1
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 1
Nelson LamNelson Lam 林智遠林智遠MBA MSc BBA ACA ACIS CFA CPA(Aust) CPA(US) FCCA FCPA FHKIoD MSCA
Property Plant and Equipment (IAS 16)
Workshop Agenda
P t 1
Updated Practices
Cases amp ExamplesLeases (IAS 17)
I t ibl A t
Revenue(IAS 18)
Part 1This
Evening
Cases amp Examples from Hospitality amp Gaming Industry
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Intangible Assets(IAS 38)
Investment Property (IAS 40)
Part 2Tomorrow
2
Presentation of Financial Statements(IAS 1 Revised in 2007)
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Complete Set of Fin Statements
bull A complete set of financial statements comprisesa) a statement of financial position as at the end of the
period
Previously we call it ldquoBalance Sheetrdquoperiod
b) a statement of comprehensive income for the periodc) a statement of changes in equity for the periodd) a statement of cash flows for the periode) notes comprising a summary of significant accounting
policies and other explanatory information andf) a statement of financial position as at the beginning of
the earliest comparative period
Previously we call it ldquoIncome Statementrdquo
3 yearsrsquo ldquobalance sheetsrdquo
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the earliest comparative periodbull when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial statements or
bull when it reclassifies items in its financial statementsbull An entity may use titles for the statements other than
those used in HKAS 1
3
Structures amp Content of Fin Statements
Statement of Financial Position as at the end of the period
Complete Set of Financial Statements Previous titleor changes
Previous title ldquoBalance Sheetrdquo
To use a single statement to present all items of income and expense
Statement of Comprehensive Income for the period
Statement of Changes in Equity for the period
No title change
No title change(but restructured)
New statement
To use two statements to present all items of income and expense
Statement of Comprehensive Income for the period
Income Statement for the period
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Statement of Cash Flows for the period
Notes
A statement of financial position as at the beginning of the earliest comparative period if required
Previous titleldquoCash Flow Statementrdquo
(but restructured)
No title change
New requirement
Sourced from Intermediate Financial Reporting (2009) by Nelson Lam and Peter Lau
Statement of Comprehensive IncomeChanges in equity
in a periodSingle Statement Single Statement
ApproachApproachTwoTwo--Statement Statement
ApproachApproach
Components of profit or loss
Components of other
comprehensive income
Non-owner changes
Presented in separateincome statement
Presented in statementof comprehensive income
Presented in statementof comprehensive income
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Components of owner changes
in equity
Owner changes
Presented in statementof changes in equity
Presented in statementof changes in equity
Sourced from Intermediate Financial Reporting (2009) by Nelson Lam and Peter Lau
4
Statement of Comprehensive IncomeCase
Consolidated statement of comprehensive income
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Statement of Comprehensive IncomeCase
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5
Property Plant and Equipment (IAS 16)
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1 Objective and Scope
bull The principal issues in accounting for property plant and equipment (PPE) area) the recognition of the assets Definitionsa) the recognition of the assetsb) the determination of their carrying amounts andc) the depreciation charges and impairment losses
to be recognised in relation to themMeasurement
Recognition
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6
bull Building acquired under an
1 Objective and Scope
What are PPE Are the following PPEWhat are PPE Are the following PPE
Example
IAS 17timesoperating lease
bull Building acquired under finance leases
bull Freehold property used for rental purpose
bull Investment property underre-development
IAS 17
radic
times
times
IAS 40
IAS 40
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pbull Property held for a currently
undetermined future usebull Leasehold land separated
from the leasehold building
times
times
IAS 40
IAS 17
2 Definitions
bull Property plant and equipment (PPE) are tangible items thata) are held for use
ndash in the production or supply of goods or servicesin the production or supply of goods or services ndash for rental to others or ndash for administrative purposes and
b) are expected to be used during more than one period
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7
2 Definitions
Cost bull is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction orq
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSseg IAS 39 IFRS 2
Residual value
bull Revised but helliphellip discussed later
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value discussed later
3 Recognition
bull The cost of an item of PPE shall be recognised as an asset if and only ifa) it is probable that future economic benefits associated with the itema) it is probable that future economic benefits associated with the item
will flow to the entity andb) the cost of the item can be measured reliably
bull Major spare parts servicing equipment replacement and inspection can also be qualified as PPE
Recognition CriteriaRecognition Criteria
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bull If the recognition criteria is met such cost is recognised the carrying amount of the replaced parts or previous inspection is derecognised
8
3 RecognitionCase
Wynn Macau Limited(N t t Fi i l St t t 2009)
bull Expenditures incurred after items of property and equipment have been brought into use such as repairs and maintenance are normally charged to the statement of comprehensive income in the period in which they are incurred
bull In situationsndash where it can be clearly demonstrated an expenditure has resulted in
(Notes to Financial Statements 2009)
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ndash where it can be clearly demonstrated an expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment and
ndash where the cost of the item can be measured reliably the expenditure is capitalized as an additional cost of that asset or as a replacement
3 Recognition
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Subsequent costs are included in the carrying
amount of the asset or recognised as a separate asset as appropriate only when bull it is probable that future economic benefits associated
with the item will flow to the Group andbull the cost of the item can be measured reliably
ndash All other repairs and maintenance costs are
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All other repairs and maintenance costs are expensed in the income statement during the financial period in which they are incurred
9
4 Measurement at Recognition
bull An item of PPE that qualifies for recognition as an asset shall be measured at its costcost
CostCost bull the amount of cash or cash equivalents paid or
bull the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs
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eg IAS 39 IFRS 2
4 Measurement at Recognition
bull The costcost of an item of PPE comprisesa) its purchase price including import duties and
non-refundable purchase taxes after deducting Purchase Pricep gtrade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
c) the initial estimate of the costs of dismantlingand removing the item and restoring the siteon which it is located the obligation for which
Directly Attributable Cost
Dismantling Cost
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on which it is located the obligation for whichan entity incurs eitherndash when the item is acquired orndash as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
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bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
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direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
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5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
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the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
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y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
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carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
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loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
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income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
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bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
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b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
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p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
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p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
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ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
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pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
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in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
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classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
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Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
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19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
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Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
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20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
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otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
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p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
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6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
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Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
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ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
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23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
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1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
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b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
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Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
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will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
2
Presentation of Financial Statements(IAS 1 Revised in 2007)
copy 2006-10 Nelson Consulting Limited 3
Complete Set of Fin Statements
bull A complete set of financial statements comprisesa) a statement of financial position as at the end of the
period
Previously we call it ldquoBalance Sheetrdquoperiod
b) a statement of comprehensive income for the periodc) a statement of changes in equity for the periodd) a statement of cash flows for the periode) notes comprising a summary of significant accounting
policies and other explanatory information andf) a statement of financial position as at the beginning of
the earliest comparative period
Previously we call it ldquoIncome Statementrdquo
3 yearsrsquo ldquobalance sheetsrdquo
copy 2006-10 Nelson Consulting Limited 4
the earliest comparative periodbull when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its financial statements or
bull when it reclassifies items in its financial statementsbull An entity may use titles for the statements other than
those used in HKAS 1
3
Structures amp Content of Fin Statements
Statement of Financial Position as at the end of the period
Complete Set of Financial Statements Previous titleor changes
Previous title ldquoBalance Sheetrdquo
To use a single statement to present all items of income and expense
Statement of Comprehensive Income for the period
Statement of Changes in Equity for the period
No title change
No title change(but restructured)
New statement
To use two statements to present all items of income and expense
Statement of Comprehensive Income for the period
Income Statement for the period
copy 2006-10 Nelson Consulting Limited 5
Statement of Cash Flows for the period
Notes
A statement of financial position as at the beginning of the earliest comparative period if required
Previous titleldquoCash Flow Statementrdquo
(but restructured)
No title change
New requirement
Sourced from Intermediate Financial Reporting (2009) by Nelson Lam and Peter Lau
Statement of Comprehensive IncomeChanges in equity
in a periodSingle Statement Single Statement
ApproachApproachTwoTwo--Statement Statement
ApproachApproach
Components of profit or loss
Components of other
comprehensive income
Non-owner changes
Presented in separateincome statement
Presented in statementof comprehensive income
Presented in statementof comprehensive income
copy 2006-10 Nelson Consulting Limited 6
Components of owner changes
in equity
Owner changes
Presented in statementof changes in equity
Presented in statementof changes in equity
Sourced from Intermediate Financial Reporting (2009) by Nelson Lam and Peter Lau
4
Statement of Comprehensive IncomeCase
Consolidated statement of comprehensive income
copy 2006-10 Nelson Consulting Limited 7
Statement of Comprehensive IncomeCase
copy 2006-10 Nelson Consulting Limited 8
5
Property Plant and Equipment (IAS 16)
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1 Objective and Scope
bull The principal issues in accounting for property plant and equipment (PPE) area) the recognition of the assets Definitionsa) the recognition of the assetsb) the determination of their carrying amounts andc) the depreciation charges and impairment losses
to be recognised in relation to themMeasurement
Recognition
copy 2006-10 Nelson Consulting Limited 10
6
bull Building acquired under an
1 Objective and Scope
What are PPE Are the following PPEWhat are PPE Are the following PPE
Example
IAS 17timesoperating lease
bull Building acquired under finance leases
bull Freehold property used for rental purpose
bull Investment property underre-development
IAS 17
radic
times
times
IAS 40
IAS 40
copy 2006-10 Nelson Consulting Limited 11
pbull Property held for a currently
undetermined future usebull Leasehold land separated
from the leasehold building
times
times
IAS 40
IAS 17
2 Definitions
bull Property plant and equipment (PPE) are tangible items thata) are held for use
ndash in the production or supply of goods or servicesin the production or supply of goods or services ndash for rental to others or ndash for administrative purposes and
b) are expected to be used during more than one period
copy 2006-10 Nelson Consulting Limited 12
7
2 Definitions
Cost bull is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction orq
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSseg IAS 39 IFRS 2
Residual value
bull Revised but helliphellip discussed later
copy 2006-10 Nelson Consulting Limited 13
value discussed later
3 Recognition
bull The cost of an item of PPE shall be recognised as an asset if and only ifa) it is probable that future economic benefits associated with the itema) it is probable that future economic benefits associated with the item
will flow to the entity andb) the cost of the item can be measured reliably
bull Major spare parts servicing equipment replacement and inspection can also be qualified as PPE
Recognition CriteriaRecognition Criteria
copy 2006-10 Nelson Consulting Limited 14
bull If the recognition criteria is met such cost is recognised the carrying amount of the replaced parts or previous inspection is derecognised
8
3 RecognitionCase
Wynn Macau Limited(N t t Fi i l St t t 2009)
bull Expenditures incurred after items of property and equipment have been brought into use such as repairs and maintenance are normally charged to the statement of comprehensive income in the period in which they are incurred
bull In situationsndash where it can be clearly demonstrated an expenditure has resulted in
(Notes to Financial Statements 2009)
copy 2006-10 Nelson Consulting Limited 15
ndash where it can be clearly demonstrated an expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment and
ndash where the cost of the item can be measured reliably the expenditure is capitalized as an additional cost of that asset or as a replacement
3 Recognition
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Subsequent costs are included in the carrying
amount of the asset or recognised as a separate asset as appropriate only when bull it is probable that future economic benefits associated
with the item will flow to the Group andbull the cost of the item can be measured reliably
ndash All other repairs and maintenance costs are
copy 2006-10 Nelson Consulting Limited 16
All other repairs and maintenance costs are expensed in the income statement during the financial period in which they are incurred
9
4 Measurement at Recognition
bull An item of PPE that qualifies for recognition as an asset shall be measured at its costcost
CostCost bull the amount of cash or cash equivalents paid or
bull the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs
copy 2006-10 Nelson Consulting Limited 17
eg IAS 39 IFRS 2
4 Measurement at Recognition
bull The costcost of an item of PPE comprisesa) its purchase price including import duties and
non-refundable purchase taxes after deducting Purchase Pricep gtrade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
c) the initial estimate of the costs of dismantlingand removing the item and restoring the siteon which it is located the obligation for which
Directly Attributable Cost
Dismantling Cost
copy 2006-10 Nelson Consulting Limited 18
on which it is located the obligation for whichan entity incurs eitherndash when the item is acquired orndash as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
copy 2006-10 Nelson Consulting Limited 19
bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
copy 2006-10 Nelson Consulting Limited 20
direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
copy 2006-10 Nelson Consulting Limited 21
5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
copy 2006-10 Nelson Consulting Limited 22
the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
copy 2006-10 Nelson Consulting Limited 23
y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
copy 2006-10 Nelson Consulting Limited 24
carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
copy 2006-10 Nelson Consulting Limited 25
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
copy 2006-10 Nelson Consulting Limited 26
income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
3
Structures amp Content of Fin Statements
Statement of Financial Position as at the end of the period
Complete Set of Financial Statements Previous titleor changes
Previous title ldquoBalance Sheetrdquo
To use a single statement to present all items of income and expense
Statement of Comprehensive Income for the period
Statement of Changes in Equity for the period
No title change
No title change(but restructured)
New statement
To use two statements to present all items of income and expense
Statement of Comprehensive Income for the period
Income Statement for the period
copy 2006-10 Nelson Consulting Limited 5
Statement of Cash Flows for the period
Notes
A statement of financial position as at the beginning of the earliest comparative period if required
Previous titleldquoCash Flow Statementrdquo
(but restructured)
No title change
New requirement
Sourced from Intermediate Financial Reporting (2009) by Nelson Lam and Peter Lau
Statement of Comprehensive IncomeChanges in equity
in a periodSingle Statement Single Statement
ApproachApproachTwoTwo--Statement Statement
ApproachApproach
Components of profit or loss
Components of other
comprehensive income
Non-owner changes
Presented in separateincome statement
Presented in statementof comprehensive income
Presented in statementof comprehensive income
copy 2006-10 Nelson Consulting Limited 6
Components of owner changes
in equity
Owner changes
Presented in statementof changes in equity
Presented in statementof changes in equity
Sourced from Intermediate Financial Reporting (2009) by Nelson Lam and Peter Lau
4
Statement of Comprehensive IncomeCase
Consolidated statement of comprehensive income
copy 2006-10 Nelson Consulting Limited 7
Statement of Comprehensive IncomeCase
copy 2006-10 Nelson Consulting Limited 8
5
Property Plant and Equipment (IAS 16)
copy 2006-10 Nelson Consulting Limited 9
1 Objective and Scope
bull The principal issues in accounting for property plant and equipment (PPE) area) the recognition of the assets Definitionsa) the recognition of the assetsb) the determination of their carrying amounts andc) the depreciation charges and impairment losses
to be recognised in relation to themMeasurement
Recognition
copy 2006-10 Nelson Consulting Limited 10
6
bull Building acquired under an
1 Objective and Scope
What are PPE Are the following PPEWhat are PPE Are the following PPE
Example
IAS 17timesoperating lease
bull Building acquired under finance leases
bull Freehold property used for rental purpose
bull Investment property underre-development
IAS 17
radic
times
times
IAS 40
IAS 40
copy 2006-10 Nelson Consulting Limited 11
pbull Property held for a currently
undetermined future usebull Leasehold land separated
from the leasehold building
times
times
IAS 40
IAS 17
2 Definitions
bull Property plant and equipment (PPE) are tangible items thata) are held for use
ndash in the production or supply of goods or servicesin the production or supply of goods or services ndash for rental to others or ndash for administrative purposes and
b) are expected to be used during more than one period
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7
2 Definitions
Cost bull is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction orq
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSseg IAS 39 IFRS 2
Residual value
bull Revised but helliphellip discussed later
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value discussed later
3 Recognition
bull The cost of an item of PPE shall be recognised as an asset if and only ifa) it is probable that future economic benefits associated with the itema) it is probable that future economic benefits associated with the item
will flow to the entity andb) the cost of the item can be measured reliably
bull Major spare parts servicing equipment replacement and inspection can also be qualified as PPE
Recognition CriteriaRecognition Criteria
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bull If the recognition criteria is met such cost is recognised the carrying amount of the replaced parts or previous inspection is derecognised
8
3 RecognitionCase
Wynn Macau Limited(N t t Fi i l St t t 2009)
bull Expenditures incurred after items of property and equipment have been brought into use such as repairs and maintenance are normally charged to the statement of comprehensive income in the period in which they are incurred
bull In situationsndash where it can be clearly demonstrated an expenditure has resulted in
(Notes to Financial Statements 2009)
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ndash where it can be clearly demonstrated an expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment and
ndash where the cost of the item can be measured reliably the expenditure is capitalized as an additional cost of that asset or as a replacement
3 Recognition
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Subsequent costs are included in the carrying
amount of the asset or recognised as a separate asset as appropriate only when bull it is probable that future economic benefits associated
with the item will flow to the Group andbull the cost of the item can be measured reliably
ndash All other repairs and maintenance costs are
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All other repairs and maintenance costs are expensed in the income statement during the financial period in which they are incurred
9
4 Measurement at Recognition
bull An item of PPE that qualifies for recognition as an asset shall be measured at its costcost
CostCost bull the amount of cash or cash equivalents paid or
bull the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs
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eg IAS 39 IFRS 2
4 Measurement at Recognition
bull The costcost of an item of PPE comprisesa) its purchase price including import duties and
non-refundable purchase taxes after deducting Purchase Pricep gtrade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
c) the initial estimate of the costs of dismantlingand removing the item and restoring the siteon which it is located the obligation for which
Directly Attributable Cost
Dismantling Cost
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on which it is located the obligation for whichan entity incurs eitherndash when the item is acquired orndash as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
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bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
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direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
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5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
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the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
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y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
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carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
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loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
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income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
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bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
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b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
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p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
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p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
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ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
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pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
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in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
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classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
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Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
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19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
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Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
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20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
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otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
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p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
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6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
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Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
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ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
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23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
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1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
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b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
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Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
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25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
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Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
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Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
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Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
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Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
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will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
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p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
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p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
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Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
4
Statement of Comprehensive IncomeCase
Consolidated statement of comprehensive income
copy 2006-10 Nelson Consulting Limited 7
Statement of Comprehensive IncomeCase
copy 2006-10 Nelson Consulting Limited 8
5
Property Plant and Equipment (IAS 16)
copy 2006-10 Nelson Consulting Limited 9
1 Objective and Scope
bull The principal issues in accounting for property plant and equipment (PPE) area) the recognition of the assets Definitionsa) the recognition of the assetsb) the determination of their carrying amounts andc) the depreciation charges and impairment losses
to be recognised in relation to themMeasurement
Recognition
copy 2006-10 Nelson Consulting Limited 10
6
bull Building acquired under an
1 Objective and Scope
What are PPE Are the following PPEWhat are PPE Are the following PPE
Example
IAS 17timesoperating lease
bull Building acquired under finance leases
bull Freehold property used for rental purpose
bull Investment property underre-development
IAS 17
radic
times
times
IAS 40
IAS 40
copy 2006-10 Nelson Consulting Limited 11
pbull Property held for a currently
undetermined future usebull Leasehold land separated
from the leasehold building
times
times
IAS 40
IAS 17
2 Definitions
bull Property plant and equipment (PPE) are tangible items thata) are held for use
ndash in the production or supply of goods or servicesin the production or supply of goods or services ndash for rental to others or ndash for administrative purposes and
b) are expected to be used during more than one period
copy 2006-10 Nelson Consulting Limited 12
7
2 Definitions
Cost bull is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction orq
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSseg IAS 39 IFRS 2
Residual value
bull Revised but helliphellip discussed later
copy 2006-10 Nelson Consulting Limited 13
value discussed later
3 Recognition
bull The cost of an item of PPE shall be recognised as an asset if and only ifa) it is probable that future economic benefits associated with the itema) it is probable that future economic benefits associated with the item
will flow to the entity andb) the cost of the item can be measured reliably
bull Major spare parts servicing equipment replacement and inspection can also be qualified as PPE
Recognition CriteriaRecognition Criteria
copy 2006-10 Nelson Consulting Limited 14
bull If the recognition criteria is met such cost is recognised the carrying amount of the replaced parts or previous inspection is derecognised
8
3 RecognitionCase
Wynn Macau Limited(N t t Fi i l St t t 2009)
bull Expenditures incurred after items of property and equipment have been brought into use such as repairs and maintenance are normally charged to the statement of comprehensive income in the period in which they are incurred
bull In situationsndash where it can be clearly demonstrated an expenditure has resulted in
(Notes to Financial Statements 2009)
copy 2006-10 Nelson Consulting Limited 15
ndash where it can be clearly demonstrated an expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment and
ndash where the cost of the item can be measured reliably the expenditure is capitalized as an additional cost of that asset or as a replacement
3 Recognition
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Subsequent costs are included in the carrying
amount of the asset or recognised as a separate asset as appropriate only when bull it is probable that future economic benefits associated
with the item will flow to the Group andbull the cost of the item can be measured reliably
ndash All other repairs and maintenance costs are
copy 2006-10 Nelson Consulting Limited 16
All other repairs and maintenance costs are expensed in the income statement during the financial period in which they are incurred
9
4 Measurement at Recognition
bull An item of PPE that qualifies for recognition as an asset shall be measured at its costcost
CostCost bull the amount of cash or cash equivalents paid or
bull the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs
copy 2006-10 Nelson Consulting Limited 17
eg IAS 39 IFRS 2
4 Measurement at Recognition
bull The costcost of an item of PPE comprisesa) its purchase price including import duties and
non-refundable purchase taxes after deducting Purchase Pricep gtrade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
c) the initial estimate of the costs of dismantlingand removing the item and restoring the siteon which it is located the obligation for which
Directly Attributable Cost
Dismantling Cost
copy 2006-10 Nelson Consulting Limited 18
on which it is located the obligation for whichan entity incurs eitherndash when the item is acquired orndash as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
copy 2006-10 Nelson Consulting Limited 19
bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
copy 2006-10 Nelson Consulting Limited 20
direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
copy 2006-10 Nelson Consulting Limited 21
5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
copy 2006-10 Nelson Consulting Limited 22
the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
copy 2006-10 Nelson Consulting Limited 23
y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
copy 2006-10 Nelson Consulting Limited 24
carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
copy 2006-10 Nelson Consulting Limited 25
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
copy 2006-10 Nelson Consulting Limited 26
income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
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bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
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iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
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Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
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Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
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42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
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related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
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in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
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at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
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ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
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ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
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ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
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Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
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Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
5
Property Plant and Equipment (IAS 16)
copy 2006-10 Nelson Consulting Limited 9
1 Objective and Scope
bull The principal issues in accounting for property plant and equipment (PPE) area) the recognition of the assets Definitionsa) the recognition of the assetsb) the determination of their carrying amounts andc) the depreciation charges and impairment losses
to be recognised in relation to themMeasurement
Recognition
copy 2006-10 Nelson Consulting Limited 10
6
bull Building acquired under an
1 Objective and Scope
What are PPE Are the following PPEWhat are PPE Are the following PPE
Example
IAS 17timesoperating lease
bull Building acquired under finance leases
bull Freehold property used for rental purpose
bull Investment property underre-development
IAS 17
radic
times
times
IAS 40
IAS 40
copy 2006-10 Nelson Consulting Limited 11
pbull Property held for a currently
undetermined future usebull Leasehold land separated
from the leasehold building
times
times
IAS 40
IAS 17
2 Definitions
bull Property plant and equipment (PPE) are tangible items thata) are held for use
ndash in the production or supply of goods or servicesin the production or supply of goods or services ndash for rental to others or ndash for administrative purposes and
b) are expected to be used during more than one period
copy 2006-10 Nelson Consulting Limited 12
7
2 Definitions
Cost bull is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction orq
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSseg IAS 39 IFRS 2
Residual value
bull Revised but helliphellip discussed later
copy 2006-10 Nelson Consulting Limited 13
value discussed later
3 Recognition
bull The cost of an item of PPE shall be recognised as an asset if and only ifa) it is probable that future economic benefits associated with the itema) it is probable that future economic benefits associated with the item
will flow to the entity andb) the cost of the item can be measured reliably
bull Major spare parts servicing equipment replacement and inspection can also be qualified as PPE
Recognition CriteriaRecognition Criteria
copy 2006-10 Nelson Consulting Limited 14
bull If the recognition criteria is met such cost is recognised the carrying amount of the replaced parts or previous inspection is derecognised
8
3 RecognitionCase
Wynn Macau Limited(N t t Fi i l St t t 2009)
bull Expenditures incurred after items of property and equipment have been brought into use such as repairs and maintenance are normally charged to the statement of comprehensive income in the period in which they are incurred
bull In situationsndash where it can be clearly demonstrated an expenditure has resulted in
(Notes to Financial Statements 2009)
copy 2006-10 Nelson Consulting Limited 15
ndash where it can be clearly demonstrated an expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment and
ndash where the cost of the item can be measured reliably the expenditure is capitalized as an additional cost of that asset or as a replacement
3 Recognition
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Subsequent costs are included in the carrying
amount of the asset or recognised as a separate asset as appropriate only when bull it is probable that future economic benefits associated
with the item will flow to the Group andbull the cost of the item can be measured reliably
ndash All other repairs and maintenance costs are
copy 2006-10 Nelson Consulting Limited 16
All other repairs and maintenance costs are expensed in the income statement during the financial period in which they are incurred
9
4 Measurement at Recognition
bull An item of PPE that qualifies for recognition as an asset shall be measured at its costcost
CostCost bull the amount of cash or cash equivalents paid or
bull the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs
copy 2006-10 Nelson Consulting Limited 17
eg IAS 39 IFRS 2
4 Measurement at Recognition
bull The costcost of an item of PPE comprisesa) its purchase price including import duties and
non-refundable purchase taxes after deducting Purchase Pricep gtrade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
c) the initial estimate of the costs of dismantlingand removing the item and restoring the siteon which it is located the obligation for which
Directly Attributable Cost
Dismantling Cost
copy 2006-10 Nelson Consulting Limited 18
on which it is located the obligation for whichan entity incurs eitherndash when the item is acquired orndash as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
copy 2006-10 Nelson Consulting Limited 19
bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
copy 2006-10 Nelson Consulting Limited 20
direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
copy 2006-10 Nelson Consulting Limited 21
5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
copy 2006-10 Nelson Consulting Limited 22
the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
copy 2006-10 Nelson Consulting Limited 23
y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
copy 2006-10 Nelson Consulting Limited 24
carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
copy 2006-10 Nelson Consulting Limited 25
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
copy 2006-10 Nelson Consulting Limited 26
income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
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ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
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ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
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ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
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Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
6
bull Building acquired under an
1 Objective and Scope
What are PPE Are the following PPEWhat are PPE Are the following PPE
Example
IAS 17timesoperating lease
bull Building acquired under finance leases
bull Freehold property used for rental purpose
bull Investment property underre-development
IAS 17
radic
times
times
IAS 40
IAS 40
copy 2006-10 Nelson Consulting Limited 11
pbull Property held for a currently
undetermined future usebull Leasehold land separated
from the leasehold building
times
times
IAS 40
IAS 17
2 Definitions
bull Property plant and equipment (PPE) are tangible items thata) are held for use
ndash in the production or supply of goods or servicesin the production or supply of goods or services ndash for rental to others or ndash for administrative purposes and
b) are expected to be used during more than one period
copy 2006-10 Nelson Consulting Limited 12
7
2 Definitions
Cost bull is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction orq
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSseg IAS 39 IFRS 2
Residual value
bull Revised but helliphellip discussed later
copy 2006-10 Nelson Consulting Limited 13
value discussed later
3 Recognition
bull The cost of an item of PPE shall be recognised as an asset if and only ifa) it is probable that future economic benefits associated with the itema) it is probable that future economic benefits associated with the item
will flow to the entity andb) the cost of the item can be measured reliably
bull Major spare parts servicing equipment replacement and inspection can also be qualified as PPE
Recognition CriteriaRecognition Criteria
copy 2006-10 Nelson Consulting Limited 14
bull If the recognition criteria is met such cost is recognised the carrying amount of the replaced parts or previous inspection is derecognised
8
3 RecognitionCase
Wynn Macau Limited(N t t Fi i l St t t 2009)
bull Expenditures incurred after items of property and equipment have been brought into use such as repairs and maintenance are normally charged to the statement of comprehensive income in the period in which they are incurred
bull In situationsndash where it can be clearly demonstrated an expenditure has resulted in
(Notes to Financial Statements 2009)
copy 2006-10 Nelson Consulting Limited 15
ndash where it can be clearly demonstrated an expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment and
ndash where the cost of the item can be measured reliably the expenditure is capitalized as an additional cost of that asset or as a replacement
3 Recognition
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Subsequent costs are included in the carrying
amount of the asset or recognised as a separate asset as appropriate only when bull it is probable that future economic benefits associated
with the item will flow to the Group andbull the cost of the item can be measured reliably
ndash All other repairs and maintenance costs are
copy 2006-10 Nelson Consulting Limited 16
All other repairs and maintenance costs are expensed in the income statement during the financial period in which they are incurred
9
4 Measurement at Recognition
bull An item of PPE that qualifies for recognition as an asset shall be measured at its costcost
CostCost bull the amount of cash or cash equivalents paid or
bull the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs
copy 2006-10 Nelson Consulting Limited 17
eg IAS 39 IFRS 2
4 Measurement at Recognition
bull The costcost of an item of PPE comprisesa) its purchase price including import duties and
non-refundable purchase taxes after deducting Purchase Pricep gtrade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
c) the initial estimate of the costs of dismantlingand removing the item and restoring the siteon which it is located the obligation for which
Directly Attributable Cost
Dismantling Cost
copy 2006-10 Nelson Consulting Limited 18
on which it is located the obligation for whichan entity incurs eitherndash when the item is acquired orndash as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
copy 2006-10 Nelson Consulting Limited 19
bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
copy 2006-10 Nelson Consulting Limited 20
direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
copy 2006-10 Nelson Consulting Limited 21
5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
copy 2006-10 Nelson Consulting Limited 22
the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
copy 2006-10 Nelson Consulting Limited 23
y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
copy 2006-10 Nelson Consulting Limited 24
carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
copy 2006-10 Nelson Consulting Limited 25
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
copy 2006-10 Nelson Consulting Limited 26
income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
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at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
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ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
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ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
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ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
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Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
7
2 Definitions
Cost bull is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an asset at the time of its acquisition or construction orq
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSseg IAS 39 IFRS 2
Residual value
bull Revised but helliphellip discussed later
copy 2006-10 Nelson Consulting Limited 13
value discussed later
3 Recognition
bull The cost of an item of PPE shall be recognised as an asset if and only ifa) it is probable that future economic benefits associated with the itema) it is probable that future economic benefits associated with the item
will flow to the entity andb) the cost of the item can be measured reliably
bull Major spare parts servicing equipment replacement and inspection can also be qualified as PPE
Recognition CriteriaRecognition Criteria
copy 2006-10 Nelson Consulting Limited 14
bull If the recognition criteria is met such cost is recognised the carrying amount of the replaced parts or previous inspection is derecognised
8
3 RecognitionCase
Wynn Macau Limited(N t t Fi i l St t t 2009)
bull Expenditures incurred after items of property and equipment have been brought into use such as repairs and maintenance are normally charged to the statement of comprehensive income in the period in which they are incurred
bull In situationsndash where it can be clearly demonstrated an expenditure has resulted in
(Notes to Financial Statements 2009)
copy 2006-10 Nelson Consulting Limited 15
ndash where it can be clearly demonstrated an expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment and
ndash where the cost of the item can be measured reliably the expenditure is capitalized as an additional cost of that asset or as a replacement
3 Recognition
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Subsequent costs are included in the carrying
amount of the asset or recognised as a separate asset as appropriate only when bull it is probable that future economic benefits associated
with the item will flow to the Group andbull the cost of the item can be measured reliably
ndash All other repairs and maintenance costs are
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All other repairs and maintenance costs are expensed in the income statement during the financial period in which they are incurred
9
4 Measurement at Recognition
bull An item of PPE that qualifies for recognition as an asset shall be measured at its costcost
CostCost bull the amount of cash or cash equivalents paid or
bull the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs
copy 2006-10 Nelson Consulting Limited 17
eg IAS 39 IFRS 2
4 Measurement at Recognition
bull The costcost of an item of PPE comprisesa) its purchase price including import duties and
non-refundable purchase taxes after deducting Purchase Pricep gtrade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
c) the initial estimate of the costs of dismantlingand removing the item and restoring the siteon which it is located the obligation for which
Directly Attributable Cost
Dismantling Cost
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on which it is located the obligation for whichan entity incurs eitherndash when the item is acquired orndash as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
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bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
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direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
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5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
copy 2006-10 Nelson Consulting Limited 22
the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
copy 2006-10 Nelson Consulting Limited 23
y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
copy 2006-10 Nelson Consulting Limited 24
carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
copy 2006-10 Nelson Consulting Limited 25
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
copy 2006-10 Nelson Consulting Limited 26
income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
8
3 RecognitionCase
Wynn Macau Limited(N t t Fi i l St t t 2009)
bull Expenditures incurred after items of property and equipment have been brought into use such as repairs and maintenance are normally charged to the statement of comprehensive income in the period in which they are incurred
bull In situationsndash where it can be clearly demonstrated an expenditure has resulted in
(Notes to Financial Statements 2009)
copy 2006-10 Nelson Consulting Limited 15
ndash where it can be clearly demonstrated an expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment and
ndash where the cost of the item can be measured reliably the expenditure is capitalized as an additional cost of that asset or as a replacement
3 Recognition
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Subsequent costs are included in the carrying
amount of the asset or recognised as a separate asset as appropriate only when bull it is probable that future economic benefits associated
with the item will flow to the Group andbull the cost of the item can be measured reliably
ndash All other repairs and maintenance costs are
copy 2006-10 Nelson Consulting Limited 16
All other repairs and maintenance costs are expensed in the income statement during the financial period in which they are incurred
9
4 Measurement at Recognition
bull An item of PPE that qualifies for recognition as an asset shall be measured at its costcost
CostCost bull the amount of cash or cash equivalents paid or
bull the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs
copy 2006-10 Nelson Consulting Limited 17
eg IAS 39 IFRS 2
4 Measurement at Recognition
bull The costcost of an item of PPE comprisesa) its purchase price including import duties and
non-refundable purchase taxes after deducting Purchase Pricep gtrade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
c) the initial estimate of the costs of dismantlingand removing the item and restoring the siteon which it is located the obligation for which
Directly Attributable Cost
Dismantling Cost
copy 2006-10 Nelson Consulting Limited 18
on which it is located the obligation for whichan entity incurs eitherndash when the item is acquired orndash as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
copy 2006-10 Nelson Consulting Limited 19
bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
copy 2006-10 Nelson Consulting Limited 20
direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
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5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
copy 2006-10 Nelson Consulting Limited 22
the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
copy 2006-10 Nelson Consulting Limited 23
y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
copy 2006-10 Nelson Consulting Limited 24
carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
copy 2006-10 Nelson Consulting Limited 25
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
copy 2006-10 Nelson Consulting Limited 26
income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
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pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
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classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
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6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
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Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
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Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
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Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
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42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
9
4 Measurement at Recognition
bull An item of PPE that qualifies for recognition as an asset shall be measured at its costcost
CostCost bull the amount of cash or cash equivalents paid or
bull the fair value of other consideration given to acquire an asset at the time of its acquisition or construction or
bull where applicable the amount attributed to that asset when initially recognised in accordance with the specific requirements of other IFRSs
copy 2006-10 Nelson Consulting Limited 17
eg IAS 39 IFRS 2
4 Measurement at Recognition
bull The costcost of an item of PPE comprisesa) its purchase price including import duties and
non-refundable purchase taxes after deducting Purchase Pricep gtrade discounts and rebates
b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management
c) the initial estimate of the costs of dismantlingand removing the item and restoring the siteon which it is located the obligation for which
Directly Attributable Cost
Dismantling Cost
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on which it is located the obligation for whichan entity incurs eitherndash when the item is acquired orndash as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
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bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
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direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
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5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
copy 2006-10 Nelson Consulting Limited 22
the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
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y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
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carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
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loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
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income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
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bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
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b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
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p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
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p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
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ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
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pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
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in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
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classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
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Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
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19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
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Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
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20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
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otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
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p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
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6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
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Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
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ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
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23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
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1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
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b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
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Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
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25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
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Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
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Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
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Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
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Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
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will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
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p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
10
4 Measurement at Recognition
bull Entity A leased an office for a lease term of 5 years in 2010 and incurred $500000 in decorating
The cost of the decoration
Example
Cost of decoration $ gthe office
bull The lease requires Entity A to restore the office to its original status when the lease expires
bull Entity A estimates that the cost of restoration will be around $60000 at that time
$500000
Initial estimate of restoring the site
Present value of $60 000
copy 2006-10 Nelson Consulting Limited 19
bull Determine the cost of the decoration
Present value of $60000
Assuming discount rate is 6bull PV of $60000 is $ 44835bull Total initial cost is $ 544835
4 Measurement at RecognitionCase
Amax Holdings Limited(Notes to the financial statements 2008)ndash The cost of self-constructed items of property plant and equipment
includes bull the cost of materials bull direct labour
copy 2006-10 Nelson Consulting Limited 20
direct labour bull the initial estimate where relevant of the costs of dismantling and
removing the items and restoring the site on which they are located and an appropriate proportion of production overheads and
bull borrowing costs
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
copy 2006-10 Nelson Consulting Limited 21
5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
copy 2006-10 Nelson Consulting Limited 22
the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
copy 2006-10 Nelson Consulting Limited 23
y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
copy 2006-10 Nelson Consulting Limited 24
carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
copy 2006-10 Nelson Consulting Limited 25
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
copy 2006-10 Nelson Consulting Limited 26
income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
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at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
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48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
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ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
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be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
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ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
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ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
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Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
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Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
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g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
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During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
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award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
11
5 Measurement after Recognition
bull An entity shall choose either
Cost ModelCost Model
Revaluation Model
bull as its accounting policy andbull the entity shall apply that policy to
an entire class of PPE
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5 Measurement after Recognition
Cost Model
After recognition as an asset an item of PPE shall be carried at
Its costCost Model
Revaluation Model
ndash Its costndash less
bull any accumulated depreciation and bull any accumulated impairment losses
After recognition as an asset an item of PPE shall be carried atndash a revalued amount being its fair value at
th d t f th l ti
copy 2006-10 Nelson Consulting Limited 22
the date of the revaluation ndash Less
bull any subsequent accumulated depreciation and
bull subsequent accumulated impairment losses
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
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y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
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carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
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loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
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income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
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p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
12
5 Measurement after Recognition
Revaluation Model
F i l i th t f hi h t ld b h d
What is fair valueWhat is fair value
All IFRSIAS have same definition on fair value now
bull Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an armrsquos length transaction
bull The fair value ofndash land and buildings rArr is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers
ndash items of PPE rArr is usually their market value determined by
copy 2006-10 Nelson Consulting Limited 23
y yappraisal
bull If there is no market-based evidence of fair value because of the specialised nature of the item of PPE and the item is rarely sold rArr an entity may need to estimate fair value using
bull an income orbull a depreciated replacement cost approach
5 Measurement after Recognition
Revaluation Model Revaluations shall be made with sufficient regularityndash to ensure that the carrying amount does not
bull The frequency of revaluations depends upon the changes in fair values of the items of PPE being revalueda) When the fair value of a revalued asset differs materially from its
to ensure that the carrying amount does not differ materially from the fair value at the balance sheet date
copy 2006-10 Nelson Consulting Limited 24
carrying amount a further revaluation is requiredb) Some items of PPE experience significant and volatile changes in
fair value thus necessitating annual revaluationc) Such frequent revaluations are unnecessary for items of PPE with
only insignificant changes in fair value Instead it may be necessary to revalue the item only every 3 or 5 years
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
copy 2006-10 Nelson Consulting Limited 25
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
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income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
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p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
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pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
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classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
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6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
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Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
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23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
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Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
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Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
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Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
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Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
13
5 Measurement after Recognition
Revaluation Model
bull If an item of property plant and equipment is revalued Entirep p y p q p ndash the entire class of PPE to which that asset belongs shall
be revaluedbull If an assetrsquos carrying amount is increased as a result of
a revaluation the increase shall be recognised in other comprehensive income (OCI) and accumulated in equity under the heading of revaluation surplusndash However the increase shall be recognised in profit or
ClassEntire class
To OCI directly
copy 2006-10 Nelson Consulting Limited 25
loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss
5 Measurement after Recognition
Revaluation Model
bull If an assetrsquos carrying amount is decreased as a result Negativey gof a revaluation the decrease shall be recognised in profit or lossndash However the decrease shall be recognised in other
comprehensive income (OCI) to the extent of any credit balance existing in the revaluation surplus in respect of that asset
ndash The decrease recognised in other comprehensive income reduces the amount accumulated in equity under
Negative to PL
copy 2006-10 Nelson Consulting Limited 26
income reduces the amount accumulated in equity under the heading of revaluation surplus
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
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at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
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ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
14
5 Measurement after Recognition
bull In 2010 an entity buys a PPE at
Example
Revaluation Model
y y$1000 and adopts revaluation model
bull At year end of 2010ndash PPErsquos fair value rises to
$1500
Dr PPE 1000Cr Cash 1000
Dr PPE (1500 ndash 1000) 500Cr OCI 500
copy 2006-10 Nelson Consulting Limited 27
bull At year end of 2011ndash PPErsquos fair value falls to $800
bull Ignore the depreciation prepare journal for each situation above
Dr OCI 500Profit and loss 200
Cr PPE (1500 ndash 800) 700
5 Measurement after RecognitionDepreciationCost Model
Revaluation Model
bull Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life
bull Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value
bull Useful life isa) the period over which an asset is expected to be available for use by an entity or
Revaluation Model
copy 2006-10 Nelson Consulting Limited 28
b) the number of production or similar units expected to be obtained from the asset by an entity
bull The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the asset were already of the age and in the condition expected at the end of its useful life
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
15
5 Measurement after RecognitionCase
Wynn Macau Limited(A l R t 2009)
Depreciation
bull Depreciation is calculated on a straight-line basis to write off the cost of each item of property and equipment to its residual value over ndash the shorter of the remaining term of
bull the gaming concession (for designated gaming assets and space) or
(Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 29
p )bull land concession (for all other assets) as
applicable or ndash their estimated useful lives
5 Measurement after Recognition
bull Each part of an item of PPE with a
Depreciation
Each significant componentbull Each part of an item of PPE with a cost that is significant in relation to the total cost of the item shall be depreciated separatelyndash eg it may be appropriate to
depreciate separately the airframe and engines of an aircraft
bull The depreciation charge for each
Each significant component shall be depreciated separately (not clearly required in the past)
copy 2006-10 Nelson Consulting Limited 30
p gperiod shall be recognised in profit or loss unless it is included in the carrying amount of another asset
Clearer approach on so-calledComponent Accounting
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
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p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
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42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
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at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
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Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
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Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
16
5 Measurement after RecognitionDepreciation
Depreciable amount
bull The depreciable amount of an asset shall be allocated on a systematic basis over its useful life
bull The residual value and the useful life of an asset shall be reviewed at least at each financial year-end
copy 2006-10 Nelson Consulting Limited 31
ndash if expectations differ from previous estimates the change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
5 Measurement after RecognitionCase
Depreciation
Depreciable amount
Amax Holdings Limited(Notes to the financial statements 2008)ndash Where parts of an item of property plant equipment
have different useful livesbull the cost of the item is allocated on a reasonable basis
between the parts and
copy 2006-10 Nelson Consulting Limited 32
pbull each part is depreciated separately
ndash Both the useful life of an asset and its residual value if any are reviewed annually
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
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Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
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42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
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related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
17
5 Measurement after RecognitionDepreciation
Depreciable amountResidual Value
bull Residual Value is updated as
the estimated amount that an entity would currently obtain from disposal of the asset after deducting the estimated costs of disposal if the assetndash were already of the age andndash in the condition expected at the end
copy 2006-10 Nelson Consulting Limited 33
in the condition expected at the end of its useful life
Inflation may be incorporated in residual value
5 Measurement after Recognition
bull Depreciation of an asset begins when it i il bl f
Depreciation
Depreciable amountis available for usendash ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management
bull Depreciation of an asset ceases at the earlier of the date thatndash the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance
Implied that depreciation still required even PPEndash becomes idle or
is retired from active use
copy 2006-10 Nelson Consulting Limited 34
classified as held for sale) in accordance with IFRS 5 and
ndash the date that the asset is derecognisedbull Land and buildings are separable assets
and are accounted for separately even when they are acquired together
ndash is retired from active use
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
copy 2006-10 Nelson Consulting Limited 35
Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
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p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
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42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
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related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
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ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
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ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
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ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
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Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
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Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
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g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
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During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
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y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
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bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
18
5 Measurement after Recognition
bull The depreciation method usedndash shall reflect the pattern in which the
assetrsquos future economic benefits are
Depreciation
Depreciable amountasset s future economic benefits are expected to be consumed by the entity
ndash shall be reviewed at least at each financial year-end and
ndash such a change shall be accounted for as a change in an accounting estimate in accordance with IAS 8
bull Other than the above that method is
Depreciation method
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Other than the above that method is applied consistently from period to periodbull unless there is a change in the expected
pattern of consumption of those future economic benefits
5 Measurement after Recognition
bull To determine whether an item of PPE is impaired an entity applies IAS 36
bull Compensation from third parties for items of
Depreciation
Depreciable amountbull Compensation from third parties for items of
property plant and equipment that were impaired lost or given up shall be included in profit or loss when the compensation becomes receivable
Depreciation method
Impairment
copy 2006-10 Nelson Consulting Limited 36
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
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6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
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Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
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23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
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Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
19
5 Measurement ndash Impairment
Triggering At each reporting date an entity shall assess whether there is any indication that an asset may
It is the higher of an assetrsquos
events
Recoverable Amount
whether there is any indication that an asset may be impairedIf any such indication exists the entity shall estimate the recoverable amount of the asset
andFair value less costs to sell Value in Use
copy 2006-10 Nelson Consulting Limited 37
Impairment Loss
If and only if the recoverable amount of an asset is less than its carrying amountbull The carrying amount of the asset shall be
reduced to its recoverable amountbull That reduction is an impairment loss
bull An entity shall assess at each reporting datewhether there is any indication that an asset
Triggering
5 Measurement ndash Impairment
whether there is any indication that an asset may be impaired
bull If any such indication exists the entity shall estimate the recoverable amount of the asset
events
copy 2006-10 Nelson Consulting Limited 38
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
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ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
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ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
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ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
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Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
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Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
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g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
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During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
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ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
20
6 Derecognition
bull The carrying amount of an item of PPE shall be derecogniseda) on disposal ora) on disposal orb) when no future economic benefits are
expected from its use or disposalbull The gain or loss arising from the
derecognition of an item of PPE shall be included in profit or loss when the item is derecognised (unless IAS 17 requires otherwise on a sale and leaseback)
copy 2006-10 Nelson Consulting Limited 39
otherwise on a sale and leaseback)bull Gains shall not be classified as revenue Amended by Annual
Improvement Project 2008
6 Derecognition
IAS 16 Property Plant and Equipmentbull Gain (on derecognition of PPE) shall not be classified as
revenue (IAS 16 68)revenue (IAS 1668)bull Amendment introduces IAS 1668A that
ndash However an entity that in the course of its ordinary activities routinely sells items of PPE that it has held for rental to othersbull shall transfer such assets to inventories at their carrying
amount when they cease to be rented and become held for sale
ndash The proceeds from the sale of such assets shall be recognised as
copy 2006-10 Nelson Consulting Limited 40
p grevenue in accordance with IAS 18 Revenue
ndash IFRS 5 does not apply when assets that are held for sale in the ordinary course of business are transferred to inventories
In some industries entities are in the business of renting and subsequently selling the same assets for example car rental company
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
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6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
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ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
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ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
21
6 Derecognition
bull Derecognition on disposalndash The disposal of an item of PPE may occur in a variety of
ways (eg by sale by entering into a finance lease or byways (eg by sale by entering into a finance lease or by donation)
ndash In determining the date of disposal of an item an entity applies the criteria in IAS 18 Revenue for recognising revenue from the sale of goods
ndash IAS 17 Leases applies to disposal by a sale and leaseback
copy 2006-10 Nelson Consulting Limited 41
6 DerecognitionCase
Melco Development Limited (新濠國際發展有限公司)Accounting policies for year ended 31122009ndash An item of property plant and equipment is derecognised
bull upon disposal or bull when no future economic benefits are expected to arise from the continued
use of the asset ndash Any gain or loss arising on derecognition of the asset
copy 2006-10 Nelson Consulting Limited 42
Any gain or loss arising on derecognition of the asset bull (calculated as the difference between
ndash the net disposal proceeds and ndash the carrying amount of the asset)
is included in profit or loss in the period in which the asset is derecognised
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
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Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
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c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
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42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
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related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
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in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
22
6 Derecognition
bull Derecognition on replacementndash If under the initial recognition principle
bull an entity recognises in the carrying amount of an item of PPE the costbull an entity recognises in the carrying amount of an item of PPE the cost of a replacement for part of the item
bull then it derecognises the carrying amount of the replaced partregardless of whether the replaced part had been depreciated separately
bull The gain or loss arising from the derecognition of an item of PPE shall be determined as the difference between
copy 2006-10 Nelson Consulting Limited 43
ndash the net disposal proceeds if any andndash the carrying amount of the item
Leases (IAS 17)
copy 2006-10 Nelson Consulting Limited 44
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
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p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
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Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
23
1 Objective and Scope
bull The objective of IAS 17 Leases
ndash is to prescribe for lessees and lessors the appropriate accounting policies and disclosure to apply in relation to leasespolicies and disclosure to apply in relation to leases
bull A lease
ndash is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time
copy 2006-10 Nelson Consulting Limited 45
1 Objective and Scope
bull IAS 17 shall be applied in accounting for all leases other than a) leases to explore for or use minerals oil natural gas and similar
non-regenerative resources andnon regenerative resources andb) licensing agreements for such items as motion picture films video
recordings plays manuscripts patents and copyrights
bull IAS 17 shall not be applied as the basis of measurement fora) property held by lessees that is accounted
for as investment property (see IAS 40)b) investment property provided by lessors
copy 2006-10 Nelson Consulting Limited 46
b) investment property provided by lessorsunder operating leases (see IAS 40)
c) biological assets held by lessees underfinance leases (see IAS 41) or
d) biological assets provided by lessorsunder operating leases (see IAS 41)
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
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ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
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ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
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ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
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Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
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Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
24
2 Classification of Leases
The classification of leases adopted in IAS 17 Is based on the extent to which risks and rewards incidental to ownership of a leased asset lie the the lessor or the leseee
Risks and Rewards
FinanceLease
bull A finance leasendash is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset
ownership of a leased asset lie the the lessor or the leseee
copy 2006-10 Nelson Consulting Limited 47
Operating Lease
pndash Title may or may not eventually be transferred
bull An operating leasendash is a lease other than a finance lease
2 Classification of Leases
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash Leases that substantially transfer to the Group all
the risks and rewards of ownership of assets are accounted for as finance leases hellip
ndash Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases
copy 2006-10 Nelson Consulting Limited 48
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
25
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease
a) the lease transfers ownership of the asset to the lessee by the end of the lease term
b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain at the inception of the lease that the option will be exercised
copy 2006-10 Nelson Consulting Limited 49
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at leastsubstantially all of the fair value of the leased asset and
e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
bull Indicators of a finance lease includeIndicators of a finance lease include
FinanceLease Major part
What isLease term Economic lifeInception of a leaseMinimum lease payment helliphellip
copy 2006-10 Nelson Consulting Limited 50
Operating Lease
c) the lease term is for the major part of the economic life of the asset even if title is not transferred
d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset and
Substantially all
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
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Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
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42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
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related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
26
2 Classification of Leases
bull Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract
FinanceLease
bull Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease area) if the lessee can cancel the lease the lessorrsquos losses
associated with the cancellation are borne by the lessee
b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example in the
copy 2006-10 Nelson Consulting Limited 51
Operating Lease
the residual accrue to the lessee (for example in the form of a rent rebate equalling most of the sales proceeds at the end of the lease) and
c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
2 Classification of Leases
Lease classification is made at the inception of the lease
What is ldquoinception of the leaserdquo
FinanceLease
p
bull The inception of the lease is the earlier ofndash the date of the lease agreement andndash the date of commitment by the parties to the
principal provisions of the lease
bull As at this date
copy 2006-10 Nelson Consulting Limited 52
Operating Lease
a) a lease is classified as either or a finance or an operating lease and
b) in the case of a finance leasebull the amounts to be recognised at the
commencement of the lease termare determined
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
27
2 Classification of Leases
bull GV Limited has financed its business expansion by acquiring new production plant and equipment through utilising certain leasing arrangements during the year
Example
g g g g ybull The leases
ndash include options enabling GV Limited to purchase the assets at their fair values at the end of the lease term
ndash will last for five years which is also the expecteduseful life of the assets
ndash Give GV Limited the right to cancel the leases andthe lessorrsquos losses associated with the cancellation
Indicator of finance lease
Indicator of finance lease
Indicator of finance lease
radic
radic
copy 2006-10 Nelson Consulting Limited 53
will be borne by GV Limited bull For simplicity GV Limited would like to record these
acquisitions off the balance sheet and charge all leasing charges to income
bull Discuss the appropriate accounting treatment
finance lease
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
copy 2006-10 Nelson Consulting Limited 54
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
28
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull Leases of land and of buildings are classified as operating or finance leases in
the same way as leases of other assets However a characteristic of land is that
Do you remember these 2 paragraphs in IAS 17
the same way as leases of other assets However a characteristic of land is that it normally has an indefinite economic life and if title is not expected to pass to the lessee by the end of the lease term the lessee normally does not receive substantially all of the risks and rewards incidental to ownership in which case the lease of land will be an operating lease A payment made on entering into or acquiring a leasehold that is accounted for as an operating lease represents prepaid lease payments hellip
bull The land and buildings elements of a lease of land and buildings are considered separately for the purposes of lease classification If title to both elements is
bull As part of its annual improvements project in 2007 the IASB reconsidered the decisions it made in 2003 specifically the perceived inconsistency between ‒ the general lease classification guidance in IAS
177ndash13 and‒ the specific lease classification guidance in IAS
17 14 and 15 related to long-term leases of land and
copy 2006-10 Nelson Consulting Limited 55
p y p pexpected to pass to the lessee by the end of the lease term both elements are classified as a finance lease helliphellip When the land has an indefinite economic life the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term in accordance with para 14 The buildings element is classified as a finance or operating lease in accordance with para 7ndash13
1714 and 15 related to long-term leases of land and buildings
bull The IASB concluded that the guidance in IAS 1714 and 15 might lead to a conclusion on the classification of land leases that does not reflect the substance of the transaction
2 Classification ndash Lease of LampB
Amendment to IAS 17 Leasesbull IAS 1714 and 15 are deleted and IAS 1715A is added as follows
Wh l i l d b th l d d b ildi l t titndash When a lease includes both land and buildings elements an entity assesses the classification of each element as a finance or an operating lease separately in accordance with IAS 177ndash13
ndash In determining whether the land element is an operating or a finance lease an important consideration is that land normally has an indefinite economic life
copy 2006-10 Nelson Consulting Limited 56
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
29
2 Classification ndash Lease of LampBExample
bull IASB describes in IAS 17BC8B and BC8C thatndash For example consider a 999-year lease of land and buildings
bull In this situation significant risks and rewards associated with the land during the lease term would have been transferred to the lessee despite there being no transfer of title
bull The Board noted that the lessee in leases of this type will typically be in a position economically similar to an entity that purchased the land and buildings
bull The present value of the residual value of the property in a lease with a term of several decades would be negligible
bull The Board concluded that the accounting for the land element as a
copy 2006-10 Nelson Consulting Limited 57
The Board concluded that the accounting for the land element as a finance lease in such circumstances would be consistent with the economic position of the lessee
Unclear how long the lease term must Unclear how long the lease term must be for the IASB to conclude that a be for the IASB to conclude that a
lessee and a purchaser are in the same lessee and a purchaser are in the same economic positioneconomic position
2 Classification ndash Lease of LampB
Galaxy Entertainment Group Limited(2009 Annual Report)
Case
( p )ndash The Group has early adopted HKAS 17
(Amendment) Leases which is mandatory for accounting periods beginning on and after 1 January 2010 hellip
ndash HKAS 17 (Amendment) requires the Group to reassess the classification of leasehold land as finance or operating lease
copy 2006-10 Nelson Consulting Limited 58
p gbull Upon adoption the opening balances have been
assessed and classified accordingly bull Current year addition to leasehold land has been
classified based on the underlying criteria of HKAS 17
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
30
2 Classification ndash Lease of LampBCase
bull Note 2 states (for early adoption of Amendment to HKAS 17 in 2009)
Financial Statements 2009
ndash The early adoption of the amendment to HKAS 17 has resulted in a change in accounting policy for the classification of leasehold land of the Group
ndash Previously leasehold land was classified as an operating lease and stated at cost less accumulated amortisation
ndash In accordance with the amendment leasehold land is classified as a finance lease and stated at cost less accumulated depreciation if substantially all risks and rewards of the leasehold land have been transferred to the Group bull As the present value of the minimum lease payments (ie the transaction
copy 2006-10 Nelson Consulting Limited 59
As the present value of the minimum lease payments (ie the transaction price) of the land held by the Group amounted to substantially all of the fair value of the land as if it were freehold
the leasehold land of the Group has been classified as a finance lease The amendment has been applied retrospectively to unexpired leases at the date of adoption of the amendment on the basis of information existing at the inception of the leases The amendment does not apply to the leasehold land disposed of by the Group in prior years
3 Lesseesrsquo Financial Statements
bull At lease commencement lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to
Initial Recognition and Measurement statements of financial position at amounts equal to
a) the fair value of the leased property orb) if lower the present value of the minimum lease
paymentseach determined at the inception of the lease
bull The discount rate to be used in calculating the present value of the minimum lease payments isndash the interest rate implicit in the lease if this is
FinanceLease
Measurement
copy 2006-10 Nelson Consulting Limited 60
the interest rate implicit in the lease if this is practicable to determine
ndash if not the lessees incremental borrowing rate shall be used
bull Any initial direct costs of the lessee are added to the amount recognised as an asset
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
31
3 Lesseesrsquo Financial Statements
bull Minimum lease payments shall be apportioned betweena) the finance charge and
Subsequent Measurement
a) the finance charge andb) the reduction of the outstanding liability
bull Finance charge allocated to each period during the leasendash so as to produce a constant periodic rate of interest
on the remaining balance of the liabilitybull Contingent rents charged as expenses in the
periods in which they are incurred
FinanceLease
copy 2006-10 Nelson Consulting Limited 61
periods in which they are incurred
bull Contingent rent is that portion of the lease paymentsndash that is not fixed in amountndash but is based on the future amount of a factor that changes other than with
the passage of timeeg percentage of future sales amount of future use future price indices future market rates of interest
3 Lesseesrsquo Financial Statements
bull A finance lease gives rise tondash depreciation expense for depreciable assets as
well as
Subsequent Measurement
well asndash finance expense for each accounting period
bull The depreciation policy for depreciable leased assetsndash consistent with that for depreciable assets that
are owned andndash the depreciation recognised shall be calculated
in accordance with IAS 16 and IAS 38
FinanceLease
copy 2006-10 Nelson Consulting Limited 62
bull If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease termndash the asset shall be fully depreciated over the
shorter ofbull the lease term andbull its useful life
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
32
3 Lesseesrsquo Financial StatementsCase
Wynn Macau Limited
bull Finance leases which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the leasendash at the fair value of the leased property or ndash if lower at the present value of the minimum
lease payments
y (Prospectus ndash Accountantsrsquo Report 2009)
Dr AssetsCr Liabilities
copy 2006-10 Nelson Consulting Limited 63
bull Lease payments are apportioned betweenndash the finance charges and ndash reduction of the lease liability
so as to achieve a constant rate of interest on the remaining balance of the liability
bull Finance charges are reflected in profit or loss
Dr LiabilitiesPL ndash Finance charge
Cr Cash
3 Lesseesrsquo Financial Statements
bull In addition to meeting the requirements of IAS 32 the following disclosures for finance leasesa) for each class of asset the net carrying amount at the
Disclosures
) y gend of the reporting period
b) a reconciliation between the total of future minimum lease payments at the end of the reporting period and their present value In addition an entity shall disclose the total of future minimum lease payments at the end of the reporting period and their present value for each of the following periods
i) not later than one yearii) later than one ear and not later than fi e ears
FinanceLease
copy 2006-10 Nelson Consulting Limited 64
ii) later than one year and not later than five yearsiii) later than five years
c) contingent rents recognised as an expense in the periodd) the total of future minimum sublease payments expected
to be received under non-cancellable subleases at the end of the reporting period
e) a general description of the lesseersquos material leasing arrangements
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
33
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 65
3 Lesseesrsquo Financial Statements
bull Lease payments under an operating leasendash shall be recognised as an expense on a
straight line basis over the lease term
Recognition (Initial and Subsequent) straight-line basis over the lease term
ndash unless another systematic basis is more representative of the time pattern of the userrsquos benefit
Subsequent)
copy 2006-10 Nelson Consulting Limited 66
Operating Lease
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
34
3 Lesseesrsquo Financial Statements
bull Lessees shall in addition to meeting the requirements of IAS 32 make the following disclosures for operating leasesa) the total of future minimum lease payments under non-
Disclosures
a) the total of future minimum lease payments under non-cancellable operating leases for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) the total of future minimum sublease paymentsexpected to be received under non-cancellable
copy 2006-10 Nelson Consulting Limited 67
Operating Lease
subleases at the end of the reporting periodc) lease and sublease payments recognised as an
expense in the period with separate amounts for minimum lease payments contingent rents and sublease payments
d) a general description of the lesseersquos significant leasing arrangements
3 Lesseesrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 68
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
35
3 Lesseesrsquo Financial Statements
bull SIC Interpretation 15 ldquoOperating Leases ndash Incentivesrdquo also clarifies thatndash All incentives for the agreement of a new or renewed operating
lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset bull irrespective of the incentives nature or form or the timing of
copy 2006-10 Nelson Consulting Limited 69
bull irrespective of the incentive s nature or form or the timing of payments helliphellip
ndash The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term on a straight-line basisbull unless another systematic basis is representative of the time
pattern of the lessees benefit from the use of the leased asset
4 Lessorsrsquo Financial Statements
Lessors shalla) recognise assets held under a finance lease in
th i t t t f fi i l iti d
Initial Recognition and Measurement their statements of financial position and
b) present them as a receivable at an amount equal to the net investment in the lease ndash Net investment in the lease is
bull the gross investment in the lease discounted at the interest rate implicit in the lease
ndash Gross investment in the lease is the aggregate of
Measurement
FinanceLease
copy 2006-10 Nelson Consulting Limited 70
a) the minimum lease payments receivable by the lessor under a finance lease and
b) any unguaranteed residual value accruing to the lessor
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
36
4 Lessorsrsquo Financial Statements
bull The recognition of finance incomendash shall be based on a pattern reflecting a constant
periodic rate of return on the lessors net
Subsequent Measurement
periodic rate of return on the lessors net investment in the finance lease
FinanceLease
copy 2006-10 Nelson Consulting Limited 71
4 Lessorsrsquo Financial Statements
bull Manufacturer or dealer lessorsndash shall recognise selling profit or loss in the period
in accordance with the policy followed by the
Leases for Manufacturer or Dealer Lessors in accordance with the policy followed by the
entity for outright salesbull If artificially low rates of interest are quoted
ndash selling profit shall be restricted to that which would apply if a market rate of interest were charged
bull Costs incurred by manufacturer or dealer lessors in ti ith ti ti d i l
Dealer Lessors
FinanceLease
copy 2006-10 Nelson Consulting Limited 72
connection with negotiating and arranging a leasendash shall be recognised as an expense when the
selling profit is recognised
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
37
4 Lessorsrsquo Financial Statements
bull CampP Inc was used to sell its self-manufactured motor car at $500000 at cash price and the cost of the car was about $280000
bull In order to boom its sale CampP Inc offers 2 plans of instalment sale to
Example
In order to boom its sale CampP Inc offers 2 plans of instalment sale to its customers1 Customers can buy the car at $550000 and repay the consideration in 12
equal instalment over a year at zero interest2 Customers can buy the car at $500000 and then arrange a 48-month
instalment plan with the subsidiary of CampP Inc and the interest rate is 10 per annum on the outstanding balance
bull Discuss the implication on the selling profit to CampP Inc
copy 2006-10 Nelson Consulting Limited 73
bull The outright profit on the sale is still $220000 ($500000 - $280000)bull Even for plan 1 the selling profit should still be restricted to $220000
ndash Since no interest (ie an artificially low rate of interest) is quoted selling profit shall be restricted to that which would apply if a market rate of interest were charged
ndash The excess of selling profit is an compensation on the loss of interest
4 Lessorsrsquo Financial Statements
Lessors shall in addition to meeting the requirements in IAS 32 disclose the following for finance leasesa) a reconciliation between the gross investment in the lease
Disclosures
a) a reconciliation between the gross investment in the lease at the end of the reporting period and the present value of minimum lease payments receivable at the end of the reporting period In addition an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period for each of the following periods
i) not later than one yearii) later than one year and not later than five yearsiii) later than five years
FinanceLease
copy 2006-10 Nelson Consulting Limited 74
iii) later than five yearsb) unearned finance incomec) the unguaranteed residual values accruing to the benefit
of the lessord) the accumulated allowance for uncollectible minimum
lease payments receivablee) contingent rents recognised as income in the periodf) a general description of material leasing arrangements
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
38
4 Lessorsrsquo Financial Statements
bull Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset
Recognition (Initial and Subsequent) according to the nature of the asset
bull Lease income from operating leasesndash shall be recognised in income on a straight-line basis
over the lease termndash unless another systematic basis is more representative
of the time pattern in which use benefit derived from the leased asset is diminished
Subsequent)
copy 2006-10 Nelson Consulting Limited 75
Operating Lease
4 Lessorsrsquo Financial Statements
bull Initial direct costs incurred by lessorsndash shall be added to the carrying amount of the leased
asset and
Recognition (Initial and Subsequent) asset and
ndash recognised as an expense over the lease term on the same basis as the lease income
bull Depreciation policy for depreciable leased assetsndash shall be consistent with the lessorrsquos normal
depreciation policyndash depreciation shall be calculated in accordance with IAS
16 and 38
Subsequent)
copy 2006-10 Nelson Consulting Limited 76
Operating Lease
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
39
4 Lessorsrsquo Financial Statements
bull Lessors shall in addition to meeting the requirements of IAS 32 disclose the following for operating leasesa) the future minimum lease payments under non
Disclosures
a) the future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periodsi) not later than one yearii) later than one year and not later than five yearsiii) later than five years
b) total contingent rents recognised as income in the period
copy 2006-10 Nelson Consulting Limited 77
c) a general description of thelessorrsquos leasing arrangements
Operating Lease
4 Lessorsrsquo Financial StatementsCase
Sands China Limited (Annual Report 2009)
copy 2006-10 Nelson Consulting Limited 78
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
40
Revenue (IAS 18)
copy 2006-10 Nelson Consulting Limited 79
1 Objective of IAS 18
bull Incomendash is defined in the Framework for the Preparation and Presentation of
Financial Statements asFinancial Statements asbull increases in economic benefits during the accounting period in the form
of inflows orbull enhancements of assets or decreases of liabilities that result in increases
in equitybull other than those relating to contributions from equity participants
ndash Income encompasses both revenue and gains
copy 2006-10 Nelson Consulting Limited 80
bull Revenue is income that ndash arises in the course of ordinary activities of an entity and is referred
to by a variety of different names including sales fees interest dividends and royalties
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
41
1 Objective of IAS 18
bull The primary issue in accounting for revenue isndash determining when to recognise revenue
bull Revenue is recognised whenbull Revenue is recognised whenndash it is probable that future economic benefits will
flow to the entity andndash these benefits can be measured reliably
bull IAS 18 identifies the circumstances in which these criteria will be met and therefore revenue will be recognised
copy 2006-10 Nelson Consulting Limited 81
2 Scope of IAS 18
bull IAS 18 shall be applied in accounting for revenue arising from the following transactions and eventsSale of goodsSale of goodsa) the sale of goodsb) the rendering of services andc) the use by others of entity assets
yielding interest royalties and dividends
Sale of goodsSale of goods
Rendering of Rendering of servicesservices
Interest royalties Interest royalties and dividendand dividend
copy 2006-10 Nelson Consulting Limited 82
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
42
2 Scope of IAS 18
IAS 18 does not deal with revenue arising froma) lease agreements (see IAS 17 Leases)b) dividends arising from investments which are accounted for under theb) dividends arising from investments which are accounted for under the
equity method (see IAS 28 Investments in Associates)c) insurance contracts within the scope of IFRS 4 Insurance Contractsd) changes in the fair value of financial assets and financial liabilities or their
disposal (see IAS 39 Financial Instruments Recognition and Measurement)e) changes in the value of other current assetsf) initial recognition and from changes in the fair value of biological assets
related to agricultural activity (see IAS 41 Agriculture)
copy 2006-10 Nelson Consulting Limited 83
related to agricultural activity (see IAS 41 Agriculture)g) initial recognition of agricultural produce (see IAS 41) andh) the extraction of mineral ores
3 What is Revenue
bull Revenue isndash the gross inflow of economic benefits
during the periodndash arising in the course of the ordinary
activities of an entityndash when those inflows result in increases
copy 2006-10 Nelson Consulting Limited 84
in equityndash other than increases relating to
contributions from equity participants
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
43
3 What is Revenue
bull Revenue includesndash only the gross inflows of economic benefits received and receivable
by the entity on its own accountby the entity on its own accountbull Amounts collected on behalf of third parties such as sales taxes goods
and services taxes and value added taxesndash are not economic benefits which flow to the entity andndash do not result in increases in equity
Therefore they are excluded from revenuebull Similarly in an agency relationship the gross inflows of economic
b fit i l d t ll t d b h lf f th i i l d hi h
copy 2006-10 Nelson Consulting Limited 85
benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity
The amounts collected on behalf of the principal are not revenueInstead revenue is the amount of commission
4 Measurement of Revenue
bull Revenue shall be measured at the fair value of the consideration received or receivablendash Fair value is the amount for which an asset could be exchanged or aFair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable willing parties in an arms length transaction
ndash The amount of revenue arising on a transaction is usually determined by agreement between the entity and the buyer or user of the asset
ndash It is measured atbull the fair value of the consideration received or receivable
copy 2006-10 Nelson Consulting Limited 86
the fair value of the consideration received or receivablebull taking into account the amount of any trade discounts and volume
rebates allowed by the entityndash In most cases the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents received or receivable
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
44
4 Measurement of RevenueCase
Wynn Macau Limited
bull Revenue ndash is recognized to the extent that it is probable that
the economic benefits will flow to the Group and the revenue can be reliably measured
bull Revenue is measured at the fair value of the consideration
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 87
ndash is measured at the fair value of the consideration received excluding discounts rebates and other sales taxes or duties
5 Identification of the Transaction
bull The recognition criteria in IAS 18 is usually applied separately to each transaction
bull However there are situations that thebull However there are situations that the recognition criteria is1 Applied to separately identifiable
components of a single transaction2 Applied to two or more transactions
together
Separately identifiable component of a single transaction
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 88
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
45
5 Identification of the Transaction
bull In certain circumstances it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction
Example
Separately identifiable component of a single transaction
bull For examplendash when the selling price of a product
includes an identifiable amount for subsequent servicing
copy 2006-10 Nelson Consulting Limited 89
subsequent servicingbull that amount is deferred and
recognised as revenue over the period during which the service is performed
5 Identification of the Transaction
bull Conversely the recognition criteria are applied to two or more transactions together when they are linked in such a way that the commercial effect cannot be understood without reference to the series
Example
of transactions as a whole
bull For examplendash an entity may sell goods and at the
same time enter into a separate agreement to repurchase the goods at a later date
Two or moretransactions together
copy 2006-10 Nelson Consulting Limited 90
at a later datebull thus negating the substantive
effect of the transaction in such a case the two transactions are dealt with together
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
46
5 Identification of the TransactionCase
Wynn Macau Limited
bull Casino revenues ndash are measured by the aggregate net difference
between gaming wins and losses ndash with liabilities recognized for funds deposited by
customers before gaming play occurs and for chips in customersrsquo possession
y (Prospectus ndash Accountantsrsquo Report 2009)
copy 2006-10 Nelson Consulting Limited 91
pbull Revenues are recognized net of certain sales
incentives bull Accordingly the Grouprsquos casino revenues
ndash are reduced by discounts commissions and points earned in customer loyalty programs
Customer Loyalty Programmes (IFRIC Interpretation 13)
copy 2006-10 Nelson Consulting Limited 92
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
47
Background
bull Customer loyalty programmes are used by entitiesto provide customers with incentives to buy their goods or services
ndash If a customer buys goods or services the entity grants the customer award credits (often described as points)
ndash The customer can redeem the award credits for awards such as free or discounted goods or services
bull The programmes operate in a variety of waysndash Customers may be required to accumulate a specified minimum number or
value of award credits before they are able to redeem them
copy 2006-10 Nelson Consulting Limited 93
value of award credits before they are able to redeem them ndash Award credits may be linked to individual purchases or groups of
purchases or to continued custom over a specified period ndash The entity may operate the customer loyalty programme itself or
participate in a programme operated by a third party ndash The awards offered may include goods or services supplied by the entity
itself andor rights to claim goods or services from a third party
Scope
bull IFRIC Interpretation 13 applies to customer loyalty award credits thata) an entity grants to its customers as part of a salesa) an entity grants to its customers as part of a sales
transaction ie a sale of goods rendering of services or use by a customer of entity assets and
b) subject to meeting any further qualifying conditions the customers can redeem in the future for free or discounted goods or services
bull The Interpretation addresses accounting by the entity that grants award credits to its customers
copy 2006-10 Nelson Consulting Limited 94
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
48
Issues
bull Whether the entityrsquos obligation to provide free or discounted goods or services (awards) in the future should be recognised and measured byg yi) allocating some of the consideration received or
receivable from the sales transaction to the award credits and deferring the recognition of revenue(applying IAS 1813) or
ii) providing for the estimated future costs of supplying the awards (applying IAS 1819) and
bull If consideration is allocated to the award creditsi) h h h ld b ll t d t th
copy 2006-10 Nelson Consulting Limited 95
i) how much should be allocated to themii) when revenue should be recognised andiii) if a third party supplies the awards how revenue
should be measured
Conclusions ndash Separation
bull An entity shall ndash apply IAS 1813 and
account for award credits as a separately
Separately Identifiable Componentndash account for award credits as a separately
identifiable component of the sales transaction(s) in which they are granted (the initial sale)
bull The fair value of the consideration received or receivable in respect of the initial sale shall be allocated between
the award credits and
Component
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 96
ndash the award credits and ndash the other components of the sale Components
Other Components
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
49
Conclusions ndash Fair Value
bull The consideration allocated to the award credits shall be measured by reference to their fair value
ndash i e the amount for which the award credits couldie the amount for which the award credits could be sold separately
bull If the fair value is not directly observable it must be estimated
bull An entity may estimate the fair value of award credits by reference to
ndash the fair value of the awards for which they could be redeemed
Award Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 97
be redeemed
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash Fair Value
bull The fair value of the awards (for which they could be redeemed) would be reduced to take into accounta) the fair value of awards that would be offered toa) the fair value of awards that would be offered to
customers who have not earned award credits from an initial sale and
b) the proportion of award credits that are not expected to be redeemed by customers
bull If customers can choose from a range of different awards the fair value of the award credits will reflect
th f i l f th f il bl dAward Credit
Fair Value
copy 2006-10 Nelson Consulting Limited 98
ndash the fair values of the range of available awards weighted in proportion to the frequency with which each award is expected to be selected
Supplied by Supplied by the Entity Itselfthe Entity Itself
Supplied by Supplied by the Third Partythe Third Party
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
50
Conclusions ndash Recognition
bull If the entity supplies the awards itself it shall recognise the consideration allocated to award credits as revenue when
ndash award credits are redeemed andndash it fulfils its obligations to supply awards
bull The amount of revenue recognised shall be based on
ndash the number of award credits that have been redeemed in exchange for awards
No of Award Credits Redeemed in Exchange
divide
copy 2006-10 Nelson Consulting Limited 99
ndash relative to the total number expected to be redeemed
Supplied bySupplied bythe Entity Itselfthe Entity Itself
Total No of Award Credits Expected to be Redeemed
Conclusions ndash Recognition
bull If a third party supplies the awards the entity shall assess whether it is collecting the consideration allocated to the award credits
ndash on its own account(ie as the principal in the transaction) or
ndash on behalf of the third party(ie as an agent for the third party)
On its Own Account
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 100
Supplied by Supplied by the Third Partythe Third Party
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
51
Conclusions ndash Recognition
bull If the entity is collecting the consideration on its own account it shall ndash measure its revenue as the grossndash measure its revenue as the gross
consideration allocated to the award creditsand
ndash recognise the revenue when it fulfils its obligations in respect of the awards
On its Own Account
copy 2006-10 Nelson Consulting Limited 101
Supplied by Supplied by the Third Partythe Third Party
Conclusions ndash RecognitionExample
bull A grocery retailer operates a customer loyalty programme‒ It grants programme members loyalty points when they
spend a specified amount on groceries p p g‒ Programme members can redeem the points for further
groceries ‒ The points have no expiry date
bull In one period the entity grants 100 points (assume sales of $2000) ‒ Management expects 80 of these points to be redeemed ‒ Management estimates the fair value of each loyalty point to
copy 2006-10 Nelson Consulting Limited 102
g y y pbe one currency unit ($1) and defers revenue of $100
Dr Cash $ 2000Cr Revenue $ 1900
Deferred income 100
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
52
Conclusions ndash RecognitionExample
Year 1bull At the end of the first year 40 points (pts) have been redeemed in exchange for
groceries ie half of those expected to be redeemed g pbull The entity recognises revenue of (40 80 pts) times $100 = $50
Dr Deferred income $ 50Cr Revenue $ 50
Year 2bull In the second year management revises its expectations and now expects 90
points to be redeemed altogetherbull During the second year 41 points are redeemed bringing the total number
copy 2006-10 Nelson Consulting Limited 103
During the second year 41 points are redeemed bringing the total number redeemed to 40 + 41 = 81 points
bull The cumulative revenue that the entity recognises is (81 90 pts) times $100 = $90 bull The entity has recognised revenue of $50 in the first year so it recognises $40
in the second yearDr Deferred income $ 40Cr Revenue $ 40
Conclusions ndash RecognitionExample
Year 3bull In the third year a further nine points are redeemed taking the total number of
points redeemed to 81 + 9 = 90 points p pbull Management continues to expect that only 90 points will ever be redeemed ie
that no more points will be redeemed after the third year bull So the cumulative revenue to date is (90 points 90 points) times $100 = $100 bull The entity has already recognised $90 of revenue ($50 in the first year and $40
in the second year) bull So it recognises the remaining $10 in the third year bull All of the revenue initially deferred has now been recognised
copy 2006-10 Nelson Consulting Limited 104
y gDr Deferred income $ 10Cr Revenue $ 10
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
53
Conclusions ndash Recognition
bull If the entity is collecting the consideration on behalf of the third party it shalli) measure its revenue as the net amount retained on its own account i e thei) measure its revenue as the net amount retained on its own account ie the
difference between bull the consideration allocated to the award credits andbull the amount payable to the third party for supplying
the awards andii) recognise this net amount as revenue when the
third party becomes obliged to supply the awardsand entitled to receive consideration for doing so
On Behalf of the Third Party
copy 2006-10 Nelson Consulting Limited 105
bull These events may occur as soon as the award credits are grantedbull Alternatively if the customer can choose to claim awards from either
the entity or a third party these events may occur only when the customer chooses to claim awards from the third party
Supplies by Supplies by the Third Partythe Third Party
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h li d IFRIC 13 C L l P
Casino Guichard-Perrachon
ndash The Group has applied IFRIC 13 ndash Customer Loyalty Programmes as of 1 January 2009 bull This standard sets out the accounting treatment for award credits
granted to customers upon an initial sale transaction for use against a future sale transaction
ndash Award credits are recognised as a separately identifiable component of the initial sales transaction and their fair value at inception is deducted from the revenue generated by the sale
copy 2006-10 Nelson Consulting Limited 106
ndash When the award credit is used by the customerbull the revenue deferred at inception is recognised and bull the cost of the award credit is either deducted
ndash from the cost of goods sold (in the case of exchange vouchers) or ndash from revenue (in the case of money vouchers)
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
54
Conclusions ndash RecognitionCase
bull A retailing amp real estate group stated in its annual report 2009Th G h f l l l d b IFRIC 13
Casino Guichard-Perrachon
ndash The Group has two types of loyalty plan covered by IFRIC 13bull plans that award points to customers when they purchase goods in Group
stores which may be cashed in for money vouchers or gift vouchersbull a money voucher plan
ndash The Group previously recognised a provision for the costs incurred in granting award credits to its customers
ndash Under IFRIC 13 the Group now accounts for the fair value of the award credits granted (that is the fair value to the customer) as
copy 2006-10 Nelson Consulting Limited 107
award credits granted (that is the fair value to the customer) as opposed to their cost
ndash Consequently the impact of customer loyalty plans is now presentedbull in the balance sheet as deferred income rather than provisions and bull in the income statement as a deduction from revenue or in the cost of
goods sold as applicable rather than in marketing costs
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
copy 2006-10 Nelson Consulting Limited 108
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA
55
IFRS for Hospitality and Gaming Industry(Part 1) 25 May 2010
QampA SessionQampA SessionQampA SessionQampA Session
copy 2006-10 Nelson Consulting Limited 109
Nelson LamNelson Lam 林智遠林智遠nelsonnelsoncpacomhkwwwNelsonCPAcomhkwwwFacebookcomNelsonCPA