Sunday, December 1, 2013

[IFRS] IAS 18 - Revenue - Part 5: Rendering of Services

Rendering of Services
Revenue from rendering of services be recognized when all of the following conditions are satisfied 
  1. The amount of revenue can be measured reliably.
  2. It is probable that economic benefits associated with the transaction will flow to the seller.
  3. The stage of completion at the end of the reporting period can be measured reliably. 
  4. The costs incurred and the cost to complete can be measured reliably 
    The revenue is said to be measured reliably, when both the parties to transaction are able to clearly establish 
    • each party’s rights regarding the service to be provided and received;
    • the consideration to be exchanged; and
    • the manner and terms of settlement
    Further, the entity should have an effective internal budgeting and reporting system to make reliable estimates.

    Probable that economic benefits associated with the transaction will flow to the seller.
    • If there is any uncertainty regarding the collectability of an amount included in revenue, then the uncollectible amount or the amount in respect of which recovery has ceased to be probable is recognized as an expense, rather than as an adjustment of the amount of revenue originally recognized
    To determine the stage of completion, the entity may use any of the following methods depending on the nature of the transaction:
    • surveys of work performed;
    • services performed to date as a percentage of total services to be performed; or
    • the proportion that costs incurred to date bear to the estimated total costs of the transaction.
    In cases where the services are performed by an indeterminate number of acts over a specified period of time, revenue is recognized on a straight-line basis over the specified period unless there is evidence that some other method better represents the stage of completion. 

    When a contract contains a specific act that is much more significant than any other acts, the recognition of revenue is postponed until the significant act is executed. For examples, an operation by a surgeon or performance by an artist.

    The costs incurred and the cost to complete can be measured reliably 
    • When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognized only to the extent of the expenses recognized that are recoverable If the contract is of long term nature and there is a difficult in estimating the future cost, then it is imperative to disclosure the judgment as a source of uncertainty. 

    Accounting Policies (Extract)
    Nokia Siemens Networks, ( ), Consolidated Financial Statement December 2012
    Revenue (Extract)
    Service revenue, which typically includes managed services and maintenance services, is generally recognized on a straight-line basis over the specified period unless there is evidence that some other method better represents the rendering of services.