IFRS 1. 5 vs. IAS 1. Huge Change Is Here When to recognize revenueHow does IFRS 15 change revenue recognition Does it affect YOU Youll find a clear explanation and its comparison with IAS 18 on a numerical example hereSantander Consumer USA Holdings Inc. Reports Second Quarter 2017 Results. Net sales were 824. GAAP gross profit was 416. Comprehensive Online Commercial Real Estate Glossary of Terms and Definitions. Professional tax and management guidance for small to mediumsized businesses since 1980. Standard IAS 16 prescribes the accounting treatment for property, plant and equipment and therefore it is one of the most important and commonly applied standards. Commercial Real Estate Leasing Definitions We hope you find this glossary of terms helpful. We study lease accounting in an international panel data set to examine how accounting outcomes vary with two features of accounting standards the emphasis on using. Gross Profit From Installment Sales Gaap' title='Gross Profit From Installment Sales Gaap' />Premature profit recognition on real estate sales transactions had been an issue for many years. In subsequent years, real estate transactions became increasingly. This simple question is one of the most controversial issues in todays accounting. Well, its simple and easy when you sell goods, but how about long term contracts or some sort of services You need to have some rules on WHEN to recognize the revenue from all these things, because all your profits and losses, your reputation in front of the outside world and your taxes depend on this. Revenue recognition rules have just changed and later in this article, youll find an example showing you the impact of this change. As you know, IAS 1. Revenue contains principles for revenue recognition, but they are quite broad and as a result, many companies use their judgment to apply them in their specific situation. Some companies even developed their own IFRS policies based on the US GAAP rules. Opposed to IFRS, US GAAP guidance about revenues is very detailed US GAAP contains about 1. Finally, these 2 standards came closer and tried to solve all these differences on 2. May 2. 01. 4. New revenue recognition standard was issued IFRS 1. Revenue from Contracts with Customers and it should fill the gap between IFRS and US GAAP. FASB the US GAAP standard setting body issued the new revenue recognition standard, too Topic 6. IFRS 1. 5 full text of Topic 6. Although Ill cover this standard in one of my videos in the following months, here are the basic points for your information Every company must follow the five step model in order to comply with IFRS 1. Well not go into details, just let me brief you a bit Step 1 Identify the contracts with a customer. IFRS 1. 5 defines a contract as an agreement between two or more parties that creates enforceable rights and obligations and sets out the criteria for every contract that must be met. Step 2 Identify the performance obligations in the contract. A performance obligationis a promise in a contract with a customer to transfer a good or service to the customer. Step 3 Determine the transaction price. The transaction price is the amount of consideration for example, payment to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Step 4 Allocate the transaction price to the performance obligations in the contract. For a contract that has more than one performance obligation, an entity should allocate the transaction price to each performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation. Step 5 Recognize revenue when or as the entity satisfies a performance obligation. Who Will Feel the Biggest Impact of IFRS 1. The experts say that the most impacted industries are telecom, software development, real estate and other industries with long term contracts. If you work in an industry where bundled contracts of product service are quite common, then you should pay attention. Im referring mainly to software development or telecommunications, where customers usually buy a prepayment plans with a handset or software development comes with implementation and post delivery service in 1 package, or any similar arrangements. Under the new model, companies in telecom and software will probably recognize revenue earlier than under older rules. Why is that Well, because under new IFRS 1. It means that under new IFRS 1. Under IAS 1. 8, the revenue is defined as a gross inflow of economic benefits arising from ordinary operating activities of an entity. It means that if the operator gives a handset for free with the prepayment plan, then the revenue from handset is 0. OK, if that sounds a bit confusing, well better look at numbers. Example IAS 1. 8 vs. IFRS 1. 5Johnny enters into a 1. ABC. The terms of plan are as follows Johnnys monthly fixed fee is CU 1. Johnny receives a free handset at the inception of the plan. ABC sells the same handsets for CU 3. CU 8. 0month. How should ABC recognize the revenues from this plan in line with IAS 1. Torrent Live Interior 3D Pro Crack. IFRS 1. 5 OK, lets ignore a couple of things here, like a price of a SIM kit, or the situations when Johnny hangs on the phone for hours and spends some minutes in excess of his plan. Lets focus just on these 2 things. Revenue under IAS 1. Current rules of IAS 1. ABC should apply the recognition criteria to the separately identifiable components of a single transaction here handset monthly plan. However, IAS 1. 8 does not give any guidance on how to identify these components and how to allocate selling price and as a result, there were different practices applied. For example, telecom companies recognized revenue from the sale of monthly plans in full as the service was provided, and no revenue for handset they treated the cost of handset as the cost of acquiring the customer. Some companies identified these components, but then limited the revenue allocated to the sale of handset to the amount received from customer zero in this case. This is a certain form of a residual method based on US GAAPs cash cap method. For the simplicity, lets assume that ABC recognizes no revenue from the sale of handset, because ABC gives it away for free. The cost of handset is recognized to profit or loss and effectively, ABC treats that as a cost of acquiring new customer. Revenue from monthly plan is recognized on a monthly basis. The journal entry is to debit receivables or cash and credit revenues with CU 1. Revenue under IFRS 1. Under new rules in IFRS 1. ABC needs to identify the contract first step 1, which is obvious here as theres a clear 1. Johnny. Then, ABC needs to identify all performance obligations from the contract with Johnny step 2 in a 5 step model Obligation to deliver a handset. Obligation to deliver network services over 1 year. The transaction price step 3 is CU 1 2. CU 1. 00 times 1. Now, ABC needs to allocate that transaction price of CU 1 2. I made it really simple for you here, so lets do it in the following table Performance obligation. Stand alone selling price on total Revenue relative selling price 1 2. Handset. 30. 0. 0. Network services. Total. 1 2. 60. 0. The step 5 is to recognize the revenue when ABC satisfies the performance obligations. Therefore When ABC gives a handset to Johnny, it needs to recognize the revenue of CU 2. When ABC provides network services to Johnny, it needs to recognize the total revenue of CU 9. Its practical to do it once per month as the billing happens. The journal entries are summarized in the following table Description. Amount. Debit Credit. When. Sale of handset. FP Unbilled revenue. PL Revenue from sale of goods. When handset is given to Johnny. Network services. JohnnyFP Receivable to Johnny When network services are provided on a monthly basis according to contract with Johnny. Persona 3 Portable Torrent English. PL Revenue from network services. FP Unbilled revenue. So as you can see, Johnny effectively pays not only for network services, but also for his handset. Whats the Impact of the IFRS 1. The biggest impact of the new standard is that the companies will report profits in a different way and profit reporting patterns will change. In our telecom example, ABC reported loss in the beginning of the contract and then steady profits under IAS 1. Under IFRS 1. 5, ABCs reported profits are the same in total, but their pattern over time is different. Why does it matter Well, because some contracts surpass one accounting period. They are long term and reporting revenues in incorrect accounting periods might cause wrong taxation, different reporting to stock exchange and other things, too. Dont believe me Just look at ABC. Lets say that contract started on 1 July 2. X1 and ABCs financial year end is 3. December 2. 0X1. Just look how much profits ABC reports from the same contract with Johnny under IAS 1. IFRS 1. 5 in the year 2. X1 Performance obligation. Under IAS 1. 8Under IFRS 1.