4.3 Particular accounting policies: Statement of Financial Performance items

4.3.1  Revenue recognition

Where revenue arises from the rendering of services, the sale of goods or the use of department's assets by others NZ IAS 18 must be applied. Most other revenue of departments will result from non-exchange transactions.

In a non-exchange transaction, an entity either receives value from another entity without directly giving approximately equal value in exchange, or gives value to another entity without directly receiving approximately equal value in exchange. There are three factors relevant in determining whether departments render services in an exchange or receive revenue in a non-exchange transaction:

• whether the services are clearly specified;
• whether the value of the services is approximately equal to the funding; and
• whether the consideration that is provided is conditional on the services to be supplied.

The key requirements of NZ IAS 18 are:

• Revenue shall be measured at the fair value of the consideration received or receivable (NZ IAS 18 paragraph 9).
• Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:
  • the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
  • the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
  • the amount of revenue can be measured reliably;
  • it is probable that the economic benefits associated with the transaction will flow to the entity; and
  • the costs incurred or to be incurred in respect of the transaction can be measured reliably (NZ IAS 18 paragraph 14).
• When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the balance sheet date. The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:
  • the amount of revenue can be measured reliably;
  • it is probable that the economic benefits associated with the transaction will flow to the entity;
  • the stage of completion of the transaction at the balance sheet date can be measured reliably; and
  • the costs incurred for the transaction and the costs to complete the transaction can be measured reliably (NZ IAS 18 paragraph 20).
• When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable. (NZ IAS 18 paragraph 26).
• Interest revenue shall be recognised using the effective interest method as set out in NZ IAS 39, paragraphs 9 and AG5-AG8 (NZ IAS 18 paragraph 30).
• Revenue from royalties shall be recognised on an accrual basis in accordance with the substance of the relevant agreement (NZ IAS 18 paragraph 30).
• Revenue from dividends shall be recognised when the shareholder's right to receive payment is established (NZ IAS 18 paragraph 30).

If assets are received from a non-exchange transaction the following applies:

• Assets acquired through a non-exchange transaction shall initially be measured at their fair value as at the date of acquisition;
• An inflow of resources from a non-exchange transaction recognised as an asset shall be recognised as revenue, except to the extent that a liability is also recognised in respect of the same inflow; and
• As an entity satisfies a present obligation recognised as a liability in respect of an inflow of resources from a non-exchange transaction recognised as an asset, it shall reduce the carrying amount of the liability recognised and recognise an amount of revenue equal to that reduction.

4.3.2  Revenue and expense offsetting

Income and expenses shall not be offset unless required or permitted by a Standard or an Interpretation.

Departments undertake in the course of their ordinary activities transactions that do not generate revenue but are incidental to their main activities. The results of such transactions are presented, when this presentation reflects the substance of the transaction or other event, by netting any income with related expenses arising on the same transaction. This treatment is permitted under NZ IAS 1 Presentation of Financial Statements, paragraph 34.

Departments should note however that NZ IAS 18 provides that revenue is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed. Similarly any expenses should be reported net of any discounts received.

4.3.2.1  Insurance proceeds

Revenue received from insurance proceeds should not be offset against repairs or impairment expenses. The insurance proceeds should be recognised as miscellaneous revenue (and a receivable recorded) when it is clear the proceeds are receivable.

Insurance proceeds will normally be recognised when the claim has been accepted by the insurance company. However, it is possible that the revenue can be recognised if the claim has not yet been accepted. Assessment about revenue recognition should be based on prior claim experience and expert input; if entities are virtually certain a claim will be accepted then this should be recognised. In this situation entities need to estimate the amount they expect to receive under the claim.

Where a receivable cannot yet be recognised, departments should consider whether a contingent asset may need to be disclosed.

In some instances insurance proceeds may not be received in the same financial year as the expense (the impairment of the damaged asset) is incurred. This may result in departments reporting a deficit in the year the expense is incurred and a surplus in the following year when the insurance proceeds are received. Where this situation occurs the department may seek approval to retain the surplus arising from the receipt of these insurance proceeds (refer section 4.4.3). For forecasting purposes it is highly likely approval will be given to departments to retain the surplus and this retention of surplus should be factored into the department's forecasts. In the event this is caused by a natural disaster where a number of departments are affected, Treasury may instigate a process to seek approval to retain surpluses for all affected departments.