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”.
