Internationally, the standards for revenue recognition and work-in-progress have already been amended and are effective as from 2018 (IFRS 15 ‘Revenue from Contracts with Customers’). The Dutch Accounting Standards Board (RJ) analyzed whether these international standards should also be introduced in the Netherlands. It has been decided that this is not desirable, taking into account the users of the RJ in combination with the associated implementation costs. Instead, the DASB has decided to implement specific changes to the guidelines for revenue recognition (RJ270) and work-in-progress (RJ221), and to supplement these with further explanations and examples.
The changes below are effective for to reporting years beginning on or after January 1, 2022.
The following changes have been made:
1. Performance obligations:
If there are more performance obligations (several goods and/or services identified) in one contract which are distinct, then revenue shall be recognized for each separate performance obligation within the contract. E.g. You sell an elevator together with a 3 year maintenance contract as one contract. In that case there are two performance obligations within this contract: the sale of the elevator, and the 3-year maintenance contract.
Another example for telecompanies is the sale of the telephone together with the usage of the data bundle. In that case there are two performance obligations: one the sale of the telephone, and the other one the usage of the data bundle.
If an additional warranty is a distinctive service, then it is recognized as a separate performance obligation. E.g. if the customer buys an additional warranty for three years besides the normal warranty of 2 years, then this additional warranty is recognized as a separate performance obligation in the P&L (over time).
3. Variable constraint:
Now it has been clarified that a best estimate for the variable constraint needs to be made, taking into account prudence. Which means that only revenue is recognized that is unlikely to be reversed in the future.
4. Allocate the transaction price to the performance obligations
Then the transaction price is allocated to the performance obligations. This is based on the relative value basis of the performance obligations. Where possible, this is based on the standalone selling price per performance obligation, otherwise based on the fair value of the performance obligation.
5. Significant financing component:
If there is a (significant) financing component, then revenue is adjusted for the effects of time value of money (=discounted). It also has been clarified that if the period is less than one year, the financing component is considered insignificant, and does not need to be discounted.
6. Principal versus agent:
A new indicator has been added: the element of control just prior to delivery of a good or service is an indicator for being a principal.
7. Licenses from intellectual property:
It is accounted for:
a) or as right to use intellectual property without obligation to update intellectual property (=point-in-time, like sale of goods) vs
b) or as right to access intellectual property throughout license period including obligation to keep intellectual property up-to-date (=over time, like service);
8. Contract modifications:
Depending on the economic substance of the changes made in the contract, the modification is accounted for:
a) or as a separate contract in addition to the existing contract, or
b) a termination of the existing contract and the creation of a new contract, or
c) a modification to the existing contract,
or a combination;.
9. Considerations payable to a customer:
If the entity sells goods and in addition pays a consideration to this client, for example (e.g. consideration paid to a customer to put the supplier’s products on a particular shelf in a shop), then in general the consideration paid to the customer is deducted from revenues. However, if the payment to a customer is made in exchange for a distinct good or service (specific shelve that the company now controls), then this payment is recognized by the entity as the purchase price of the good or service acquired instead of reduction of revenues.
10. Customer loyalty programs:
It has been clarified that if the value of the option is not insignificant, then this option is a separate performance obligation and revenue is recognized when those future services are delivered/goods are transferred or when the option expires. E.g. a 25% discount on your next sale. Then not all revenue is recognized upfront, but a part is recognized during the next sale when the voucher is exchanged.
11. Non-refundable upfront fee at contract inception (e.g. joining fees in health club)
it has now been clarified that this activity does not result in the delivery of promised goods/services to the customers at inception of the contract. Therefore the entity does not recognize revenue until such time as those expected future goods or services are delivered. E.g. joining fee health club: this upfront fee is recognized in the P&L over time during the contract period instead of in time at inception of the contract.
12. Customers’ unexercised rights:
If the entity expects that that customers will not exercise all the rights granted, then revenue is recognized in accordance with the pattern of rights expected to be exercised by customers.
For example if a company expects based on past experience that only 85% of the vouchers will be exercised, then only this 85% is deferred.
If the entity expects customers to exercise all rights granted, then only at the date when it becomes highly improbable that the customer will still exercise its remaining rights, revenue is recognized.
if the customer has a right of return, then revenue is recognized if the entity can reliably estimate the expected return (see principles variable return). The entity does not recognize revenue for amounts received to which the entity does not expect to be entitled. Then a refund liability shall be recognized (DAS 270.112), and an asset is recognized for the right to recover goods from the customer when settling the refund liability. This asset is initially measured by reference to the former carrying amount less the expected costs for the recovery of those goods and possible decrease in value of the returned goods.
14. Onerous contracts (also for work-in-progress):
The provision for onerous contracts is based on unavoidable costs of meeting the obligations under the contract. The unavoidable costs under a contract reflect the lower of (1) the cost of fulfilling it and (2) any compensation or penalties arising from failure to fulfil it. This includes: a) the incremental costs, i.e. the additional costs that would not have incurred without the contract; and b) an allocation of other costs that relate directly to fulfilling a contract, such as employee costs, materials and attributable depreciation costs of tangible fixed assets that are used when executing of the contract. Overhead costs are not part of costs of fulfilling a contract (‘AK-opslag’), and are therefore not included in the provision. This has now also become applicable for construction contracts.
15. Presentation of construction contracts in the profit and loss account:
In the P&L by nature it is no longer allowed to present changes in construction contracts for not completed contracts in the line item ‘change in work in progress on construction contracts’ in the P&L. Contract revenue must be presented as “revenue” in the profit and loss account, and the contracts costs are presented as expenses, depending on its nature, now also for projects not completed at reporting date.
16. Presentation of construction contracts in the balance sheet:
Netting of all construction contracts and present this or as an asset or as a liability, is no longer allowed. It is now split.
If the net amount of a construction contract is:
– a debit amount, the net amount is recognized as an asset;
– a credit amount, the net amount is recognized as a liability.
17. Disclosure requirements:
The following is disclosed:
a) nature of major performance obligations;
b) per major type of performance obligation, the method of attribution of revenue to the reporting periods, including:
– revenue from sales of goods;
– revenue from provision of services;
– revenue from licenses.
c) the amount of revenues recognized for the major revenue categories described under b);
d) total amount of capitalized costs of obtaining a contract.
18. Transitional provision:
a) Prospective: only apply for contracts entered into or modified on or after opening balance sheet date as from 1 January 2022. The previous standards are still be applicable for contracts entered into or modified before the initial application date.
b) partially retrospective: apply the amendments in this standards only to contracts entered into or modified on or after a date chosen by the entity itself, preceding January 1, 2022 or the relevant effective date on earlier application;
c) fully retrospective, including adjustment of comparative figures.
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