Sime Darby Berhad – Annual report – 30 June 2017
3 Significant Accounting Policies (extract)
w. Revenue recognition
Revenue from contracts with customers is recognised by reference to each distinct performance obligation in the contract with customer. Revenue from contracts with customers is measured at its transaction price, being the amount of consideration which the Group expects to be entitled in exchange for transferring promised goods or services to a customer, net of goods and service tax, returns, rebates and discounts. Transaction price is allocated to each performance obligation on the basis of the relative standalone selling prices of each distinct good or services promised in the contract. Depending on the substance of the contract, revenue is recognised when the performance obligation is satisfied, which may be at a point in time or over time.
Performance obligations by segment are as follows:
Industrial segment revenue consists of sale and installation of equipment, sale of parts, provision of after-sales services and engineering services.
(a) Sale and installation of equipment and parts
Revenue from sale of equipment and after-sales maintenance are recognised respectively in the period in which the customer accepts the delivery of the goods and services rendered.
Contracts that bundle the sale of equipment, after-sales maintenance, provision of parts credit and extended warranty are recognised as four distinct performance obligations for revenue recognition purposes. Revenue from sale of equipment and after-sales maintenance are recognised respectively in the period in which the customer accepts the delivery of the goods and services rendered. Parts credit represents prepaid amounts for equipment parts which customers will redeem in the future. Credit is given together with the sale of machine based on negotiated terms with the customer. Revenue from parts credit are recognised upon utilisation of credit for parts exchange.
Contracts that bundle the sale and installation of generator sets are recognised as a single performance obligation as the installation includes a significant integration service. Revenue is recognised progressively based on the percentage of completion determined by reference to the completion of a physical proportion of contract work to-date.
(b) Extended warranty programme
The Group operates an extended warranty programme where customers are given an additional 12 months warranty in addition to standard warranty. Revenue for the extended warranty is recognised in the period in which the warranty services are rendered. No element of financing is deemed present as the sales are made on the normal credit terms. Obligation to repair or replace faulty products under standard warranty terms is recognised as a provision.
(c) Construction of equipment
Contracts for construction of equipment comprise multiple deliverables which include a significant integration service and are therefore recognised as a single performance obligation. Revenue are recognised progressively based on the percentage of completion determined by reference to the completion of a physical proportion of contract work to-date.
(d) Sale and operating leaseback arrangements
Sales of equipment arising from sale and operating leaseback arrangements are recognised when the Group transfers control of the equipment to the customer, being when the customer accepts delivery of the equipment. If it is clear that the sale and operating leaseback transaction is established at fair value, the Group recognises any profit or loss immediately. If the sale price is below fair value, the Group recognises immediately any profit or loss except when the loss is compensated for by future lease payments at below market price, in which case the Group defers and amortises the loss in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair value, the Group defers the excess over fair value and amortises the excess over the period for which the asset is expected to be used.
(e) Engineering services
Construction contracts involving engineering services comprise multiple deliverables which are highly integrated, and are therefore recognised as a single performance obligation. Revenue are recognised progressively based on the percentage of completion determined by reference to the completion of a physical proportion of contract work to-date.
The Group is the authorised distributor of vehicles and parts and also operates a network of dealerships selling vehicles and parts. Motors segment revenue consists of sales of vehicles and parts, after-sales services, assembly of vehicles and handling and commission income.
(a) Sale of vehicles and parts
Revenue from sale of vehicles and parts is recognised when the Group sells the vehicle to customers and control of the vehicle and parts has transferred, being when the vehicles and parts are delivered to the customer. The retail sale of parts normally occurs during performance of after-sales services. Therefore, revenue from sale of parts is presented within performance of after-sales services.
The vehicles and parts are often sold with volume based discounts and incentives based on aggregate sales over an agreed period. Accumulated experience is used to estimate and provide for the discounts and incentives, using expected value or most likely methods depending on the type of discounts and incentives. Revenue is recognised to the extent that it is highly probable that a significant reversal will not occur. A contract liability is recognised for the expected discounts and incentives payable to customers in relation to sales made until the end of the reporting period.
Consistent with market practice, the Group collects deposit from customers for sale of vehicle. A contract liability is recognised for the customer deposits as the Group has an obligation to transfer vehicle to the customer in respect of deposits received. Customer deposits would be recognised as revenue upon sale of vehicle to the customer.
No element of financing is deemed present as the sales are made with a credit term of 30 to 60 days, which is consistent with market practice. The Group’s obligation to provide warranty for the vehicles and parts under the standard warranty terms is recognised as a provision (see Note 48).
(b) After-sales services
The Group provides after-sales services or routine vehicle maintenance services within and/or outside of the warranty period in relation to the vehicle brands that the Group sells. The performance of maintenance services is often accompanied with the sale of parts. Revenue from after-sales services are recognised over the period of performance of services to customers.
The sale of vehicle to customer may be bundled together with extended warranties and/or free services. The extended warranty provides assurance to the customer that the vehicle parts comply with agree-upon specifications beyond the general standard warranty period. The extended warranties and free services are separate performance obligations and the transaction price is allocated to the service obligations based on its relative standalone selling prices. The extended warranties and free services are deferred and recognised over the period covered by the extended warranties and when the free services are performed respectively.
There is no significant financing component in the sale of extended warranties and/or free services as the sales are made on the normal credit terms not exceeding 12 months. Where consideration is collected from customers in advance of services being performed, a contract liability is recognised. The contract liability would be recognised as revenue when the related services are rendered.
(c) Assembly of vehicles
The Group manufactures and assembles light commercial and passenger vehicles, and are contract assemblers of motor vehicles. Revenue arising from the assembly of vehicles is either recognised upon completion of the assembly service or over the period when assembly services are rendered based on the contractual terms with the customers.
Revenue is recognised for certain assembly customers when control of vehicles has transferred, being when the vehicles are delivered to the customer, the customer has full discretion over the channel and price to sell the vehicle and there is no unfulfilled obligation that could affect the customers’ acceptance of the vehicles. Delivery occurs when the vehicles have been accepted by the customers upon completion of the assembly service.
Revenue from these services is recognised based on the fixed price specified in the contract and the variable expenses recoverable from the customers, based on the aggregate service provided over an agreed period. Accumulated experience is used to estimate and provide for the variable expenses recoverable, using the expected value method, and revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. There is no significant financing component in the revenue arising from assembly of vehicles as the sales are made on the normal credit terms not exceeding 12 months.
Revenue is recognised over the assembly period for certain assembly customers if the vehicles being assembled do not have any alternative use and when the Group is able to enforce payment for performance completed to date during the assembly period.
Revenue is recognised based on the actual costs incurred at the end of the reporting period plus a proportion of the expected profit margin with the customer. This method represents a faithful depiction of the service as the actual costs incurred represents the percentage of service rendered.
Estimates of revenues or expected profit margin are revised if circumstances change. Any resulting increases or decreases in estimated revenues are reflected in profit or loss in the period in which the circumstances that give rise to the revision become known by management. The Group’s obligation to provide warranty for the vehicles under the standard warranty terms is recognised as a provision.
(d) Handling and commission income
Revenue arising from rendering services, handling income and commission income are recognised when the relevant services are completed.
Logistics segment revenue consist of port and water charges.
(a) Revenue from terminal handling and related services
Revenue from providing services is recognised in the period in which the services are rendered. The price of handling contracts is usually define as fixed charge rate per tonnage/container boxes, hence revenue is recognised based on the actual tonnages/number of boxes handled multiplied by the contracted charge rates. Some handling contracts include multiple deliverables, such as the cargo storage services. Generally, the storage service is charged by fixed price per day and has no inter-relationship with the handling charges. It is therefore accounted for as a separate performance obligation and revenue is recognised based on the unit price multiplied by days of storage.
(b) Revenue from supply of industrial water
Revenue is recognised when control of the water has transferred, being when the water is delivered to the site of customers. The price of the water is based on relevant government approved tariff rate during the period. The volume is based on the actual usage volume as recorded in the meter installed at the customers’ site. There is no discount or return obligation attached with the water supply contracts.
iv. Other revenue
Revenue from other sources are recognised as follows:
(a) interest income is recognised on an accrual basis using the effective interest method;
(b) dividend income is recognised when the right to receive payment is established; and
(c) rental income is recognised on a straight-line basis over the tenure of the lease.
The Group’s revenue from Plantation segment is derived mainly from its upstream and downstream operations. In the upstream operations, the Group sells agricultural produce such as crude palm oil (CPO), beef, sugar, fresh fruit bunches (FFB), palm kernel (PK) and rubber. In the downstream operations, revenue is derived from sale of refined oil related products and provision of freight and tolling services.
(a) Sale of agricultural produce and refined palm oil related products
Revenue from sales of agricultural produce and refined palm oil related products is recognised net of discount and taxes at the point in time when control of the goods has transferred to the customer. Depending on the terms of the contract with the customer, control transfers either upon delivery of the goods to a location specified by the customer and acceptance of the goods by the customer; or upon delivery of the goods on board vessels or tankers for onward delivery to the customer.
Contracts where control of goods transfer to the customer upon delivery of the goods on board vessels or tankers are often bundled with freight services. In such contracts, sale of goods and provision of freight are accounted for as separate performance obligations as the customer can benefit from the sale of goods and shipping services on its own or with the use of other resources. The transaction price is allocated to each performance obligation based on the standalone selling prices of the goods and services.
There is no element of financing present as the Group’s sale of goods are either on cash terms (immediate payments or advance payments not exceeding 30 days); or on credit terms of up to 30 days. The Group’s obligation to provide quality claims against off-spec goods under the Group’s standard contractual terms is recognised as a provision.
(b) Rendering of services – Provision of freight, tolling and other services
Revenue from provision of freight is recognised in the period in which services are rendered. In cases where customers pay for the bundled contract in advance to the rendering of the freight services, a deferred income is recognised.
Revenue from the provision of tolling services is recognised in the period in which the manufacturing activities are performed. There is no element of financing present as the sales is made with credit terms of up to 30 days.
Property revenue consists of sales of development properties, revenue from concession arrangement and club membership fees.
(a) Property development
Contracts with customers may include multiple promises to customers and therefore accounted for as separate performance obligations. In this case, the transaction price will be allocated to each performance obligation based on the standalone selling prices. When these are not directly observable, they are estimated based on expected cost plus margin.
The revenue from property development is measured at the fixed transaction price agreed under the sales and purchase agreement.
Revenue from property development is recognised as and when the control of the asset is transferred to the customer and it is probable that the Group will collect the consideration to which it will be entitled in exchange for the asset that will be transferred to the customer. Depending on the terms of the contract and the laws that apply to the contract, control of the asset may transfer over time or at a point in time. Control of the asset is transferred over time if the Group’s performance does not create an asset with an alternative use to the Group and the Group has an enforceable right to payment for performance completed to date.
If control of the asset transfers over time, revenue is recognised over the period of the contract by reference to the progress towards complete satisfaction of that performance obligation. Otherwise, revenue is recognised at a point in time when the customer obtains control of the asset.
The Group recognises revenue over time using the output method, which is based on the level of completion of the physical proportion of contract work to-date, certified by professional consultants.
The promised properties are specifically identified by its plot, lot and parcel number and its attributes (such as its size and location) in the sale and purchase agreements and the attached layout plan. The purchasers could enforce its rights to the promised properties if the Group seeks to sell the unit to another purchaser. The contractual restriction on the Group’s ability to direct the promised property for another use is substantive and the promised properties sold to the purchasers do not have an alternative use to the Group. The Group has the right to payment for performance completed to date. The Group is entitled to continue to transfer to the customer the development units promised and has the rights to complete the construction of the properties and enforce its rights to full payment.
The Group recognises sales at a point in time for the sale of completed properties, when the control of the properties has been delivered to the purchasers, being when the properties have been delivered to the purchasers and it is probable that the Group will collect the considerations to which it will be entitled to in exchange for the assets sold.
(b) Revenue for concession arrangement
Under the Concession Agreement, the Group is engaged to construct the facilities and infrastructure, supply teaching equipment and provide asset management services, which are separate performance obligations. The fair value of revenue, which is based on fixed price under the agreement have been allocated based on relative standalone selling price of the considerations for each of the separate performance obligations. The Group recognised construction revenue over time as the project being constructed has no alternative use to the Group and the Group has an enforceable right to the payment for the performance completed to date. The stage of completion is measured using the output method, which is based on the level of completion of the physical proportion of contract work to-date, certified by professional consultants.
Revenue from the supply of teaching equipment is recognised when the control of the asset is transferred to the customer when:
- the Group has delivered and transferred the physical possession of the asset and has a present right to payment for the asset; and
- the customer has accepted the assets after the assets have been tested and commissioned and the customer has significant risks and rewards of ownership of the asset.
(c) Revenue for club membership fees
The Group provides club membership. Club membership fees are received upfront and recognised on a straight line basis over the tenure of the memberships offered.
Revenue of Plantation and Property are classified under discontinuing operations as the businesses are held for distribution to shareholders of the Company (see Note 17).
o. Contract assets/(liabilities)
Contract asset is the right to consideration for goods or services transferred to the customers. In the case of property development and construction contracts, contract asset is the excess of cumulative revenue earned over the billings to-date.
When there is objective evidence of impairment, the amount of impairment losses is determined by comparing the contract asset’s carrying amount and the present value of estimated future cash flows to be generated by the contract asset.
Contract liability is the obligation to transfer goods or services to customer for which the Group has received the consideration or has billed the customer. In the case of property development and construction contracts, contract liability is the excess of the billings to-date over the cumulative revenue earned. Contract liabilities include the club membership fees, downpayments received from customers and other deferred income where the Group has billed or has collected the payment before the goods are delivered or services are provided to the customers.
4 Critical Accounting Estimates and Judgment in Applying Accounting Policies (extract)
b. Revenue recognition from property development projects
Revenue is recognised when or as the control of the asset is transferred to our customers and, depending on the terms of the contract and the applicable laws governing the contract, control of the asset may transfer over time or at a point in time.
If control of the asset transfers over time, revenue is recognised over the period of the contract by reference to the progress, based on the physical proportion of contract work-to-date certified by professional consultants. Significant judgment is required in determining the progress based on the certified work-to-date corroborated by the level of completion of the development based on actual costs incurred to-date over the estimated total property development costs. The total estimated costs are based on approved budgets, which require assessments and judgments to be made on changes in, for example, work scope, changes in costs and costs to completion. In making these judgments, management relies on past experience and the work of specialists.
The Group recognised revenue from property development projects of RM2,049 million (2016: RM2,335 million) for the financial year ended 30 June 2017.