issue that Arises After Period-End

Disclosure

Chapter 17: Financial Reporting in Hyperinflationary Economies

Introduction

Designating an Economy as Hyperinflationary

How to Restate Financial Results

Selecting a General Price Index

Disclosures

Part IV: Public Company Reporting

Chapter 18: Operating Segments

Introduction

Definition of an Operating Segment

Criteria for Reporting Operating Segments

When to Restate Segment Information

Disclosures of Segment Information

Disclosures of Reconciling Information

Disclosures About Products and Services

Disclosures About Geographical Areas

Disclosures About Major Customers

Chapter 19: Earnings per Share

Introduction

Basic Earnings per Share

Diluted Earnings per Share

Retrospective Changes to Earnings per Share

Earnings per Share Presentation

Disclosures

Chapter 20: Interim Financial Reporting

Introduction

Contents of an Interim Financial Report

Accompanying Explanatory Notes

Periods of Presentation for Interim Financial Statements

Materiality in Interim Periods

Consistency of Accounting Policy Application

Retrospective Adjustment of Interim Financial Statements

Restatement of Interim Financial Statements

The Use of Estimates in Interim Financial Statements

Part V: Broad Transactions

Chapter 21: Business Combinations

Introduction

Definitions

Accounting for a Business Combination

Accounting for Contingent Consideration

Accounting for an Acquiree's Contingent Liabilities

Accounting for Step Acquisitions

The Measurement Period

Adjusting for a Provisional Measurement

Accounting for Acquisition-Related Costs

Subsequent Measurement of a Business Combination

Disclosures

Chapter 22: Changes in Accounting Policies, Estimates, and Errors

Introduction

Retrospective Application and Restatement

Accounting Policy Changes

Accounting Estimate Changes

Accounting Error Changes

Immaterial Changes

Disclosures

Chapter 23: Discontinued Operations and Non-Current Assets Held for Sale

Introduction

Definition of a Discontinued Operation

Accounting for a Discontinued Operation

Classifying a Non-Current Asset as Held for Sale

Accounting for Assets Classified as Held for Sale

Disclosures

Chapter 24: Effects of Foreign Exchange Rate Changes

Introduction

Definitions

Accounting for a Foreign Currency Transaction

Incorporating Exchange Rates into the Financial Statements

Accounting for a Foreign Currency Transaction in Later Periods

Accounting for Exchange Differences Between Periods

Translating From a Functional Currency to a Presentation Currency

Disclosures

Chapter 25: Leases

Introduction

Definitions

Determining When an Arrangement Contains a Lease

Accounting by a Lessee for a Financial Lease

Accounting by a Lessee for Subsequent Financial Lease Payments

Accounting by a Lessor for a Financial Lease

Accounting by a Manufacturer or Dealer Lessor for a Financial Lease

Accounting by a Lessee for an Operating Lease

Accounting by a Lessor for an Operating Lease

Accounting for Incentives Associated with an Operating Lease

Accounting for a Sale and Leaseback Transaction

Disclosures–By a Lessee for a Financial Lease

Disclosures–By a Lessor for a Financial Lease

Disclosures–By a Lessee for an Operating Lease

Disclosures–By a Lessor for an Operating Lease

Index

Copyright © 2011 by John Wiley & Sons. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-0-470-89070-7 (book); 978-1118003626 (ebk); 978-1118003633 (ebk); 978-11180003640 (ebk)

Trademarks: Wiley and the Wiley Publishing logo are trademarks of John Wiley and Sons, Inc. and/or its affiliates in the United States and/or other countries, and may not be used without written permission. IFRS is a registered trademark of The International Accounting Standards Board. All other trademarks are the property of their respective owners. Wiley Publishing, Inc. is not associated with any product or vendor mentioned in this book.

Preface

IFRS Made Easy is designed to give you answers to the most common accounting questions arising from international financial reporting standards. The accountant, controller, and chief financial officer can learn about such key topics as:

Revenue recognition rulesDefined benefit and defined contribution pension plansPayments based on an entity's share priceDeferred tax assets and liabilitiesCash flow hedges and fair value hedgesInvestments in associates and joint venturesInventory revaluationsFair value adjustments for property, plant, and equipmentAsset impairmentContingent liabilitiesThe proper structure of financial statementsDisclosures for related party transactionsFinancial restatements in a hyperinflationary economyOperating segment thresholdsBasic and diluted earnings per shareAccounting principles in interim reporting periodsBusiness combinationsRestatements caused by accounting errorsAccounting for assets held for saleForeign currency translationLease accounting by the lessee and lessor

IFRS Made Easy is divided into five sections, each dealing with the main categories of IFRS: revenue and expenses, assets and liabilities, the financial statements, public company financial statements, and broad transactions.

Part I, Revenue and Expenses (Chapters 1-4) delves into a variety of revenue and expense topics. These include revenue recognition, employee benefits, share-based payments, and income taxes.

Part II, Assets and Liabilities (Chapters 5-12) addresses IFRS for accounting issues related to assets and liabilities. There are separate chapters covering the accounting for financial instruments, interests in joint ventures, investments in associates, inventory, property, and intangible assets. A separate chapter addresses the key issue of asset impairment, and we conclude Part II with a discussion of provisions and contingencies.

Part III, The Financial Statements (Chapters 13-17) addresses IFRS for the construction of financial statements. Part III is divided into separate chapters to address the basic form of the financial statements, how to consolidate them, and how to report on special situations. These situations address disclosures, including related-party disclosures and the reporting of events occurring after the reporting period. Finally, Part III covers financial reporting in hyperinflationary economies.

Part IV, Public Company Reporting (Chapters 18-20) addresses IFRS that are specific to additional information required to be disclosed by public companies as part of their financial statements. Separate chapters address the reporting of operating segments, earnings per share, and interim reporting.

Part V, Broad Transactions (Chapters 21-25) addresses a broad range of accounting transactions. These include business combinations, changes in accounting estimates, discontinued operations, the effects of foreign exchange rate changes, and leases.

Throughout, IFRS Made Easy has been structured to give the user a clear understanding of those IFRS topics that the accountant is most likely to encounter on an ongoing basis.

About the Author

Steven Bragg, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young. He received a master's degree in finance from Bentley College, an MBA from Babson College, and a Bachelor's degree in Economics from the University of Maine. He has been the two-time President of the Colorado Mountain Club, and is an avid alpine skier, mountain biker, and certified master diver. Mr. Bragg resides in Centennial, Colorado. He has written the following books:

Accounting and Finance for Your Small Business

Accounting Best Practices

Accounting Control Best Practices

Accounting Policies and Procedures Manual

Advanced Accounting Systems

Billing and Collections Best Practices

Business Ratios and Formulas

Controller's Guide to Costing

Controller's Guide to Planning and Controlling Operations

Controller's Guide: Roles and Responsibilities for the New Controller

Controllership

Cost Accounting

Cost Reduction Analysis

Essentials of Payroll

Fast Close

Financial Analysis

GAAP Guide

GAAP Policies and Procedures Manual

GAAS Guide

IFRS Made Easy

Inventory Accounting

Inventory Best Practices

Investor Relations

Just-in-Time Accounting

Management Accounting Best Practices

Managing Explosive Corporate Growth

Mergers and Acquisitions

Outsourcing

Payroll Accounting

Payroll Best Practices

Revenue Recognition

Run the Rockies

Running a Public Company

Sales and Operations for Your Small Business

The Controller's Function

The New CFO Financial Leadership Manual

The Ultimate Accountants’ Reference

The Vest Pocket Controller's Guide

The Vest Pocket GAAP Guide

The Vest Pocket IFRS Guide

Throughput Accounting

Treasury Management

Free On-Line Resources by Steve Bragg

Steve issues the Accounting Best Practices podcast. You can sign up for it at www.accountingtools.com, or access it through iTunes. The accountingtools.com Web site contains hundreds of accounting tips, best practices, and book reviews.

Part One

Revenue and Expenses

Chapter 1

Revenue Recognition

Introduction

Many entities stretch the boundaries of how much revenue they can recognize within an accounting period, since they want to show exceptional revenue growth to their investors and creditors. This tendency has resulted in a number of IFRS rulings regarding the appropriate recognition of revenue. Most such rulings are relatively simple, single-paragraph statements, but others are more complex. The next section deals with the simpler revenue recognition rules, while other, more complex areas are addressed later in separate sections.

Revenue Recognition Rules

This section contains the bulk of all revenue recognition rules under IFRS, in alphabetical order. More complex revenue recognition situations, such as construction projects and customer loyalty programs are dealt with later, in separate sections. The simpler revenue recognition rules are:

Admission fees. The fees generated from artistic performances and other special events are recognized when the event takes place. If the seller is selling subscriptions to a number of events, then it allocates the subscription to each event covered by the subscription, based on the extent to which services are performed at each event.Advance payments. The buyer may send either full or partial payment to the seller in advance of the delivery of goods. The seller may not yet have the items in inventory, they may still be in the production process, or they will be drop shipped by a third party. Under these circumstances, the seller should not recognize revenue until the goods are delivered to the buyer.Barter exchange. A transaction does not generate revenue if it involves the exchange of goods or services of a similar nature or value. If the exchange is for dissimilar goods or services, the transaction does create revenue; this is measured at the fair value of the goods or services received, as modified by the amount of any cash transferred. If the fair value of received goods or services cannot be reliably measured, then use instead the fair value of the goods or services given up, as modified by the amount of any cash transferred.Bill and hold. In a bill and hold sale, the buyer requests that delivery be delayed, but accepts billing and takes title to the goods. The seller recognizes revenue when the buyer takes title and the following conditions are satisfied: Normal payment terms apply to the transactionThe buyer acknowledges the delayed delivery instructionsIt is probable that delivery will be madeThe goods are identified, on hand and ready for delivery

The seller cannot recognize revenue related to a bill and hold transaction if there is only an intention to acquire or produce the goods in time for delivery, as opposed to actually being on hand.

Cash on delivery terms. If a seller is selling goods based on cash on delivery terms, then it should recognize revenue when it delivers the goods and collects the cash from the transaction.Deferred payments. In the event of a deferred cash payment, the fair value of the consideration received may be reduced. When a delayed payment effectively constitutes a financing transaction, recognize revenue as the discounted cash flow of the transaction, using an imputed interest rate that is the more clearly determinable of either a) the prevailing interest rate for a similar transaction by an entity with a similar credit rating; or b) a rate of interest that discounts the transaction to the current cash price of the underlying goods or services.

Example

Snoring Sofas is offering a year-end deal for its luxury leather sofas, under which customers can either pay €2,000 in cash or a zero-down payment with 24 monthly payments of €100 each, totaling €2,400. Since there is a difference of €400 between the cash price and the extended terms, the zero-down payment deal is essentially comprised of separate financing and sale transactions. For any sale under the zero-down payment plan, Snoring should record a sale of €2,000, which is the amount of consideration attributable to the sofa. The difference between the cash price and the total payment stream is interest revenue, and Snoring should record it under the effective interest method over the two-year payment period.

Goods sold. If goods are sold, then measure revenue at the fair value of the consideration received, taking into account the amount of any trade discounts and volume rebates accepted by the entity. When paid in cash, recognize revenue only for the amount of cash received or receivable. You can only recognize revenue from the sale of goods when all of the following conditions have been recognized: Benefits assured. The economic benefits associated with the transaction will flow to the entity.Costs measurable. The costs related to the transaction can be reliably measured.Ownership relinquished. The entity no longer retains management control over the goods sold.Revenue measurable. The amount of revenue to be recognized can be reliably measured.Risks and rewards transferred. All significant risks and rewards associated with the goods have been transferred to the buyer. This usually coincides with the transfer of legal title or possession to the buyer.Initiation fees. If an initiation or membership fee only creates a membership condition, then the seller can recognize revenue when there is no significant uncertainty regarding fee collectability. However, if the fee entitles the buyer to services or publications or discounted purchases from the seller during the membership period, then the seller recognizes revenue on a basis that reflects the timing, nature, and value of the benefits provided.Installation fees. When a seller charges an installation fee associated with a delivery of goods, the seller recognizes revenue in accordance with the stage of completion of the installation. However, if the installation fee is incidental to the sale of goods, then the fee is recognized when the goods are sold.Installment sales. The buyer may send a series of payments to the seller in exchange for the immediate delivery of goods from the seller to the buyer. In this case, the seller can recognize revenue once the goods are delivered; however, the amount recognized is the present value of all payments, which the seller calculates by discounting the payments at the imputed rate of interest. The seller recognizes the interest portion of the payments as it earns them, which it calculates using the effective interest method.Layaway sales. Layaway sales occur when goods are delivered to the buyer only when the buyer has completed the final payment in a series of installment payments. In a layaway sale, the seller only recognizes revenue when it delivers the goods. However, if the seller's historical experience shows that most layaway transactions are converted into sales, it can recognize revenue when it receives a significant deposit, provided that the goods are on hand, identified, and ready for delivery.Royalties. Recognition is in accordance with the terms of the relevant agreement, unless the substance of the agreement calls for a different method. From a practical perspective, recognition may be on a straight-line basis over the term of the agreement. If the agreement is an assignment of rights in exchange for a fixed fee or non-refundable guarantee where the licensor has no remaining performance obligations, the licensor can recognize revenue at the time of sale. If payment under the agreement is contingent upon the occurrence of a future event, revenue should be recognized when it is probable that the fee or royalty will be received.Servicing fees. A seller of goods may include in the selling price a fee for subsequent servicing or product upgrades. If so, the seller should defer the amount of revenue related to the servicing fee, which should cover the servicing cost and a reasonable profit. It should then recognize the associated revenue over the servicing period.Subscriptions. When the seller makes deliveries of publications and similar items to the buyer under a subscription agreement, it normally recognizes revenue on a straight-line basis over the period when the items are issued. However, if the items vary in value by period, then the seller should recognize revenue based on the sale value of each item in proportion to the total estimated sales value of all items included in the subscription.Tuition fees. The provider of educational services should recognize revenue from tuition fees over the period of instruction.

Impact of Goods Ownership on Revenue Recognition

If an entity retains significant risks of ownership in ostensibly transferred goods, then it cannot recognize related revenue. Examples of significant retained ownership risks are:

Contingent conditions. The buyer of the goods must in turn sell the goods before it pays the entity for the sale.Installation conditions. Installation is a significant part of the contract, and it has not yet been completed. The seller can recognize revenue immediately after the buyer accepts delivery if the installation process is simple, or when the inspection is performed only for purposes of final determination of contract prices.Performance obligations. The entity retains an obligation for unsatisfactory performance that exceeds normal warranty provisions.Return rights. The buyer is entitled to rescind the purchase, and the probability of such return is uncertain. The seller can recognize revenue when the buyer has formally accepted delivery or when the time period allowed for rejection has expired.

Example

Diamond Flatware sells its tableware through the Garnet retail chain. Garnet purchases tableware from Diamond under a consignment agreement. Diamond should recognize revenue from the sale of its tableware only when the goods are sold by Garnet.

If an entity retains an insignificant risk of ownership, it can recognize revenue. For example, if an entity has transferred the significant risks and rewards of ownership, except for legal title in order to protect collectibility, then revenue may be recognized. Similarly, a retail establishment can recognize revenue even when customers have a refund right, as long as the retailer can reliably estimate future returns, and recognizes a related liability.

Advertising Barter Transactions

An entity may enter into a barter transaction to provide advertising services in exchange for receiving advertising services from its customer. This can involve the exchange of no cash at all, or approximately equal amounts of cash or other consideration. Two forms of revenue recognition can arise from this scenario:

1.Similar services. If there is an exchange of similar advertising services, then the exchange does not result in revenue recognition by either party.

2.Dissimilar services. If there is an exchange of dissimilar advertising services, the seller can recognize revenue. It is not allowable to do so based on the fair value of advertising services received. Instead, the seller can measure revenue based on the fair value of the advertising services it provides, by reference to non-barter transactions that:

a. Involve advertising similar to that included in the barter transaction

b. Occur frequently

c. Involve a different counterparty than in the barter transaction

d. Involve cash or other consideration that has a reliably measurable fair value

e. Represent a predominant number of transactions and amounts as compared to the barter transaction

Example

Trouser TV enters into an advertising barter transaction with Macho magazine, where Trouser advertises Macho on its cable network in exchange for similar coverage in Macho magazine. Trouser is providing Macho with five advertising spots of 30 seconds duration. Trouser normally provides such coverage at a rate of $10,000 per spot, and does so frequently with other parties, who pay cash. The proportion of transactions where Trouser is paid cash for advertising is approximately 90 percent of all of its advertising transactions. Accordingly, Trouser TV can recognize the fair value of its advertising as revenue, which is $10,000 multiplied by five coverage spots, or $50,000.

Construction Contract Revenue Recognition

The contractor can recognize the revenues and expenses associated with a contract, through the stage of completion of the contract at the end of the current reporting period (the percentage of completion method), when it can reliably estimate the outcome of the contract.

If the contract is fixed price, the contractor can consider the contract's outcome to be reliably estimated when the following four conditions are satisfied:

All contract revenue can be reliably measured.The benefits of the contract will probably flow to the contractor.The remaining contract costs and the stage of completion at the end of the reporting period can be reliably measured.Costs attributable to the contract can be identified and reliably measured, so that costs actually incurred can be compared to prior cost estimates.

If the contract is cost plus, the contractor can consider the contract's outcome to be reliably estimated when the following two conditions are satisfied:

The benefits of the contract will probably flow to the contractor.Contract costs, whether or not reimbursable, can be reliably measured.

If the contractor cannot reliably estimate the outcome of a contract, then it can only recognize revenue to the extent of contract costs incurred that it will probably recover, with no profit recognition.

Under the percentage of completion method, the contractor matches revenues with contract costs incurred in reaching a designated stage of completion; this results in the reporting of both revenue and expenses that can be attributed to the proportion of work completed. If the contractor has incurred costs that relate to future contract activity, then it categorizes these costs as an asset (assuming that the costs are recoverable) designated as Contract Work in Progress.

A contractor can use a variety of methods to determine the stage of completion of a contract, including the following:

Surveys of work performed.Completion of a physical proportion of the work.The contract costs incurred to date as a percentage of the estimated total contract costs. This calculation should exclude contract costs related to future activity on a contract and payments made to subcontractors in advance of work performed.

Example

Wolf Construction is working on a contract for Mr. Grimm, involving a main house and guest house. The first segment of the contract is for the main house. Wolf spends €180,000 for building materials that have been delivered to the construction site, but which are designated for the guest house, for which no work has yet begun. Wolf has also made an advance payment of €25,000 to Piglet Concrete for the construction of an Olympic-size swimming pool. In both cases, Wolf cannot include the expense in its percentage of completion calculations, since they do not reflect work performed to date.

The percentage of completion method involves making ongoing changes in accounting estimates. As such, changes in estimate are recognized in the period in which the change is made and in subsequent periods; it does not alter the accounting in prior periods.

Example

Wolf Construction enters into a fixed price contract with Amiens Prefecture to build a suspension bridge. The amount of revenue listed in the contract is €5,800,000. Wolf's initial estimate of project costs is €5,000,000 over the expected three-year term of the project.

At the end of Year 1, Wolf revises its estimate of project costs upward to €5,100,000.

In Year 2, Amiens approves a change in the contract scope to include temperature sensors on the bridge surface that will transmit a warning when the road temperature drops below freezing. The scope change calls for a revenue increase of €300,000, and Wolf estimates additional contract costs of €250,000. At the end of that year, Wolf has spent €150,000 for materials that are stored at the construction site, but which are intended for use in the following year.

Wolf calculates its revenue recognition based on the percentage of completion method. A summary of its calculations follows:

Wolf calculates the 80% stage of completion at the end of Year 2 without the €150,000 of contract costs related to materials stored for use in Year 3.

Based on the preceding information, Wolf recognizes revenue and expenses by year in the following amounts:

The contractor should recognize an expected loss immediately when it is probable that total contract costs will exceed total contract revenue. The amount of the loss recognized is not impacted by the stage of project completion or the amount of profits that the contractor may earn from contracts that are not treated as part of the same contract. Examples of situations where contract recoverability is in doubt are:

Contracts that are not enforceableContracts that are subject to litigation or legislationContracts for property that are likely to be condemned or expropriatedContracts where the customer is unlikely to meet its obligationsContracts where the contractor cannot meet its obligations

Customer Loyalty Program Revenue Recognition

A customer loyalty program is used by a company to give its customers an incentive to buy its goods or services. Customers earn award credits by buying from the company, which they can then use to obtain free or discounted goods or services.

A company that issues award credits shall treat them as a separately identifiable component of the sales transaction in which they are granted. The company must allocate the sale between the award credits and the other components of the sale. The amount of the allocation to the award credits shall be based on the fair value of credits, which is the price at which the credits can be sold separately, or the fair value of the awards for which they can be redeemed. In the latter case, the fair value of the awards should be reduced to account for the proportion of award credits that the company does not expect its customers to redeem. If customers can select from a number of awards, then the fair value analysis should reflect an average of the award fair values, weighted for the frequency of expected award selection. If an allocation of consideration to award credits is not possible based on fair values, a company may use alternative methods.

If the company pays out awards itself, then it recognizes revenue for the consideration allocated to the award credits when customers redeem the awards and the company delivers the awards.

Example

Manchester Electronics has a customer loyalty program. It grants participating customers award points every time they purchase from Manchester. Customers can redeem their points for free oil changes at any Manchester store. The points are valid for three years from the date of each customer's last purchase, so that points essentially have no termination date as long as customers keep buying from Manchester.

During February, Manchester issues 80,000 award points. Management expects that 75% of these points, or 60,000 points, will eventually be redeemed. Management estimates that the fair value of each award point is ten cents, and so defers revenue recognition on €6,000.

After one year, customers have redeemed 30,000 of the award points for oil changes, so Manchester recognizes revenue of €3,000 (30,000 redeemed points/60,000 estimated total redemptions × €6,000 deferred revenue).

During the second year, management revises its redemption estimate, and now expects that 70,000 of the original 80,000 award points will be redeemed. During that year, 20,000 points are redeemed, so that a total of 50,000 points have now been redeemed. The cumulative revenue that Manchester recognizes is €4,286 (50,000 redeemed points/70,000 estimated total redemptions × €6,000 deferred revenue). Since Manchester already recognized €3,000 in Year 1, it now recognizes €1,286 in Year 2.

During the third year, customers redeem an additional 20,000 award points, which brings total redemptions to 70,000. Management does not expect additional redemptions. Accordingly, Manchester recognizes the remainder of the deferred revenue, which is €1,714.

If a third party pays out the awards, the company is essentially collecting the consideration allocated to the awards on behalf of the third party. In this scenario, the company measures its revenue as the difference between the consideration allocated to the award credits and the amount payable to the third party for supplying the awards. The company can recognize this net difference as revenue as soon as the third party becomes obligated to supply awards and is entitled to be paid for doing so. This recognition may arise as soon as the company grants award credits. However, if customers can claim awards from either the company or the third party, revenue recognition only occurs when customers claim awards.

Example

Real Fruit, a purveyor of organically-grown farm produce, participates in the customer loyalty program operated by Icarus Airlines. Real Fruit grants its participating customers one air travel point for every dollar they spend on farm produce. These customers can then redeem the points for air travel with Icarus. Real Fruit pays Icarus €0.008 for each point. During the first year of the program's operation, Real Fruit awards 3 million points.

Real Fruit estimates that the fair value of an award point is €0.01. It therefore allocates to the 3 million issued points €30,000 of the consideration it has received from the sale of its produce. Real Fruit has no further obligation to its customers, since Icarus is now obligated to supply the awards. Accordingly, Real Fruit can recognize the €30,000 of revenue allocated to the award points at once, as well as the €24,000 expense payable to Icarus (€3,000,000 × €0.008).

If Real Fruit had acted as an agent for Icarus and simply collected funds on behalf of Icarus, then it would only recognize revenue as the net amount it retains, which is €6,000 (€30,000 allocated to the awarded points - €24,000 paid to Icarus).

If the cost of the obligation to supply awards exceeds the consideration received, the company should recognize a liability for the excess amount. This situation can arise, for example, when the cost of supplying awards increases, or when the proportion of award credits redeemed increases.

Franchise Fee Revenue Recognition

Franchise fees are recognized based on the purpose for which they were charged. The following types of fee recognition can be used:

Assets. The franchisor recognizes fees as revenue either when it delivers assets to franchisees or when it transfers title.Services. The franchisor recognizes revenue associated with continuing services over the period during which the services are rendered. If the related fee is not sufficient to cover the franchisor's provisioning costs and a reasonable profit, then it must defer the necessary additional amount from its initial franchise fee and recognize it as revenue over the servicing period. The franchisor can recognize the remainder of any initial fee when it has performed all of its obligations to the franchisee.Continuing franchise fees. When the franchisor charges a fee for various continuing rights or services, it recognizes revenue over the applicable period.Agency transactions. If the franchisor acts as an agent for a franchisee, such as when it orders supplies on behalf of the franchisee at no profit, this transaction cannot be recognized as revenue.

If franchise fees are collectible over an extended period and there is significant collection uncertainty, then the franchisor recognizes revenue as it collects cash installments.

If the franchisor's obligations under an area franchise agreement depend on the number of outlets established, revenue recognition should be based on the proportion of outlets for which services have been substantially completed.

Professional Services Revenue Recognition

Commissions can be earned for a variety of transactions. Here are the recognition criteria for several types of commissions:

Advertising. An advertising agency can recognize commissions when the related advertisements are released. If it earns commissions for production work, it recognizes revenue based on the stage of completion of the project.Financial services. Revenue recognition of fees earned for financial services requires the seller to distinguish between the following: Fees that are really part of the interest rate of a financial instrument, which should be treated as an adjustment to the effective interest rate.Fees earned for services to be rendered, such as a loan servicing fee or an investment management fee.Fees earned upon the completion of a significant act, such as a loan placement fee or a loan syndication fee.Insurance. An insurance agent is not normally obligated to render further services once the policy commences. If so, the agent can recognize the commission as revenue on the policy commencement date. If the agent is required to render further services during the policy period, then the agent must recognize the commission over the policy period.

Services Revenue Recognition

An entity is usually able to make reliable revenue estimates after the parties to the transaction have agreed to the terms of settlement, consideration to be exchanged, and each party's rights regarding services to be provided and received. An entity can recognize the revenue associated with services provided when it satisfies all of the following conditions:

Revenue measurable. The amount of revenue to be recognized can be reliably measured.Benefits assured. The economic benefits associated with the transaction will flow to the entity.Completion measurable. The stage of completion at the end of the reporting period can be reliably measured.Costs measurable. The costs related to the transaction can be reliably measured, as can the costs to complete it.

The following issues drive the calculation method used to recognize services revenue:

Straight-line recognition. If the services provided are comprised of an indeterminate number of acts over a specified period of time, revenue should be recognized on a straight-line basis over the designated time period, unless some other method better represents the provision of services.Significant activities. If a specific activity is substantially more significant than other activities, then an entity should defer revenue recognition until that activity has been completed.Unreliable estimates. When an entity cannot reliably estimate the outcome of services, it should only recognize revenue to the extent of the expenses recognized that are recoverable. Under this scenario, no profit is recognized. If it is not probable that the costs incurred are recoverable, then the entity does not recognize revenue and it recognizes all costs incurred as expenses.

Disclosures

An entity should disclose the following items:

Policies. The revenue recognition policies the entity has adopted, including the methods it uses to determine stages of completion for the provision of services.Revenue categories. The amount of revenue associated with each of the following categories: Sale of goodsRendering of servicesInterestRoyaltiesDividendsExchanges. The revenue caused by exchanges of goods or services in each of the preceding categories.

Chapter 2

Employee Benefits

Introduction

There are many types of employee benefits, including compensated absences, bonus plans, and pension plans. This chapter discusses all types of employee benefits and how to account for and disclose them, with particular attention to defined benefit plans.

Types of Employee Benefits

Short-term employee benefits are those due to be settled within 12 months of the period in which employees render the related service. Post-employment benefits are those payable following the completion of employment. Termination benefits are payable as a result of either the entity's decision to terminate employment prior to the retirement date, or an employee's voluntary acceptance of redundancy in exchange for those benefits. Other long-term benefits are those other than post-employment and termination benefits that will be settled after the 12 months following the period when employees render the related service.

Definitions

The following terms are central to an understanding of employee benefits:

Actuarial gains and losses. These include adjustments for the differences between previous actuarial assumptions and what has actually occurred, and changes in actuarial assumptions.Defined benefit plan. A post-employment benefit plan under which an entity provides specific benefits to current and former employees.Defined contribution plan. A post-employment benefit plan under which an entity pays a fixed contribution into a fund.Group administration plan. An aggregation of individual employer plans that are combined so that participating employers can pool their assets to reduce investment and administration costs. Employee claims within the plan are segregated by employer. From an accounting perspective, a group administration plan is identical to a single employer plan.Multi-employer plan. A defined contribution or benefit plan that pools the assets contributed by various entities, and uses the assets to provide benefits to the employees of multiple entities. A plan is a defined benefit multi-employer plan if participating entities contribute just enough to it to pay the benefits due in the same period, and employee benefits are determined by the length of their service, and participating entities cannot realistically withdraw without paying an additional contribution for benefits earned but not yet paid.Past service cost. The change in the present value of defined benefit obligations caused by employee service in prior periods. This cost arises from changes in post-employment benefits or other long-term employee benefits. The change in this cost may be either positive or negative.Post-employment benefit plan. An arrangement whereby an entity provides post-employment benefits for its employees.Qualifying insurance policy.