The EU VAT Treatment of Vouchers (FM nr. 157) 2019/4.5.2.3:4.5.2.3 Proposed accounting rules

The EU VAT Treatment of Vouchers (FM nr. 157) 2019/4.5.2.3

4.5.2.3 Proposed accounting rules

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In the process used for recognising revenue, a number of steps are prescribed under the proposed rules. I described the first two steps, ‘identifying the contract with a customer’ and ‘identifying the separate performance obligations in the contract’, in Section 4.1.2.4. These steps were applied to determine which elements should be included in a multiple-element transaction.

I will now describe the next (proposed) steps used for revenue recognition, demonstrating that these can be used for determining whether specific elements of a multiple-element transaction are performed for consideration, even if they are advertised as ‘free’. As mentioned above, I will also show that the result of applying these (proposed) rules is not the same as the result of applying the relevant EU VAT rules.

I will first briefly list the steps, and then elaborate on Step 4, which is – in my view – the most relevant step for the purpose stated above. The steps are:

Step 3: Determine the transaction price

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (for example, sales taxes).1

Step 4: Allocate the transaction price to the separate performance obligations in the contract

For a contract that has more than one separate performance obligation, an entity would allocate the transaction price to each separate performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each separate performance obligation.

To allocate an appropriate amount of consideration to each separate performance obligation, an entity would determine the stand-alone selling price at contract inception of the good or service underlying each separate performance obligation and allocate the transaction price on a relative stand-alone selling price basis. If a stand-alone selling price is not observable, an entity would estimate it.2

Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

This step is outside the scope of this research.

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