Revenue or investment

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JRSB
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Revenue or investment

Post by JRSB »

Suppose a management entity brokers a transaction (let's say the sale of an asset from one entity to another), but simply acts as a broker - so it is not itself involved in lending/buying/selling etc. Let's say that new asset is put into a new entity and starts generating earnings. The management entity is not a shareholder and has no further involvement, it just brokered the deal.

But instead of charging a fee for its service, it agrees to take a fixed percentage of profits generated from the transaction that was brokered, after an initial hurdle is met. So if the initial deal was to broker to sale of a factory, once that new entity owning the factory generates €50m of earnings, 5% of further earnings go to the management entity, with no cap. It could take 5 years until that threshold is met. However the factory's capacity/life is not expected to be significantly more than €55m of earnings, so the upside is potentially limited.

So for the management entity it sounds like a revenue arrangement based on fully variable consideration. (ie not recording revenue until greater certainty of receivables arises).

However when I think about it, it seems also that it's more of an investment (for which the management entity 'paid' in upfront brokering services, rather than cash'). Clearly not an investment in shares but an interest in the performance of an asset.

At high level, could anyone point me to the fundamental distinction in this scenario, which might then point me to a solution.
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pub_acco
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Re: Revenue or investment

Post by pub_acco »

Do you mean, if it’s an investment, you are going to initially record dr. financial asset and cr. revenue at a fair value and subsequently measure the financial asset at FVTPL?
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Re: Revenue or investment

Post by pub_acco »

I was first thinking it would depend on whether the revenue sharing agreement is separately identifiable from the contract with the customer. In that case, the revenue sharing agreement will be treated as a non-cash consideration in accordance with IFRS 15 and accounted for almost as if it were an investment.

But on second though, this kind of contracts is quite common in some industries and is treated as variable considerations, for example in a case where an agent sells newspaper subscription and receives 1% of subscription sales as long as the subscription continues.

So ultimately it depends on whether the entity enters the contract in the ordinary course of business or not, maybe? In other words, it depends on whether the entity conducts it as an operating activity or investing activity.
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JRSB
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Re: Revenue or investment

Post by JRSB »

Thanks Pub and I like the newspaper commission example.

I understand this is the 'business model' (ie multiple iterations expected) in which case this would be in the ordinary course of business. It's interesting how there can be limited distinction between one and the other.

Many thanks.
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Marek Muc
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Re: Revenue or investment

Post by Marek Muc »

my initial thought, too, was variable consideration under IFRS 15, and honestly I wouldn't have thought about an "investment" if you hadn't brought it up :)

contracts with customers are scoped out of IFRS 9, so first you need to determine whether it's IFRS 15 or not, and it seems that it is IFRS 15

pub_acco's example is great indeed :)
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Re: Revenue or investment

Post by Irfan Mustafa »

as long as an asset is recorded, does it matter that it's with the name of 'Receivable' or 'Investment'.
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Re: Revenue or investment

Post by JRSB »

I think there are a range of implications between the two.
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