IAS 18 REVENUE Presented by Pradeep Kumar ACA

IAS 18 REVENUE Presented by Pradeep Kumar ACA, CPA(USA), DISA(ICAI), CISA(USA)

SESSION AS 9 Revenue Recognition CAS 9 Revenue IAS 18 Revenue IFRIC 13 Customer Loyalty Programs IFRIC 18 Transfer of assets from customers IFRIC 15 Agreements relating to construction of real estate • SIC 31 Barter Transactions involving advertising services • • •

Scope Sale of goods – land or property held for resale Rendering of services – AS 7? Interest, royalties, & dividends Does not deal with Revenue Gross inflow of economic benefits during the period - ordinary activities –inflows result in increases in equity, other than increases relating to contributions from equity participants. • economic benefits– Framework for preparation & presentation of FS issued by ICAI. • •

MEASUREMENT OF REVENUE • Fair value of the consideration received or receivable • cash or cash equivalents received or receivable • interest-free credit or below market rate • Discount future receipts using an imputed interest rate • exchanged or swapped for goods or services – similar nature & value

Transaction • Identification of Transaction • separately identifiable components of a single transaction • Combining linked transactions • Sale of Goods: • Transfer of significant risks & rewards of ownership • No continuing managerial involvement or effective control of goods sold • Uncertainty • Matching Concept

Recognition • Reliable measurement of revenue • Costs incurred or to be incurred reliably measured • Probable flow of economic benefits • Rendering of services: • Reliable measurement of revenue, • probable flow of economic benefits, • Reliable measurement of state of completion • Reliable measurement of cost incur to complete • Reliable estimate: enforceable rights, consideration to be exchanged & manner & terms of settlement

STAGE OF COMPLETION • Depending on the nature of the transaction, the methods may include: • (a) surveys of work performed; • (b) services performed to date as a percentage • © proportion that costs incurred to date bear to the estimated total costs of the transaction. • Other Aspects: • Progress payments and advances received from customers? • Indeterminate number of acts over a specified period of time ? • Unable to estimate revenue? Expenses? • Revenue not recognised, costs are recognised

RECOGNITION Interest, royalties & dividends Probable flow of economic benefits Reliable measurement of revenue Base: Interest: Effective Interest Method IAS 39, CAS 30 • Royalties: accrual • Dividends: right to receive • • •

DISCLOSURE • Accounting Policies including methods used to determine stage of completion. • Amount of significant category of revenue • Revenue from exchange of goods or services.

WIPRO NOTES TO ACCOUNTS • • WIPRO IGAAP 31. 03. 2010 Revenue from Software development services comprises revenue from time and material and fixed –price contracts. Revenue from time and material contracts is recognised as related services are performed. Revenue from fixed-price, fixed-time frame contracts is generally recognised in accordance with the “Percentage of Completion” method. • • • WIPRO IFRS Q 4 31. 03. 10 The Company derives revenue primarily from software development and related services, BPO services, sale of IT and other products. a) Services: The Company recognizes revenue when the significant terms of the arrangement are enforceable, services are being delivered and the collectability is reasonably assured. The method for recognizing revenues and costs depends on the nature of the services rendered: A. Time and materials contracts Revenues and costs relating to time and materials contracts are recognized as the related services are rendered. B. Fixed-price contracts Revenues from fixed -price contracts, including systems development and integration contracts are recognized using the “percentage -of-completion” method

WIPRO NOTES TO ACCOUNTS • IGAAP • Provision for estimated losses, if any, on incomplete contracts are recorded in the period in which such losses become probable based on the current contract estimates • • IFRS Percentage of completion is determined based on project costs incurred to date as a percentage of total estimated project costs required to complete the project. The cost expended (or input) method has been used to measure progress towards completion as there is a direct relationship between input and productivity. If the Company does not have a sufficient basis to measure the progress of completion or to estimate the total contract revenues and costs, revenue is recognized only to the extent of contract cost incurred for which recoverability is probable. When total cost estimates exceed revenues in an arrangement, the estimated losses are recognized in the statement of income in the period in which such losses become probable based on the current contract estimates

WIRPRO NOTES TO ACCOUNTS • • • Revenues from BPO services are derived from both time-based and unit-priced contracts. Revenue is recognised as the related services are performed, in accordance with the specific terms of the contract with the customers. Revenue from customer training, support and other services is recognised as the related services are performed. Revenue from application maintenance services is recognised over the period of the contract. • • Revenue from contracts with multiple element arrangements are recognized using the guidance in IAS 18, Revenue. The Company allocates the arrangement consideration to separately identifiable components based on their relative fair values. Revenue from maintenance contracts is recognized ratably over the period of the contract using the percentage of completion method. The Company accrues the estimated cost of warranties at the time when the revenue is recognized. The accruals are based on the Company’s historical experience of material usage and service deliver y costs

WIPRO NOTES TO ACCOUNTS • Revenue from products are • Products: recognized when the significant • Revenue from sale of risks and rewards of ownership have transferred to the buyer, products is recognised when continuing managerial the product has been involvement usually associated delivered, in accordance with ownership and effective with the sales contract. control have ceased, the amount of revenue can be Revenues from product measured reliably, it is sales are shown as net of probable that economic excise duty, sales tax benefits associated with the transaction will flow to the separately charged and Company and the costs applicable discounts. incurred or to be incurred in respect of the transaction can be measured reliably.

SIC 31 • Barter transactions involving advertising services. • Scope: • no cash or other consideration is exchanged between the entities – advertising services • Advertising Services exchanged are dissimilar • Measurement: • a Seller can reliably measure revenue at the fair value of the advertising services it provides in a barter transaction.

IFRIC 13 • Customer Loyalty Programmes • Scope: • Credits as part of sales transaction that the customer can redeem in future • Account for award credits as a separately identifiable component of the initial sale either on its own or on behalf of third party • Use fair value

Example • A grocery retailer operates a customer loyalty programme. It grants programme members loyalty points when they spend a specified amount on groceries. Programme members can redeem the points for further groceries. The points have no expiry date. In one period, the entity grants 100 points. Management expects 80 of these points to be redeemed. Management estimates the fair value of each loyalty point to be Re. 1, and defers revenue of Rs. 100. • Year 1 • IE 2: At the end of the first year, 40 of the points have been redeemed in exchange for groceries, ie half of those expected to be redeemed. The entity recognises • revenue of (40 points/80 points) × Rs. 100 = Rs. 50.

EXAMPLE • Year 2 • IE 3 In the second year, management revises its expectations. It now expects 90 points to be redeemed altogether. • IE 4 During the second year, 41 points are redeemed, bringing the total number redeemed to 40 + 41 = 81 points. The cumulative revenue that the entity recognises is (81 points/90 points) × Rs. 100 = Rs. 90. The entity has recognised revenue of Rs. 50 in the first year, so it recognises Rs. 40 in the second year. • Year 3 • IE 5 In the third year, a further nine points are redeemed, taking the total number of points redeemed to 81 + 9 = 90. Management continues to expect that only 90 points will ever be redeemed, ie that no more points will be redeemed after the third year. So the cumulative revenue to date is (90 points/909 points) × Rs. 100 = Rs. 100. The entity has already recognised Rs. 90 of revenue (Rs. 50 in the first year and Rs. 40 in the second year). So it recognises the remaining Rs. 10 in the third year. All of the revenue initially deferred has now been recognised.

IFRIC 15 • Agreements for construction of real estate • Scope: • Agreements in construction of real estate & includes delivery of other goods & services. • Agreement under AS 7 or AS 9? Major structural elements. • Agreement is construction contract • Agreement is rendering of services? or • Agreement is of sale of goods? During construction or at single point? • Further work on real estate already delivered?

Disclosures • the % of completion method for agreements that meet all the criteria in paragraph 14 of AS 9 continuously as construction progresses • How it determines the agreement • Amount of revenue arising • Methods used to % completion • Agreements that in process at reporting date • Cost incurred & revenue recognised • Advance payments received

• • • IFRIC 18 Transfer of assets from customers Scope: Applies to PPE transferred from customers to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services, or to do both. Entity receives cash to construct PPE Recognition of asset: Asset transferred – Fair Value Cash received from customer – Cost Example: Electricity Substation How credit shall be accounted?

IFRIC 18 • Identifying the separately identifiable services • Service connection, • ongoing access, the goods or services, or both at a price lower than would be charged. • Revenue recognition • one service • more than one separately identifiable service • ongoing service is identified

EXEMPTIONS FOR 1 ST TIME ADOPTER • Transfers of assets from customers • D 24 A first time adopter shall apply Appendix D of AS 9 (Revised 20 XX) prospectively to transfers of assets from customers received on or after the date of transition to Ind-AS, • Earlier application is permitted provided • Valuations and other information needed to apply Appendix D of AS 9 (Revised 20 XX) to past transfers were obtained at the time those transfers occurred. • Disclose the date from which the Appendix D of AS 9 (Revised 20 XX) was applied.

1 ST TIME ADOPTION IMPLEMENTATION GUIDANCE • AS 9 (Revised 20 XX) Revenue • IG 17 If an entity has received amounts that do not yet qualify for recognition as revenue in accordance with AS 9 (Revised 20 XX) (for example, the proceeds of a sale that does not qualify for revenue recognition), the entity recognises the amounts received as a liability in its opening Ind-AS Balance Sheet and measures that liability at the amount received.

• • • EXAMPLES Sale of goods: Bill & hold sales – buyer request Goods shipped subject to conditions Installation & inspection Approval Consignment sales – recipient to 3 rd party Cash on delivery Lay away sales: - Final installment Advance payment Sale & repurchase agreement Subscriptions to publications and similar items Installment sales

RENDERING OF SERVICES • Installation fee • Servicing fee – included in price of contract. • Financial service fee –for which service is provided • effective interest rate for financial instrument • Origination fees evaluating the borrower’s financial condition, recording guarantees, collateral and other security arrangements, negotiating the terms of the instrument, preparing and processing documents and closing the transaction. • Commitment fees received by the entity to originate a loan • Franchise fees.

Interest Royalty & Dividend • Licence fees and royalties – agreement or SLM • An assignment of rights for a fixed fee or nonrefundable guarantee under a noncancellable • contract which permits the licensee to exploit those rights freely and • the licensor has no remaining obligations to perform is, in substance, a sale.

Agent or Principal • acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. • primary responsibility for providing the goods or services to the customer or fulfilling the order • inventory risk before or after the customer order • latitude in establishing prices, either directly or indirectly • entity bears the customer’s credit risk for the amount receivable from the customer • either a fixed fee per transaction or a stated percentage of the amount billed to the customer

SOURCE • ED on AS 9 Revenue, ED on AS 41 First time adoption of Indian Accounting Standards. • IAS 18, SIC & IFRICs • Wipro Annual statements & interim Fs as on 31. 03. 2010