The EU VAT Treatment of Vouchers (FM nr. 157) 2019/4.1.2.4:4.1.2.4 Proposed joint IASB/FASB rules for accounting for free products

The EU VAT Treatment of Vouchers (FM nr. 157) 2019/4.1.2.4

4.1.2.4 Proposed joint IASB/FASB rules for accounting for free products

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

As mentioned in Section 4.1.2.1, the result of the project initiated by the IASB and the FASB to clarify the principles for recognizing revenue and to develop a common revenue standard for IFRSs and U.S. GAAP should have taken effect in 2017.1,2

The core principle of the proposed joint accounting rules is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity would apply all of the following steps:

Step 1—Identify the contract with a customer.

Step 2—Identify the separate performance obligations in the contract.

Step 3—Determine the transaction price.

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

Step 5—Recognise revenue when (or as) the entity satisfies a performance obligation.3

For this research, I consider Step 3 and Step 5 to be less relevant. Step 5 deals with the timing of revenue recognition, which falls outside the scope of this research. Also, the result of Step 3, determining the transaction price, is not relevant for determining whether a contract consists of one (composite) transaction or various different supplies or whether the consideration received should be allocated to all transactions (and how).

Step 1 is interesting for this research in the sense that it demonstrates that the transactions to which the relevant rules apply, are defined in a similar way as under the ‘legal’ approach of the EU VAT rules. Therefore, I will examine Step 1 and Step 2 now to determine whether these can be useful for determining which elements are included in a multiple-element transaction.

I will compare Steps 1 and 2 with the EU VAT rules before I examine Step 4. Step 4 will be examined as part of ‘economic and commercial reality’ in Section 4.5.2.2 in this Chapter.

Step 1: Identify the contract with a customer

Under the relevant rules, a contract is defined as an agreement between two or more parties that creates enforceable rights and obligations. Contracts can be written, oral or implied by an entity’s customary business practices.4

Step 2: Identify the separate performance obligations in the contract

A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. If an entity promises to transfer more than one good or service, the entity would account for each promised good or service as a separate performance obligation only if it is distinct. If a promised good or service is not distinct, an entity would combine that good or service with other promised goods or services until the entity identifies a bundle of goods or services that is distinct. In some cases, that would result in an entity accounting for all the goods or services promised in a contract as a single performance obligation.

A good or service is distinct if either of the following criteria is met:

(a)

the entity regularly sells the good or service separately; or

(b)

the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer.

Notwithstanding those criteria, a good or service in a bundle of promised goods or services is not distinct and, therefore, the entity would account for the bundle as a single performance obligation, if both of the following criteria are met:

(a)

the goods or services in the bundle are highly interrelated and transferring them to the customer requires that the entity also provide a significant service of integrating the goods or services into the combined item(s) for which the customer has contracted; and

(b)

the bundle of goods or services is significantly modified or customised to fulfil the contract.5

It is clear from the above that under the relevant accountancy rules, elements have to be promised or agreed in a contract to be considered part of a multiple-element supply. This implies that also from an accounting perspective, the legal agreement between parties should be leading when determining whether a multiple-element transaction should be considered a single, composite supply or several separate supplies. In Section 4.5.2.2, I will investigate some more accounting rules for determining whether the consideration received for a multiple-element supply should be allocated to all elements of that transaction.

Economic reality, or the ‘economic viewpoint’, is used by the CJEU for determining whether a multiple-element supply comprises a single transaction that, from an economic point of view, should not be artificially split. Under the ‘economic’ accounting rules, multiple-element supplies should be considered one single, composite, supply only if the elements, or promised goods or services, are ‘distinct’. Looking at the rules for determining whether a promised good or service is distinct, accounting rules use economic criteria rather than legal criteria as well.

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