Revenue Recognition policy of Chevron INC

Revenue Recognition policy of Chevron

Company: Chevron

Business: Oil and Gas

Reference to annual Report of: 2010

Revenues associated with sales of crude oil, natural gas, coal, petroleum and chemicals products, and all other sources are recorded when title passes to the customer, net of royalties, discounts and allowances, as applicable.

Revenues from natural gas production from properties in which Chevron has an interest with other producers are generally recognized on the entitlement method.

Excise, value-added and similar taxes assessed by a governmental authority on a revenue-producing transaction between a seller and a customer are presented on a gross basis. (Refer Explanation 1.1)

Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another (including buy/sell arrangements) are combined and recorded on a net basis and reported in “Purchased crude oil and products” on the Consolidated Statement of Income. (Refer Explanation 1.2)

Author’s Remarks:

Explanation 1.1

As per para 8 of IAS 18:

“Revenue includes only the gross inflows of economic benefits received and receivable by the entity on its own account. Amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes are not economic benefits which flow to the entity and do not result in increases in equity. Therefore, they are excluded from revenue.”

1.1.1   Grossing up of indirect taxes with Revenue

The company prepares its financial statements under US GAAP which permits the treatment of grossing up of revenue with indirect taxes.

However IAS 18 (IFRS Framework) does not permit presenting of indirect taxes on a gross basis and hence revenue has to be reduced to that extent when preparing IFRS Compliant financial statements.

1.1.2   Revenue reported net of royalties, discount and allowances.

Company is required to pay Royalty and discount and the amount is not received on its own account and hence the same has been reduced from the gross revenue.

Explanation 1.2

As per para 12 of IAS 18:

“When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to fulfill demand on a timely basis in a particular location. When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred.”

1.2.1   Netting up of purchases and purchases of inventory

The sale of inventory invokes another obligation of the company to purchase a inventory from the party as per the agreement entered with the counterparty.

Such transactions needs to be reported by netting off the sales with the purchase obligation and the profits/loss of the same needs to be reported in the financials as per the requirement of para 12 of IAS 18.