Enquiry:

We recognise revenue from consultancy and brokerage services on later of billing date or effective date of underlying policy. We recognise revenue in light of the example 17 para 23A.21 of IFRS for SMEs which states that revenue are recognized on the effective date of commencement or renewal of the related policies, if the agent is not required to render further service, otherwise the commission or part thereof is deferred and recognized as revenue over the period which the policy is in force.

The rationale for later of billing date or effective date of underlying policy is due to the fact that  amount of revenue can be measured reliably at that point in time.

We understand that insurance contracts are considered ‘uberrima fides’ that is correct of utmost good faith and the only thing available is a policy document which undertakes that on happening of an event, which cannot be predicted, the insured will be indemnified.

Since the probability to render further services is not measurable therefore the revenue is recognized at later of billing date or the effective date of underlying policy.

Additionally, as we record the revenue at the later of effective date of insurance policy or invoice date, exchange gains or loss arising on foreign currency denominated invoices are not recorded for services that fall between more than one financial years as revenue is recognized on the invoice date only instead of stage of completion method.

You are requested to please guide us which policy to follow.

 

Opinion:

Paragraph 23.14 of section 23 of IFRS for SMEs provides guidance on the revenue recognition from rendering of services. The paragraph is reproduced as under (underline is ours):

“When the outcome of a transaction involving the rendering of services can be estimated reliably, an entity shall recognise revenue associated with the transaction by reference to the stage of completion of the transaction at the end of the reporting period (sometimes referred to as the percentage of completion method). The outcome of a transaction can be estimated reliably when all the following conditions are satisfied:

1. the amount of revenue can be measured reliably;
2. it is probable that the economic benefits associated with the transaction will flow to the entity;
3. the stage of completion of the transaction at the end of the reporting period can be measured reliably; and
4. the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.”

Further, paragraph 23.15 provides guidance on the revenue recognition in cases:

• where services are performed by an indeterminate number of acts over a specified period of time; or
• when a specific act is much more significant than any other act.

Accordingly, it is to be noted that the revenue recognition example related to insurance agency commission (quoted in paragraph 23A.21 of IFRS for SMEs Standard) is based on the basic premise that all revenue recognition requirements (contained in paragraph 23.14) have been fulfilled.

The revenue from rendering of services is generally recognised on the performance of the services, under the terms of the agreement. Further, generally its recognition is based on the performance of the service and not to the billing arrangement.

Generally, the revenue from insurance brokerage commission would be recognized when the performance obligation is satisfied (effective date of the policy or upon completion of a milestone).

Further, paragraph 30.7 states that:

“An entity shall record a foreign currency transaction, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

Based on the above discussion, the Board is of the view that:

• Revenue from the consultancy and brokerage services earned under the terms of agreement(s), in accordance with the principle set out in paragraph 23.14 of IFRS for SME Standards.
• The foreign currency transactions (revenue from the consultancy and brokerage services), in accordance with the paragraph 30.7 of IFRS for SMEs Standard.
• The gain on loss on the foreign currency revenue related monetary assets, in accordance with the principle outlined in paragraph 30.10 of IFRS for SME Standards.

 (March 12, 2018)