IFRS 15, revenue policies, estimates, buy-back commitments, incentives, automotive

Stellantis N.V. – Annual report – 31 December 2020

Industry: automotive

Significant accounting policies (extract)

Revenue recognition

Revenue was recognized when control of FCA’s vehicles, services or parts had been transferred and the FCA Group’s performance obligations to its customers had been satisfied. Revenue was measured as the amount of consideration the FCA Group expected to receive in exchange for transferring goods or providing services. The timing of when the FCA Group transferred the goods or services to the customer could differ from the timing of the customer’s payment. The FCA Group recognized a contract liability when it invoiced an amount to a customer prior to the transfer of the goods or services provided. When the FCA Group gave its customers the right to return eligible goods, the FCA Group estimated the expected returns based on an analysis of historical experiences. Sales, value added and other taxes that the FCA Group collected on behalf of others concurrently with revenue generating activities were excluded from revenue and were recognized within the Other liabilities and the Tax liabilities line items in the Consolidated Statement of Financial Position. Incidental items that were immaterial in the context of the contract were recognized as expense.

The FCA Group also entered into contracts with multiple performance obligations. For these contracts, the FCA Group allocated revenue from the transaction price to the distinct goods and services in the contract on a relative standalone selling price basis. To the extent that the FCA Group sold the good or service separately in the same market, the standalone selling price was the observable price at which the FCA Group sold the good or service separately. For all other goods or services, the FCA Group estimated the standalone selling price using a cost-plus-margin approach.

Sales of goods

The FCA Group had determined that FCA customers from the sale of vehicles and service parts were generally dealers, distributors or fleet customers. Transfer of control, and therefore revenue recognition, generally corresponded to the date when the vehicles or service parts were made available to the customer, or when the vehicles or service parts were released to the carrier responsible for transporting them to the customer. This was also the point at which invoices were issued, with payment for vehicles typically historically due immediately and payment for service parts typically historically due in the following month. For component part sales, revenue recognition was consistent with that of service parts. The FCA Group also sold tooling, with control transferring at the point in time when the customer accepted the tooling.

The cost of incentives, if any, was estimated at the inception of a contract at the expected amount that would ultimately be paid and was recognized as a reduction to revenue at the time of the sale. If a vehicle contract transaction had multiple performance obligations, the cost of incentives was allocated entirely to the vehicle as the intent of the incentives was to encourage sales of vehicles. If the estimate of the incentive changed following the sale to the customer, the change in estimate was recognized as an adjustment to revenue in the period of the change. Refer to the Use of estimates – Sales incentives for more information on these programs.

New vehicle sold through Guaranteed Depreciation Program (“GDP”) were recognized as revenue when control of the vehicle transferred to the fleet customer, except in situations where the FCA Group issued a put option for which there was a significant economic incentive to exercise, as discussed below. Upon recognition of the vehicle revenue, the FCA Group established a liability equal to the estimated amount of any residual value guarantee.

The FCA Group also sold vehicles where, in addition to guaranteeing the residual value, the contract included a put option whereby the fleet customer could require the FCA Group to repurchase the vehicles. For these types of arrangements, the FCA Group assessed whether a significant economic incentive existed for the customer to exercise its put option. If the FCA Group determined that a significant economic incentive did not exist for the customer to exercise its put option, then revenue was recognized when control of the vehicle transferred to the fleet customer and a liability was recognized equal to the estimated amount of the residual value guarantee. If the FCA Group determined that a significant economic incentive existed, then the arrangement was accounted for similarly to a repurchase obligation, as described in Lease installments from assets sold with buy-back commitments.

Services provided

When control of a good transferred to the customer prior to the completion of shipping activities for which the FCA Group was responsible, this represented a separate performance obligation for which the shipping revenue was recognized when the shipping service was complete. Other revenues from services provided were primarily comprised of maintenance plans and extended warranties, and also included connectivity services, and were recognized over the contract period in proportion to the costs expected to be incurred based on FCA’s historical experience. These services were either included in the selling price of the vehicle or separately priced. Revenue for services was allocated based on the estimated stand-alone selling price. Costs associated with the sale of contracts were deferred and were subsequently amortized to expense consistent with how the related revenue was recognized. The FCA Group had €204 million of deferred service contract costs at December 31, 2020 (€224 million at December 31, 2019) and recognized €96 million of amortization expense during the year ended December 31, 2020 (€68 million during the year ended December 31, 2019).

Contract revenues

Revenue from construction contracts, which was comprised of industrial automation systems, included within “Other activities”, was recognized as revenue over the contract period in proportion to the costs expected to be incurred based on FCA’s historical experience. A loss was recognized if the sum of the expected costs for services under the contract exceeded the transaction price.

Lease installments from assets sold with buy-back commitments

Vehicle sold to fleet customers could include a repurchase obligation, whereby the FCA Group was required to repurchase the vehicles at a given point in time. The FCA Group accounted for such sales as an operating lease. Upon the transfer of vehicles to the fleet customer, the FCA Group recorded a liability equal to the proceeds received within Other liabilities in the Consolidated Statement of Financial Position. The difference between the proceeds received and the guaranteed repurchase amount was recognized as revenue over the contractual term on a straight-line basis. The cost of the vehicle was recorded within Assets sold with a buy-back commitment in the Consolidated Statement of Financial Position and the difference between the cost of the vehicle and the estimated residual value was recognized within Cost of revenues in the Consolidated Income Statement over the contractual term.

Interest income of financial services activities

Interest income, which was primarily generated from the FCA Group by providing dealer and retail financing, was recognized using the effective interest method.

Use of estimates (extract)

Sales incentives

The FCA Group recorded the estimated cost of sales incentive programs offered to dealers and consumers as a reduction to revenue at the time of sale to the dealer. This estimated cost represented the incentive programs offered to dealers and consumers, as well as the expected modifications to these programs in order to facilitate sales of the dealer inventory. Subsequent adjustments to sales incentive programs related to vehicles previously sold to dealers were recognized as an adjustment to Net revenues in the period the adjustment was determinable.

The FCA Group used price discounts to adjust vehicle pricing in response to a number of market and product factors, including pricing actions and incentives offered by competitors, economic conditions, the amount of excess industry production capacity, the intensity of market competition, consumer demand for the product and the desire to support promotional campaigns. The FCA Group offered a variety of sales incentive programs at any given point in time, including cash offers to dealers and consumers and subvention programs offered to customers, or lease subsidies, which reduced the retail customer’s monthly lease payment or cash due at the inception of the financing arrangement, or both. Sales incentive programs were generally brand, model and region specific for a defined period of time.

Multiple factors were used in estimating the future incentive expense by vehicle line, including the current incentive programs in the market, planned promotional programs and the normal incentive escalation incurred as the model year ages. The estimated incentive rates were reviewed monthly and changes to planned rates were adjusted accordingly, thereby impacting revenues. As there were a multitude of inputs affecting the calculation of the estimate for sales incentives, an increase or decrease of any of these variables could have a significant effect on Net revenues.