IFRS 15 adopted, para B63, sales based royalties, other policies, para 123, judgements

Syngenta AG – Financial report – 31 December 2017

Industry: manufacturing

  1. New IFRSs and accounting policies (extract)

Early adoption of IFRS 15 “Revenue from Contracts with Customers”

Syngenta has early adopted IFRS 15 “Revenue from Contracts with Customers” with effect from January 1, 2017 using the cumulative effect method, which does not require Syngenta to restate comparative financial statement amounts for 2016 and prior periods. The effect of adoption on retained earnings at January 1, 2017 was not material. Under the cumulative effect method, Syngenta has used IFRS 15 to determine when revenue is recognized after January 1, 2017 for contracts with obligations to supply products or provide services that had not been fulfilled by that date. Syngenta has used IAS 18 to account for changes after January 1, 2017 in estimates of the amount of revenue for contracts under which Syngenta had supplied or provided all required products and services before that date.

Syngenta’s main source of revenue is product sales. Control of products passes to Syngenta’s customers, and revenue for product sales is recognized, at a point in time which is usually upon delivery, subject to reasonable assurance of collectability. Delivery is defined based on the terms of the sale contract. This is consistent with the timing of revenue recognition in accordance with the previous standard, IAS 18. Syngenta also derives revenue from licensing the right to use its intellectual property (IP), principally its seeds germplasm and traits. Each licensing contract Syngenta enters into has unique terms and certain licensing contracts may involve significant upfront or milestone payments in addition to sales-based royalties.

Revenue is measured at the amount of consideration to which Syngenta expects to be entitled in exchange for the products or license rights it transfers to customers. If the consideration is receivable more than 12 months after the transaction date and the effect of discounting is material, the revenue amount recognized is discounted to its present value at the transaction date and the unwinding of this discount is recognized as financial income over the period until the date the consideration is due. Revenue in contracts with non-cash consideration is measured at the fair value of the consideration at contract inception.

The requirements relating to contracts where revenue is variable, which for Syngenta include both product sales and licensing agreements, have been expanded significantly in IFRS 15. The main forms of variable revenue for Syngenta are as follows and the judgments associated with them are discussed in Note 2:

  • cash incentive programs that provide rebates and discounts dependent on achievement of targets for purchase of Syngenta products, and cash discounts for punctual or early payment of invoices. Syngenta recognizes sales minus an allowance for rebates, and a refund liability presented within Trade accounts payable in the consolidated balance sheet. The allowance and liability are measured at the amount expected to be refunded or credited to customers, estimated based on the programs’ terms, market conditions and historical experience.
  • sales returns, which arise both in markets where the customer has a legal or contractual right of return and where Syngenta’s commercial practice is to accept returns. In these markets, Syngenta recognizes sales minus an allowance for expected returns, an estimated refund liability, and an asset for the right to recover its products corresponding to the expected returns. The refund liability and the asset are presented within Trade accounts payable and Inventories respectively in the consolidated balance sheet. The allowance and liability are measured at the amount expected to be refunded or credited to customers and the asset is measured at the standard purchase or production cost of the underlying Syngenta products, minus allowances for transportation and obsolescence where relevant.
  • in certain markets, sales terms allow customers to exchange purchased products at a later date for other Syngenta products of their choice, to the same value. For these sales, Syngenta recognizes revenue upon delivery of the original products, minus a provision for products expected to be exchanged. This provision is released, and the corresponding revenue is recorded, when the substitute products are delivered or the period available to exchange the products expires, whichever is earlier.
  • In licenses which grant the right to use Syngenta’s IP, revenue for non-refundable lump sums and minimum guaranteed income amounts which can be reliably estimated and for which there are no related future Syngenta performance obligations or contingencies other than the passage of time is recognized in full on signature of or on the effective date of the license, whichever is later. Revenue for lump sum milestone payments which are contingent on product regulatory approvals are recognized only when the competent regulatory authorities have granted the relevant approvals. Sales-based royalty income is recognized in the period that the licensees make sales in respect of which the royalties are payable.

In certain markets, sales terms allow customers the option of a one-time, non-repeatable extension of credit, for a defined additional period, in respect of a defined proportion of purchases made during a defined period, if the customers still have the inventories on hand upon expiration of the initial agreed credit period. Customers have no right to return these inventories, and must pay unconditionally when the additional credit period expires. In accordance with IFRS 15, revenue for these sales is recognized upon product delivery.

Where third parties hold Syngenta inventories on a consignment basis, revenue is recognized in the period that inventories are withdrawn from consignment and delivered to customers.

For product sales which are qualifying purchases in customer loyalty incentive programs, Syngenta allocates revenue between its qualifying product sales and the incentive awards of additional free or discounted products or services based on the relative stand-alone selling prices of the respective items and, where awards are subject to expiry, the extent to which customers are expected to redeem their rights based on historical experience of similar programs. In programs where Syngenta acts as principal for the supply of the incentives, it recognizes the revenue allocated to incentive products or services when customers receive them or redeem their right to an award. In programs where Syngenta acts as agent for a third party, it recognizes any net income from supply of the incentive when the third party becomes obliged to supply the awards. Revenue related to programs where Syngenta is a principal is presented as part of Sales, and associated costs are presented within Cost of goods sold or Marketing and distribution expense as appropriate. Syngenta determines whether it is a principal or an agent according to whether it obtains control of the third party incentive products or services before they are transferred to customers. Syngenta assesses this for awards of products principally by considering whether it bears inventory risk and for awards of services by considering whether its agreement with the third party service provider enables it to direct how services are provided to Syngenta’s customers. The estimated liabilities for incentives which customers will be entitled to receive for qualifying purchases for which Syngenta has recognized revenue are classified within Contract liabilities.

On adoption of IFRS 15, Syngenta has changed how it presents revenue and expenses for third party incentive products and services in certain of its loyalty programs. From January 1, 2017, Syngenta has presented the revenue it allocates to these items in Sales and their cost in Cost of goods sold. Because Syngenta defines in contracts with the third party suppliers how customers receive these incentives, it is deemed to be supplying the third party products and services as a principal. Prior to January 1, 2017, Syngenta accounted for these incentives on a net basis and reported Sales and Cost of goods sold included only the value of Syngenta products supplied. Syngenta has also presented the expense for certain royalties payable by Syngenta to third parties when Syngenta’s licensees sell seeds containing sub-licensed traits, as Cost of goods sold in the consolidated income statement instead of as a deduction from the related license income. The additional amount reported in Sales and Cost of goods sold in 2017 as a result of these changes in presentation was $19 million. These changes had no impact on net income.

Syngenta periodically enters into prepayment contracts with customers whereby it receives advance payments for products to be delivered in a future period. These advance payments are recorded as liabilities and presented as part of Contract liabilities in the consolidated balance sheet. Advance payment liabilities are released and revenues associated with such advance payment transactions are recognized when control of the prepaid products passes to the customer.

IFRS 15 requires contract assets and liabilities to be presented separately in the consolidated financial statements. Accordingly, Syngenta has presented the $480 million amount of contract liabilities at December 31, 2017 on a separate balance sheet line. This amount includes $432 million of customer payments received in advance of product delivery, $44 million of products and services to be delivered to customers under loyalty program offers and $4 million of other obligations. In the December 31, 2016 consolidated balance sheet, the equivalent amounts, totalling $517 million, are included in Trade accounts payable. Accrued liabilities to customers for product returns and rebates in respect of sales recognized up to the balance sheet date continue to be included in Trade accounts payable. Syngenta has not presented a separate line for contract assets at December 31, 2017 because all material relevant assets are presented either as Inventories or Trade receivables. No incremental costs have been capitalized on adoption of IFRS 15 because lead times for individual orders are less than one year, costs directly attributable to obtaining contracts are already recognized as intangible assets and costs to fulfil contracts are already recognized as inventories.

For certain customers in certain markets, trade receivables are settled either with proceeds from sales by such customers of agricultural commodities or by delivery of commodities to Syngenta by such customers. For these arrangements, Syngenta recognizes revenue when it has a legally enforceable receivable, the amount of which is reliably measurable based on an agreed price for the Syngenta products. Where Syngenta has a contract with the customer for physical delivery of a commodity at a fixed price which is hedged using derivative financial instruments, an embedded derivative is recognized for the fair value of the contract until physical delivery. When Syngenta subsequently resells the commodity, it classifies additional revenue as sales only to the extent that the original contract for the sale of Syngenta products included revenue that was contingent upon the commodity sales proceeds. Any remaining gains or losses on the commodity sale are recorded in Marketing and distribution expense in the consolidated income statement.

  1. Significant accounting policy judgments and estimates (extract)

Application of critical accounting policies (extract)

Royalty and license income

Individual agreements licensing to third parties the right to use Syngenta technology can and do have unique terms and, consequently, the accounting judgments required to apply IFRS 15 to each such agreement can differ significantly. In accordance with the transitional requirements of IFRS 15 “Revenue from Contracts with Customers”, Syngenta has applied IFRS 15 to licenses agreed during 2017, but continued to apply IAS 18 “Revenue” to licenses agreed in prior years in respect of which Syngenta had satisfied all its performance obligations before January 1, 2017 but had contingent license income which had not met accounting recognition criteria at that date. Note 27 contains a full description of Syngenta’s transition to IFRS 15.

In 2015, Syngenta entered into license agreements with KWS SAAT SE, Vilmorin & Cie S.A. and their joint ventures AgReliant Genetics LLC, AgReliant Genetics Inc. and Genective S.A., granting worldwide non-exclusive rights to its corn germplasm and traits portfolio, including in-licensed third party traits. In accordance with this agreement, in 2017 Syngenta received a $75 million milestone payment on being notified of import approval from the Chinese Ministry of Agriculture for food and feed use of corn containing its Agrisure Duracade® trait and a further $25 million on granting a license to Genective S.A. to develop corn seed products containing stacks of Syngenta traits and other traits. No further revenue was recognized from this agreement in 2016 or 2017. Additional sales-based royalties may become receivable if sales of licensed products exceed thresholds defined in the agreement, and would be recognized as revenue at the time that the licensees make the related sales.

Critical accounting estimates (extract)

Adjustments to revenue and trade receivables

Syngenta’s products are consumed mainly by growers, but Syngenta invoices the majority of its sales to distributors. The timing and amount of cash inflows received by growers is impacted by a broad range of economic and political risks, including crop yields and prices, the availability of credit, and the cost of agricultural inputs such as the products sold by Syngenta and its competitors. The cash flows of distributors that supply Syngenta’s products to growers and represent the majority of Syngenta’s customers are also impacted by these factors. These distributors vary in size and nature from large publicly owned entities to small or medium sized owner-managed businesses. Syngenta’s customer base reflects the geographical diversity of its operations, which encompass more than 90 countries and all significant agriculture areas. Considerable management effort and judgment is applied to actively manage and mitigate the risks to Syngenta from these factors and to determine the accounting estimates associated with them, which are set out below:

  • the estimated cost of incentive programs that provide rebates and discounts dependent upon achievement of sales targets, as well as cash discounts for punctual payment of accounts receivable. Syngenta records the estimated cost of these programs when the related sales are made, based on the programs’ terms, market conditions and historical experience. At December 31, 2017, trade accounts payable includes $1,360 million (2016: $1,366 million) of accruals for customer rebates and incentive programs.
  • commercial terms in certain markets also provide a right of return, subject to eligibility restrictions by product and either an annual cap equal to a percentage of sales in the immediately prior year, or a return period typically extending up to the end of the agricultural season in which the product was originally sold, which can be 9 months. Accruals for estimated product returns are based on contractual sales terms and on historical experience of actual returns where Syngenta considers these to be reliable estimates of future returns. At December 31, 2017, trade accounts payable includes $284 million (2016: $160 million) of accruals for sales returns. Actual returns can vary significantly from estimates in market segments where the distribution channel holds several months’ sales of Syngenta products at the reporting date, forecast consumption of those products by growers could be materially affected if market or weather conditions after the reporting date were significantly different from those expected and the volume of products returned by distributors varies with changes in grower consumption. This is especially relevant to Brazil and certain other markets in the southern hemisphere given the Group’s financial reporting year-end falls in the middle of the peak demand season for the Group’s crop protection products. Actual sales returns in 2016 in Brazil of crop protection products Syngenta sold during 2015, including products exchanged for other products, were $175 million, representing 10% of relevant sales. This exceeded the $106 million provided at December 31, 2015, mainly due to the severe drought conditions in parts of northern Brazil during February and March 2016. Syngenta worked with customers in northern Brazil during 2016 to reduce the high inventory levels resulting from the drought. Actual sales returns in 2017 in Brazil of crop protection products Syngenta sold during 2016, including products exchanged for other products, were $201 million, representing 12% of relevant sales. This exceeded the $87 million provided at December 31, 2016, mainly due to two reasons: firstly, high inventories arose in the distribution channel in southern Brazil from continuing lower levels of pest pressure and crop prices than in prior years. A significant proportion of 2017 returns resulted from Syngenta working with customers to manage their inventory levels and accounts receivable. This significantly reduced receivable balances through increased collections as well as credits for returned products. Secondly, Syngenta repositioned its key fungicide ElatusTM to ensure growers receive maximum benefit from using the product as the Brazilian crop protection industry addresses performance issues growers have experienced from applying carboxamide fungicides. Returns of ElatusTM in 2017 were $50 million. In accordance with IFRS 15, sales subject to returns are recognized only to the extent that it is highly probable that a significant reversal in the amount of revenue recognized will not occur when the uncertainty associated with the amount of returns is subsequently resolved. At December 31, 2017, channel inventories of crop protection products in Brazil are estimated to be significantly lower than at the end of 2016, but in recognition of continuing economic risks, Syngenta has recorded a $171 million allowance for sales returns of crop protection products in Brazil, representing 14% of relevant sales in 2017.
  • allowances for doubtful receivables, which are estimated by critically analyzing individual receivable account balances, taking into account historical levels of recovery and the value of any security held or agreed barter programs which mitigate credit exposure, the economic condition of individual customers, and the overall economic and political environment in relevant countries. As shown in Note 9, the provision for doubtful receivables at December 31, 2017 amounted to $448 million, or 10 percent (2016: $396 million or 8 percent) of total trade receivables, of which $230 million and $52 million (2016: $168 million and $60 million) related respectively to sales made to the Brazilian and Venezuelan markets. In Brazil, Syngenta increased the allowance because lower crop prices and high inventory levels have resulted in several customers experiencing payment difficulties. In Venezuela the collection shortfall is due to constraints on availability of credit and foreign currency at both customer and country level. Collections from Venezuela in 2017 were $9 million. In 2017, Syngenta reported $69 million bad debt expense (2016: $67 million), of which $45 million and $nil (2016: $10 million and $49 million) related to Brazil and Venezuela respectively.

Syngenta records these estimates as separate allowances, but its estimation process recognizes their interdependency, as the level of credits to accounts receivable for discounts and product returns may affect the probability of receiving full payment of the net receivable balances.