- What is the Effective Interest Method of Amortization?
- IFRS 15: Transaction Price
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What is the Effective Interest Method of Amortization?
In some cases those contracts will be easily identifiable and information about their terms and conditions will be readily available. In other cases, companies have to look at activities and transactions in a new way. MarketWatch reporters will be watching and reporting on any new disclosures about the impact of the new standard during this coming earnings season. See also: Four key sectors to watch closely this earnings season.
The new standard eliminates previous media industry-specific revenue recognition guidance and imposes new criteria to determine how revenue will be recognized, in particular license revenue.
IFRS 15: Transaction Price
That change will significantly affect many entertainment and media companies. Media and entertainment industry may now accelerate revenue recognition for certain types of licenses while others could be deferred. Time Warner Inc. US:TWX made a detailed disclosure in its first quarter filings with the SEC of the potential impact of the new standard on its business model. Time Warner expects to see new deferrals related to future leased library content that will primarily impact its Home Box Office segment. Currently revenue is recognized once access to the library is granted to the licensee.
Time Warner also says revenue for the renewed license term will not be recognized until the date the renewal term begins, compared with now, when it is recorded on the date the renewal is agreed to contractually. This new deferral will primarily impact its Warner Bros. Finally, revenue from licenses of symbolic intellectual property such as brands, trade names and logos will be deferred too, primarily for the Warner Bros. Banks and financial services firms will not see as many changes to their core business as some other industries, but the impact will still be felt, according to recent disclosures.
Read: Banks are beginning to admit a new rule on revenue recognition will have an impact. The asset-management industry will also see changes in accounting for upfront fees, upfront costs, and performance-based fees.
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For example, the new standard will require upfront fees to be deferred or recognized immediately, depending on whether or not the customer activity includes a distinct service that is provided upfront. Asset managers will now recognize sales commissions—the incremental costs of obtaining a contract with a customer—as an asset, not an expense, if it expects to recover those costs. Return-based performance fees are now considered variable consideration, so the asset manager will recognize revenue when the amount becomes fixed and is no longer subject to reversal, such as at redemption.
Morgan Stanley said that if it determines the fees are within the scope of the new rules, there will be a significant delay in the recognition of these fees as revenue in the future. Automotive industry companies, including suppliers, dealers, original equipment manufacturers and their finance affiliates, will be significantly affected by the new revenue standard, which replaces all current revenue recognition guidance for companies reporting under U.
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The automotive industry will have to adopt new accounting for preproduction activities, such as design and tooling arrangements, marketing incentives like cash rebates, volume rebates, repurchase options, product warranties, contract costs, and lease financing arrangements. New accounting for warranties could result in revenue deferral. Customer contracts containing repurchase options will now be accounted for as a lease when the customer has the right to require the company to repurchase the vehicle and the customer has a significant economic incentive to exercise that right.
That will happen if the market price of the vehicle is less than the contract repurchase price when the customer becomes eligible for the option. Tesla Inc. Delphi Automotive PLC. These reimbursements from customers are currently recorded as cost offsets, but under the new standard guaranteed recoveries may be recognized as revenues. General Motors Co. Certain transactions with daily rental car companies may also qualify, the company said, to be accounted for as a sale as opposed to the current accounting as an operating lease.
Retail and consumer products companies will be broadly affected because they offer a wide array of customer incentives such as coupons, rebates issued at the point of sale, free products, price protection, or price matching programs to their customers. That creates additional performance obligations, which can affect the timing of revenue recognition, and often introduce price variability, which can affect the amount of revenue recognized. Revenue recognition for loyalty rewards, a customer contract liability, will be later than before, but recognition of gift card breakage income, as highlighted in an earlier MarketWatch article, will be faster in most cases.
See also: An obscure accounting change could boost Amazon, Starbucks, Wal-Mart profits by hundreds of millions of dollars.
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Franchise agreements common to the retail and consumer industry will probably be accounted for as rights to access intellectual property or IP, so revenue will be recognized over time. Extended warranties will be recognized over the warranty period but standard product warranties that are not sold separately will most likely follow current guidance.
Hardware vendors sell extended maintenance contracts and consulting along with the hardware, and vendors of software licenses may provide professional services in addition to the license. For these companies the new revenue recognition standard will replace all industry-specific revenue guidance, including software revenue recognition guidance under U. For software and software-related transactions, in particular, companies will have much different timing for revenue recognition of licenses than in the past.
Under the new standard, revenue is recognized when a customer obtains control of the product, even if they have a right of return or a price protection option. That compares to prior practice where revenue was recognized once the risks and rewards of ownership transferred to the end consumer. When a portion of revenue is subject to reversal, revenue is only recognised at the amount that would not be subject to significant reversal. This could result in recognising an amount less than the transaction price. Question Retailer E provides a price match guarantee for its customers.
How should Retailer E account for the sale?
Answer The amount that Retailer E expects to repay to the customer needs to be excluded from the sale and recorded as a liability. Retailer E would book the following journal entries:.
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To promote certain products, it is not uncommon for manufacturers to offer customers the chance to enter into a draw for a big prize, e. They will need to fill in the form and drop it into the lucky draw boxes in store, or submit the form online.
XYZ Co estimates that 5, customers will be eligible for the draw. Manufacturers and wholesalers sometimes pay retailers a fee to have their When customers have a right to return goods and receive a refund, credit note If the retailer expects that a proportion of the gift card will not be used The key to determining whether this warranty is a separate performance Free gifts are a separate performance obligation that need to be accounted The core principle in IFRS 15 is to recognise revenue in a way that reflects