Revenue Recognition policy of General Motors

Revenue Recognition policy of General Motors

Company: General Motors

Business: Automobile

Reference to annual Report of: 2010

1.    Business Area: Automotive

1.1  Automotive sales are primarily composed of revenue generated from the sale of vehicles. Vehicle sales are recorded when title and risks and rewards of ownership have passed, which is generally when a vehicle is released to the carrier responsible for transporting it to a dealer and when collectability is reasonably assured.(Refer Para 14 of IAS 18 which explains the timing of revenue recognition) Provisions for recurring dealer and customer sales and leasing incentives, consisting of allowances and rebates, are recorded as reductions to Automotive sales at the time of vehicle sales. All other incentives, allowances, and rebates related to vehicles previously sold are recorded as reductions to Automotive sales when announced.

1.2  Vehicle sales to daily rental car companies with guaranteed repurchase obligations are accounted for as operating leases. (Refer Explanation 1.1) Estimated lease revenue is recorded ratably over the estimated term of the lease based on the difference between net sales proceeds and the guaranteed repurchase amount. The difference between the cost of the vehicle and estimated residual value is depreciated on a straight-line basis over the estimated term of the lease.(Refer Explanation 1.2)

1.3  Sales of parts and accessories to GM dealers are recorded when the goods arrive at the dealership and when collectability is reasonably assured. Sales of aftermarket products and power train components are recorded when title and risks and rewards of ownership have passed, which is generally when the product is released to the carrier responsible for transporting them to the customer and when collectability is reasonably assured.

1.4  Revenue from OnStar, comprised of customer subscriptions related to comprehensive in-vehicle security, communications and diagnostic systems, is deferred and recorded on a straight-line basis over the subscription period. An OnStar subscription is provided as part of the sale or lease of certain vehicles. The fair value of the subscription is recorded as deferred revenue when a vehicle is sold, and amortized over the subscription period. Prepaid minutes for the Hands-Free Calling system are deferred and recorded on a straight-line basis over the life of the contract. (Refer Explanation 2)

1.5  Payments received from banks for credit card programs in which there is a redemption liability are recorded on a straight-line basis over the estimated period of time the customer will accumulate and redeem their rebate points. This time period is estimated to be 60 months for the majority of the credit card programs. This redemption period is reviewed periodically to determine if it remains appropriate. The redemption liability anticipated to be paid to the dealer is estimated and accrued at the time specific vehicles are sold to the dealer. The redemption cost is classified as a reduction of Automotive sales.

2.    Business Area: Automotive Financing

2.1 Finance income earned on receivables is recognized using the effective interest method.(Refer Explanation 3) Fees and commissions (including incentive payments) received and direct costs of originating loans are deferred and amortized over the term of the related finance receivables using the effective interest method and are removed from the consolidated balance sheets when the related finance receivables are sold, charged off or paid in full. Accrual of finance charge income is suspended on accounts that are more than 60 days delinquent, accounts in bankruptcy, and accounts in repossession.

2.2 Income from operating lease assets, which includes lease origination fees, net of lease origination costs, is recorded as operating lease revenue on a straight-line basis over the term of the lease agreement.

Author’s Remarks:

Explanation 1

1.1       Para 8 of IAS 17 on Leases states:

“A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to  ownership.”

Vehicles are sold with a guaranteed repurchase obligation and hence the transaction in substance is not recognized as revenue but as an operating lease.

1.2       Para 50 of IAS 17 on Leases states:

“Lease income from operating leases shall be recognized in income on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished”

           

The Difference between the sales price and the repurchase obligation is recognized as lease rental for the period covered under lease.

Explanation 2

Para 13 of IAS 8 on Revenue Recognition in case of multiple element transaction states:

“The recognition criteria in this Standard are usually applied separately to each transaction. However, 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. For example, when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognized as revenue over the period during which the service is performed.”

2.1  The revenue from Onstar subscription has to be differed over the period of subscription and the same needs to be separated from the transaction of sales of goods.

2.2  In similar case the prepaid minutes are to be recognized as revenue over the life of contract.

Explanation 3

Para 30 of IAS 8 on Revenue Recognition states that the interest has to be recognized by effective interest rate method as explained in IAS 39.

The effective interest rate is defined as “the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, where appropriate, a shorter period to the net carrying amount of the financial asset or financial liability”.

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.

Revenue Recognition policy of Walmart INC.

Revenue Recognition policy of Walmart INC.

Company: Walmart INC

Business: Retail sales

Reference to annual Report of: 2011

The Company recognizes sales revenue net of sales taxes and estimated sales returns at the time it sells merchandise to the customer. (Refer Explanation 1.1) Customer purchases of shopping cards are not recognized as revenue until the card is redeemed and the customer purchases merchandise by using the shopping card. (Refer Explanation 1.2)The Company also recognizes revenue from service transactions at the time the service is performed. Generally, revenue from services is classified as a component of net sales on our Consolidated Statements of Income.

Revenue Recognition of Sam’s Club Membership Fee

The Company recognizes Sam’s Club membership fee revenue both in the United States and internationally over the term of the membership, which is 12 months. The deferred membership fee is included in accrued liabilities on the accompanying Consolidated Balance Sheets.

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.”

The receipt of sales tax is not received on account of company and hence is not added to Revenue.

Explanation 1.2

Receipt of money for sale of shopping card is a liability for the company and is not revenue for the company unless the company sells the goods. Hence purchase of shopping card is not recognized as revenue.

Revenue Recognition Policy of Apple INC FY 2011

Revenue Recognition policy of Apple INC

Company: Apple INC

Business: Information Technology and Hardware

Reference to annual Report of: 2011

1.     Introduction

Net sales consist primarily of revenue from the sale of hardware, software, digital content and applications, peripherals, and service and support contracts.

1.1  The Company recognizes revenue when

1.1.1       persuasive evidence of an arrangement exists,

1.1.2       delivery has occurred,

1.1.3       the sales price is fixed or determinable,

1.1.4       and collection is probable.

1.2  Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. (Refer Explanation 1)

For most of the Company’s product sales, these criteria are met at the time the product is shipped.

2.     Cases when Risk is not transferred

For online sales to individuals, for some sales to education customers in the U.S., and for certain other sales, the Company defers recognition of revenue until the customer receives the product because the Company retains a portion of the risk of loss on these sales during transit. (Refer Explanation 1.1)

The Company recognizes revenue from the sale of hardware products, software bundled with hardware that is essential to the functionality of the hardware, and third-party digital content sold on the iTunes Store in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for the following types of sales transactions: (Broad Categories of Sales transaction)

2.1.1       standalone sales of software products,

2.1.2       sales of software upgrades and

2.1.3       sales of software bundled with hardware not essential to the functionality of the hardware.

3.     Multi-element arrangements in a single sales transaction:

3.1        Allocation of the total revenue to different elements

For multi-element arrangements that include hardware products containing software essential to the hardware product’s functionality, undelivered software elements that relate to the hardware product’s essential software, and undelivered non-software services, the Company allocates revenue to all deliverables based on their relative selling prices. (Refer Explanation 2)

3.2        Method of measuring revenue from various types of transactions after its bifurcation from main transaction:

In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”) and (iii) best estimate of the selling price (“ESP”). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs reflect the Company’s best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis.

4.     Change in Estimate

4.1        Accounting for the elements which cannot be deferred as they were not estimated earlier:

For sales of iPhone, iPad, Apple TV, for sales of iPod touch beginning in June 2010, and for sales of Mac beginning  in June 2011, the Company has indicated it may from time-to-time provide future unspecified software upgrades and features free of charge to customers. In June 2011, the Company announced it would begin providing various non-software services to owners of qualifying versions of iOS devices and Mac. Because the Company has neither VSOE nor TPE for these unspecified software upgrade rights or the non-software services, revenue is allocated to these rights and services based on the Company’s ESPs.

4.2        Accounting for change in estimate:

Amounts allocated to the unspecified software upgrade rights and non-software services are deferred and recognized on a straight-line basis over the estimated lives of each of these devices, which range from 24 to 48 months. The Company’s process for determining ESPs involves management’s judgment.

Change in Estimated selling price (ESP) due to change in circumstances

The Company’s process considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstances underlying the factors considered change, including the estimated or actual costs incurred to provide non-software services or the estimated lives of the related devices, or should future facts and circumstances lead the Company to consider additional factors, the Company’s ESP for software upgrades and nonsoftware services related to future sales of these devices could change. If the estimated life of one or more of the devices should change, the future rate of amortization of the revenue allocated to the software upgrade rights would also change.

5.     Transactions in which the company has to protect the price by reimbursing the extra costs to the vendors:

The Company records reductions to revenue for estimated commitments related to price protection and for customer incentive programs, including reseller and end-user rebates, and other sales programs and volume-based incentives. For transactions involving price protection, the Company recognizes revenue net of the estimated amount to be refunded, provided the refund amount can be reasonably and reliably estimated and the other conditions for revenue recognition have been met. (Refer Explanation 3)

5.1        Recognition of revenue in case of the aforesaid refunds cannot be measured:

The Company’s policy requires that, if refunds cannot be reliably estimated, revenue is not recognized until reliable estimates can be made or the price protection lapses. For customer incentive programs, the estimated cost of these programs is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. The Company also records reductions to revenue for expected future product returns based on the Company’s historical experience.

5.2        Change in estimates for refund in case of price protection

Future market conditions and product transitions may require the Company to increase customer incentive programs and incur incremental price protection obligations that could result in additional reductions to revenue at the time such programs are offered.

5.3        Accounting for incentives to be offered in future:

Additionally, certain customer incentive programs require management to estimate the number of customers who will actually redeem the incentive. Management’s estimates are based on historical experience and the specific terms and conditions of particular incentive programs. If a greater than estimated proportion of customers redeem such incentives, the Company would be required to record additional reductions to revenue, which would have a negative impact on the Company’s results of operations.

Font in Bold and Italics indicate the text of author.

Author’s Remarks:

Explanation 1

Para 14 of IAS 18 states:

“Revenue from the sale of goods shall be recognized when all the following conditions have been satisfied:

(a) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;

(b) the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

(c) the amount of revenue can be measured reliably;

(d) it is probable that the economic benefits associated with the transaction will flow to the entity;

and

(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.”

1.1        If any of the above condition is not satisfied revenue should not be recognized. Thus the company does recognize the revenue in case the risk and rewards of ownership has not been transferred to the customers in case of online sales.

Explanation 2

Para 13 of IAS 18 states that

“The recognition criteria in this Standard are usually applied separately to each transaction. However, 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. For example, when the selling price of a product includes an identifiable amount for subsequent servicing, that amount is deferred and recognized as revenue over the period during which the service is performed”.

2.1        The consolidated revenue of sale of services and hardware is bifurcated into its element as they separately reflect the substance of the transaction.

Explanation 3

Para 19 of IAS 18 states that

“Revenue and expenses that relate to the same transaction or other event are recognised simultaneously; this process is commonly referred to as the matching of revenues and expenses. Expenses, including warranties and other costs to be incurred after the shipment of the goods can normally be measured reliably when the other conditions for the recognition of revenue have been satisfied.”

3.1        When Company insists on price protection it  is required to refund the excess amount of sales price to the reseller. Thus, the transaction of sales creates another obligation of payment of refund.

3.2        In that case in order to match the revenue with the expenses the refund has to be accounted for.

3.3        The net change in equity is to extent of sales price reduced by the amount refundable to the reseller. Hence the revenue has to be netted off.