Syngenta AG – Financial report – 31 December 2019
2. Significant accounting policy changes, 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. Syngenta recognizes revenue for non-refundable lump sum and guaranteed minimum license income at the start of a license only when the license is distinct from any related Syngenta obligations to supply licensed products during the license term and Syngenta has performed any obligations related to the license grant. For licenses of seed germplasm and trait technology, Syngenta considers that these criteria are met when the license has become effective, the licensee either has control of biological material from which it can independently breed, produce and sell seeds containing the technology Syngenta has licensed to it under the agreement or can obtain any seed purchase requirements in the market from producers other than Syngenta. For licenses of crop protection technology, Syngenta considers that these criteria are met when the license grants the right to manufacture and sell chemical products containing the licensed technology, the right to obtain related manufacturing and formulation know-how and the right to use existing regulatory data necessary for the licensee to establish its own independent registration to sell the licensed products.
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 is 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, 2019, trade accounts payable include $1,542 million (2018: $1,604 million after effects of accounting policy changes and restatements described below) 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, 2019, trade accounts payable includes $305 million (2018: $258 million after effects of accounting policy changes and restatements described below) 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 Syngenta’s financial reporting year-end falls in the middle of the peak demand season for Syngenta’s crop protection products. Actual sales returns in 2018 in Brazil of crop protection products Syngenta sold during 2017 were $137 million, representing 11 percent of relevant sales. This was less than the $171 million provided at December 31, 2017. Actual sales returns in 2019 in Brazil of crop protection products Syngenta sold during 2018 were $82 million, representing 5 percent of relevant sales. This is less than the $113 million provided at December 31, 2018. 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. Syngenta expects slightly higher levels of sales returns in 2020 compared to 2019 for the following reasons:
- Adverse weather patterns in Southern and Northeastern Brazil that are expected to impact soybean production.
- Credit challenges for growers in the regions affected by the adverse weather patterns.
The effect of these negative factors is expected to be partly offset by the consumption of the crop protection products in the 2019/20 season that is expected to be higher than in 2018/19 by a single digit percentage. At December 31, 2019, Syngenta has recorded a $130 million allowance for sales returns of crop protection products in Brazil, representing 7 percent of relevant sales in 2019.
- 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, 2019 amounted to $465 million, or 10 percent (2018: $375 million or 8 percent) of total trade receivables, of which $113 million, $60 million and $86 million (2018: $98 million, $60 million and $59 million) related respectively to sales made to the Brazilian, Venezuelan and Argentine markets. In 2019, Syngenta reported $106 million bad debt expense (2018: $33 million). The increase is mainly related to the deteriorating economic environment in Ukraine and Argentina, resulting in increased credit risk in those markets.
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.
27. New IFRSs and accounting policies (extract)
Syngenta early adopted IFRS 15 “Revenue from Contracts with Customers” with effect from January 1, 2017 using the cumulative effect transition method. Under that method, Syngenta uses 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 uses 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. 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, using a discount rate which reflects customer risk, 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 main forms of variable revenue for Syngenta are as follows and the judgments associated with estimating their amount 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 in markets where customers do not have such rights but Syngenta’s commercial practice is to accept returns. In either case, 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 customer’s right to exchange the products expires, whichever is earlier.
- In licenses which grant the right to use Syngenta’s IP as it exists when the license is granted, and in which Syngenta receives 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, Syngenta recognizes that revenue 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 is 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 (“incentives”) based on the value of incentives to which customers are expected to be entitled, the relative stand-alone selling prices of the respective product sales and incentives 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. Syngenta recognizes estimated liabilities for the incentives in the period in which it recognizes the associated product sales, and presents these liabilities as Contract liabilities in the consolidated balance sheet. In programs where the incentive is either a product normally sold by Syngenta, a third party product which Syngenta is primarily responsible for supplying to customers or for which Syngenta bears inventory risk, or a service provided to customers by a third party acting under Syngenta’s direction, Syngenta obtains control of the incentives before transferring them to customers, and so supplies the incentives as a principal. For these programs, Syngenta recognizes the revenue allocated to the incentives when customers receive them or redeem their right to an award. Revenue related to these programs is presented as part of Sales, and associated costs are presented within Cost of goods sold or Marketing and distribution expense as appropriate. In other programs, Syngenta acts as agent for a third party who supplies the incentives, and Syngenta recognizes any net income from supply of the incentive when the third party becomes obliged to supply the awards.
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.
Syngenta has not presented a separate line in the consolidated balance sheet for Contract assets because all material relevant assets are presented either as Inventories or Trade receivables. Incremental costs of obtaining customer contracts with a term of one year or less are expensed. Except for payments made to customers at inception of contracts which are recognized as intangible assets and purchase and production costs recognized as inventories, Syngenta has no other material incremental costs of obtaining contracts or direct costs of fulfilling contracts that qualify for recognition as an asset.
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.