International Financial Reporting Standards_guide.pdf

262 Chapter 23 Revenue (IAS 18)
23.7 COMMENTARY
23.7.1 Financial services fees that are an integral part of the effective interest rate of a financial
instrument (such as origination fees) may instead be recognized as an adjustment to the
effective interest rate. This results in the deferral of the recognition of revenue items that
historically may have been recognized when received. This has a particularly big impact on
financial institutions when IFRS is adopted.
23.7.2 The application of IFRIC 13 regarding customer loyalty programs could also result
in the deferral of the recognition of a significant portion of revenue that historically has been
recognized when the amounts are received. For example, airlines and retail stores are
required under IFRIC 13 to defer a portion of their revenue until the customer awards are
redeemed. Determining the fair value of the award could be complex and require system
development and management judgment.
23.7.3 The IASB issued a discussion paper on December 19, 2008 titled “Preliminary Views
on Revenue Recognition in Contracts with Customers.” The discussion paper is a consequence
of the IASB’s efforts to develop a single conceptual model for revenue recognition to
ensure comparability between industries. The paper proposes a single contract-based revenue
recognition model that would apply broadly to contracts with customers, although
contracts in the areas of financial instruments, insurance, and leasing may be excluded. In the
proposed model, revenue is recognized when a contract asset increases or a contract liability
decreases (or some combination of the two). This occurs when an entity satisfies an obligation
in the contract with the customer.
23.7.4 In accordance with the IASB project timetable, the final IFRS is expected to be issued
in the first half of 2011. If the final standard adopts the principles addressed in the discussion
paper, entities could be required to apply significantly different revenue recognition principles.
The Statement of Financial Position and Statement of Comprehensive Income would
then present amounts that are very different from the current approach.
EXAMPLES: REVENUE
EXAMPLE 23.1
Sykes and Anson, a high-tech company, is having a very poor year as a result of weak
demand in the technology markets. The entity’s controller has determined that much of the
inventory on hand is worth far less than the value recorded on the entity’s books. He decides
to write off this excess amount, which totals $10 million. Furthermore, he is worried that the
inventory will fall in value next year and decides to take a further write-down of $5 million.
Both of these write-offs occur in the current year.
Which of the following statements is true?
a. The company has engaged in a technique known as recording “sham” revenue.
b. The company has overstated its income in the current period.
c. The company has engaged in a technique that shifts future expenses into the current
period.
d. The company should be applauded for being so conservative in its accounting for
inventories.