Quasi reorganization under ifrs when is sales
As of the coming year, the new regulations of IFRS 15 for the recognition of sales are to be applied for the first time. Now is the time to give an insight into the new concept. Will everything change now and sales will have to be recorded in completely different periods than before?
In any case, the examination of when sales are to be recognized is based on a completely new concept, which the standard-setting IASB regards as a closed concept compared to the old regulations. The test takes place in 5 steps:
Step 1: First of all, a contract with the customer must be identified. This requires in particular the consent of both contracting parties to the agreement, in which rights and obligations can be identified, which has economic substance and from which payment is also likely.
Step 2: Then the agreed performance obligations are to be identified. This relates in particular to multi-component transactions in which several performance obligations are agreed with the customer in an economic context. For example, this can be a bundle of different products or service obligations. In addition to the delivery of a product, an implicit financing component can also be included if, for example, a long payment term has been agreed. Here it must be decided on a case-by-case basis whether these are separate service components or parts of a service component. The delivery and installation of a heating system, for example, should regularly be interpreted as a service component. The conclusion of the purchase of a smartphone and an agreement on telecommunications services for a fixed term (“mobile phone contract”), on the other hand, comprises at least two service components.
Step 3: Here the total transaction price is to be determined. Particular problems can arise with variable price elements, agreed payments to the customer, a financing component or non-monetary fees (swap transactions).
Step 4: The fourth step is again important for the recording of multi-component transactions, because here the entire transaction price determined in step 3 has to be distributed over the components of the transaction identified in step 2. In the past, it was controversial here which procedure should be used for the division. IFRS 15 now clearly focuses on a market price analysis. This means that the total remuneration is to be divided in the ratio of the individual values of the services. As a result, a price reduction that is included in the total price compared to the sum of the individual prices is distributed across all service components.
Step 5: Finally, it must be assessed for each service component when the revenue is to be recognized in the income statement. A distinction is made between time-dependent and time-related services. Period-dependent services are defined positively:
- The customer receives and uses the service at the same time, which is assumed, for example, by a cleaning service.
- An asset is produced or improved over which the customer already has the power of disposal while the service is being provided, for example the renovation of a building belonging to the customer.
- For the created asset, the performing company has no alternative utilization option other than delivery to the customer and there is an enforceable right to payment for the service performed to date.
In the case of time-dependent services, the revenue is recognized according to the progress made. Input and output-oriented methods can be used for the measurement. So far, the so-called cost-to-cost method has enjoyed particular popularity in the context of contract manufacturing, in which the progress in performance is defined as the ratio of the costs already incurred to the expected total costs.
If there is no time-dependent performance according to any of the aforementioned criteria, the performance is to be classified as point-based. In this case, the proceeds are recorded at the point in time at which the power of disposal over the object of performance is transferred to the customer. This is regularly the case with delivery.
In many practical cases, the new regulations will not result in a different periodization of revenues than before, but this cannot be generalized. As always with IFRS, the devil lies in the detail and it must be checked, taking into account the extensive regulations in the standard, when the revenue is to be recorded in each individual case.
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