IFRS -15

[Al-Mahamud]

Dear All,
Greetings of the day
Let, One tobacco parent company ( China)is bearing its one subsidy company's(Bangladesh) marketing and brand promotion expense. Quarterly subsidy company report the total expense of three months and parent company pay that on basis of contract . But the subsidy company consider this receipt as revenue from service. Subsidy company consider that they are giving service through brand promoting of parent company. The parent and subsidy company deal with same tobacco brand. Can the subsidy company consider the receipt as revenue?
Thanks a lot in advance

[exIFRS]

I think this is a really interesting question. And it might need some thought (then again there might be something really obvious I am missing). For me the first question is does IFRS 15 apply? This hinges on one key question, is the parent a "customer". Paragraph 6 (emphasis added):

An entity shall apply this Standard to a contract ... only if the counterparty to the contract is a customer. A customer is a party that
has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration. A counterparty to the contract would not be a customer if, for example, the counterparty has contracted with the entity to participate in an activity or process in which the parties to the contract share in the risks and benefits that result from the activity or process (such as developing an asset in a collaboration arrangement) rather than to obtain the output of the entity’s ordinary activities.

I am not sure that advertising meets this definition, it doesn't seem to me that the core business of the subsidiary is to provide advertising services to customers. Also, depending on the nature of the business the parent could be benefiting from the advertising.

I also worry that defining it as revenue could mislead users into over estimating the "true" performance of the entity.

But I would be interested to hear what you and others think.

[Marek Muc]

I agree that IFRS 15 does not seem to apply as this is not a relationship with a customer.

Al-Mahamud, can you please provide us more details on the terms of the arrangement?
1. who decides about the nature and scope of the marketing activities? are they somehow specified in the contract?
2. does the parent reimburse the expenses 1:1? is there any mark-up or allocation of indirect costs of the subsidiary?
3. any other key terms?

[Al-Mahamud]

Dear, i have no word to thank you. I truly appreciate your response. Now come in details. Basically, the parent and subsidiary company made a contact that for the following 3 years the parent company will bear some expenses which are related with marketing and business brand promotion . The parent company make advance at the beginning of the year for next 3 months on basis of annual budget. At the end of quarter, the subsidiary company report the total actual expenses by issuing a debit note and adjust with the advance. No mark up is added on the actual expenses. The core business of the subsidiary company is to sell Tobacco product. Here the subsidiary company doesn’t produce the Tobacco product rather get produced by another tobacco company on basis of contract.Interestingly the subsidiary company sell this product to the distributor of the producing company. The producing company produce the product under full direction of the subsidiary and parent company. Again the raw materials of it are provided by the parent company to the producing company. In reality, the subsidiary company, does not receive the Produced tobacco product. Rather from the producing company, this product are distributed to its distributor.In record, the subsidiary company show that thay are purchasing the product from the producing company and sell to the distributor after adding a margin on it. On purpose of tax avoidance, this company follow this somewhat critical Process. This subsidiary company pay tax as trader (32.5%) not as manufacturer ( 45%).
Again, this subsidiary company has no marketing or brand promoting service which are given to any other else.

Please give strong evidence so that i can prove that this company would not consider the receipt as revenue and Again tell the real treatment of this receipt as per IFRS.

[Marek Muc]

please answer question 1 from my previous post

[Al-Mahamud]

I have some scope limitation here. In the contract, nothing has been said about it only the contract mentions the name of expenses which will be paid by parent company. Even, the contract does not mention any consideration in return of this payment. The parent company has not mention in contract this payment in return of brand promotion.Rather, this contract seems that the parent company providing subsidy to establish its subsidiary company. According to my assumption, the subsidiary company is doing marketing according to the direction of parent company.

[Marek Muc]

at first glance it looks more like a capital contribution from the parent to be accounted for in equity by the subsidiary

if it is to be treated as a transaction outside of equity, the question is whether it should be presented as revenue, other income, or even whether the original expenses should be recognised as expenses and not receivables from the parent (Dr receivable/ Cr cash) without even going through P&L

I could imagine showing this a revenue if one of the principal tasks of the subsidiary was to establish the parent's brand in another country, but then a careful principal vs agent analysis should be carried out

but this is all very judgemental so don't expect any 'strong evidence' i.e. reference to IFRS that will deal with this specific intragroup arrangement

[Al-Mahamud]

Thanks a lot for your valuable information. Dear, as per IFRS -15 is it possible to determine these? 3)DETERMINE THE TRANSACTION PRICE
STEP 4 – ALLOCATE THE TRANSACTION PRICE TO EACH PERFORMANCE OBLIGATION
Again has there any other IFRS which deals with other Income specifically?

[Marek Muc]

no other specific IFRS

for revenue vs other income presentation, this is really really judgemental

for showing revenue (or other income) gross or net, I gave you reference in my previous post

[Al-Mahamud]

Thanks a lot

[JRSB]

The 'no mark-up' part suggests it's not a commercial arrangement. Wasn't it only arrangements with commercial substance that are within IFRS 15?

[Marek Muc]

yes this seems to be out of scope of IFRS 15 (as discussed at the beginning of this topic)
but this conclusion doesn't give a solution