IFRS 15 Vehicle sales by Original Equipment Manufacturers (OEMs) shows examples of real life situations, in this case close at home, selling cars and when is it really sold as per IFRS 15. An Original Equipment Manufacturer (OEM) typically sells the cars and trucks that it produces to a dealer that then sells the vehicles to consumers. Under IFRS 15, an OEM recognizes revenue for the sale of a vehicle when it transfers control of the vehicle to its customer (i.e., the dealer). Control of the vehicle transfers to the dealer when the dealer has the ability to direct the use and obtain substantially all the remaining benefits of the vehicle. IFRS 15 Vehicle sales by Original Equipment Manufacturers
OEMs need to consider whether they have transferred control of a vehicle to the dealer upon shipment or delivery. The transfer of title, as dictated by the shipping terms, is only one indicator for determining the point in time when control transfers. OEMs also need to consider when they have the right to payment from the customer, when they have transferred the significant risks and rewards of ownership to the customer and the timing of customer acceptance of the vehicle, among other indicators. IFRS 15 Vehicle sales by Original Equipment Manufacturers
In addition, an OEM needs to consider whether it has an agreement to repurchase the vehicle or provide a resale value guarantee, which could mean that a transaction should be accounted for as a lease, a sale with a right of return or a financing arrangement. Refer to the section on repurchase agreements and residual value guarantees for further discussion. IFRS 15 Vehicle sales by Original Equipment Manufacturers
OEMs may also have affiliate (captive) finance companies that purchase vehicles from dealers and lease the vehicles to retail customers in separate transactions. These repurchases typically do not result from an option that exists in the contract between the OEM and the dealer. Under IFRS 15’s control model, OEMs need to assess whether the possibility that vehicles will be repurchased by their captive finance companies precludes them from recognizing revenue when they ship or deliver the vehicles to dealers.
Another example – same subject
Entities often create original parts for sale to Original Equipment Manufacturers (OEMs) in the development of new products. Initially, these parts will not typically have an alternative use (i.e. they can only be sold to the OEM) and the entity will often have a present right to payment for any production completed to date. Therefore the contract would meet one of the criteria in IFRS 15.35(c) to recognise revenue over time. IFRS 15 Vehicle sales by Original Equipment Manufacturers
Once an aftermarket emerges, the parts which were originally sold only to the OEM and for which there was no alternative use can now be sold to the other customers, as further parts are manufactured under subsequent contracts entered into with either the OEM or other customers in the aftermarket.
The existence of several customers for the parts means that as more parts are manufactured under a new contract with one customer, those parts could typically be sold to other customers, with subsequent production of additional units being used to satisfy the original contract. This in turn means that, once an aftermarket emerges, the manufacturer will typically have an alternative use for products being manufactured under any particular contract with a customer. Therefore, the conditions for recognising revenue over time would no longer be met.
And yes one more on the run – Repurchase agreement
An auto manufacturer (i.e., an original equipment manufacturer (OEM)) contracts with a lease-broker to sell 40 units of a particular model of vehicle A at a price of $20,000 per unit. At the lease-broker’s request, the OEM agrees to repurchase any units six months after the date of the original sale. The agreement stipulates the vehicles will be repurchased at a value of $19,000 per unit. At the time of repurchase, the market value is expected to be $16,000 per unit. IFRS 15 Vehicle sales by Original Equipment Manufacturers
Under old IFRSs guidance, although the principle existed, there was no detailed guidance on how to account for such transactions. However, under IFRS 15 (by applying repurchase agreement), this particular repurchase agreement is a put option since the lease-broker has the right to require the OEM to repurchase the units. IFRS 15 Vehicle sales by Original Equipment Manufacturers
At a repurchase price of $19,000 per unit, the price is lower than the original selling price of $20,000 and therefore an assessment is required as to whether the customer has a significant economic incentive to exercise this right. In this particular example, at the end of the six-month period, the market value of such vehicles is expected to be $16,000.
An argument may be made that the customer has significant economic incentive to exercise this right, since the amount received from the OEM exceeds the expected market value. In this case, this transaction is not a “sale” that generates revenue within the scope of IFRS 15, but rather a lease transaction accounted for in accordance with IFRS 16.
See also: The IFRS Foundation