by John Hughes
Easyhome Ltd., obviously one of the country’s luckier entities, discloses three separate differences relating to revenue recognition. Here’s the first:
The question of whether to recognize a particular income stream on a gross versus a net basis comes up fairly often in practice – EIC-123 addressed it under old Canadian GAAP. As typical for this kind of issue, the Abstract didn’t provide a precise formula for making the determination, but set out various factors or indicators pointing in one direction versus another. Although, IAS 18 addresses the topic much more briefly, the briefer discussion in IFRS maps fairly comfortably onto the greater detail in Canadian GAAP, and rarely seems to result in reaching a different conclusion.
But as we see here, rare doesn’t mean never. I don’t know anything about Easyhome’s specific transaction stream beyond what it discloses, so I’m really using them to muse in hypothetical terms on what could cause a different analysis on such an issue, rather than attempting to comment on this particular case. Although the factors set out in IAS 18 all correspond (albeit in fewer words) to items included in EIC-123, IFRS doesn’t mention some other items that might in some fact patterns have been pivotal to the Canadian GAAP determination. For example, among its indicators of gross reporting, EIC-123 included situations where the entity changes the product or performs part of the service, where it has discretion in supplier selection, and where it’s involved in determining product or service specifications; IAS 18 doesn’t specifically cite any of these.
These could be relevant to assessing an insurance-related situation perhaps, for example where the entity initiates and to some degree designs a coverage program and then goes out to find an insurer to provide coverage for it. IFRS might be interpreted as placing less weight on how the program was conceived or initiated or on how it might have been designed differently, and relatively more weight on the arrangement as it actually exists (in particular, as one in which the entity earns a predetermined fixed fee or fixed percentage of whatever was remitted by the customer).
That could work the other way round too. An entity might be established for the specific purpose of distributing a preexisting product. In that case, it may not have the possibility of changing the product or determining its specifications, or of changing to a different supplier. You might say that’s three strikes against gross revenue recognition, but on the other hand, that’s just the business the entity is in – maybe it’s not so much that the factors point toward net treatment as that they’re not applicable. More broadly, it may or may not be significant that IFRS also lays out the basic concept more concisely than Canadian GAAP did: “in an agency relationship, the gross inflows of economic 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 revenue. Instead, revenue is the amount of commission.” Possibly, on occasion, this pithier statement of the concept allows a clearer focus on the arrangement’s dominant feature.
EIC-123 is one of those funny Abstracts, largely imported from the US of course, that includes a disproportionate amount of detail compared to other aspects of Canadian GAAP. It has no less than sixteen examples of how to apply the gross/net concept, which is sixteen more than CICA 3400 has on every other aspect of revenue recognition. Perhaps these examples, no matter how carefully drafted, may occasionally have been counter-productive in allowing an entity to latch onto an example that roughly reflected its own circumstances, even if some of the key underlying nuances were different.
Here’s Easyhome’s second revenue-related difference:
EIC-144 set out a consensus that cash consideration received by a customer from a vendor was presumed to be a reduction of the prices of the vendor’s products or services, to be characterized as a reduction of cost of sales and related inventory. However, it went on to say the presumption would be overcome, characterizing the consideration as revenue, when the consideration was a payment for assets or services delivered to the vendor. Advertising has always been dicey territory for recognizing revenue on such arrangements though, allowing the possibility, as someone once put it, of pumping up numbers by purporting to exchange my million-dollar dog for your two half-million-dollar cats (as a point of reference, SIC-31, addressing barter transactions involving advertising services, says revenue in such a transaction can never be measured reliably at the fair value of advertising services received). By their very nature, vendor incentive agreements are “special” arrangements not typically falling very comfortably into the broad concept of revenue as “gross inflows of economic benefits arising from an entity’s ordinary activities.” It’s not too surprising then if IFRS reduces the likelihood of treating them as revenue.
And as for the third difference in this area…well, better leave something for another day…
The opinions expressed are solely those of the author