——Qualified right to receive shares, low-price shares, promotion service fees, equity transfer time, cash flow presentation
-- Shanghai Stock Exchange Accounting Supervision Dynamics (2023 No. 6, Total No. 18).
oneCommon case studies
Question[Revenue period methodQualifying Receiving RightsApplication]: Whether the company's business meets the requirements of the time period methodQualifying Receiving RightsRevenue Recognition Conditions?
Case:
Company A's main business is the sales of robot automated production lines, which has the characteristics of non-standard customization, large contract amount and long project cycle. Company A uses the time period method to recognize revenue, and believes that the third situation of the time period method is satisfied, that is, "having an irreplaceable use + qualified right to receive payment" (hereinafter referred to as "case 3"). On the one hand, Company A sells robot automated production lines, which need to be customized and developed according to the customer's individual requirements, and the intellectual property rights and other rights and interests generated in the process of contract performance belong to the customer, and the corresponding products have irreplaceable uses. On the other hand, Company A sorted out the contracts and divided them into the following two types of contracts: (1) if the contract is terminated due to reasons not attributable to the company, after the contract is terminated, the company has the right to request the customer to settle according to the amount of work or work completed;(2) The breaching party is required to compensate for a certain amount of profit as liquidated damages. Does Company A's sales of robot automated production lines meet the conditions of "qualified right to collect", and can the time period method be applied to recognize revenue?
Analysis:
According to the relevant provisions of Accounting Standard for Business Enterprises No. 14 - Revenue (revised in 2017), if the goods produced by an enterprise in the course of performance have irreplaceable uses, and the enterprise has the right to receive payment for the part of the performance that has been completed so far during the entire contract period, it is considered to have fulfilled the performance obligation within a certain period of time, and the revenue should be recognized using the time period method. Among them, the right to receive payment for the part of the performance that has been completed so far means that in the event of termination of the contract due to reasons attributable to the customer or other parties, the enterprise has the right to receive payment for the part of the performance that has been completed so far that can compensate for the costs and reasonable profits it has incurred, and this right is legally binding.
In this case, Company A sells a robot automated production line, which is a non-standard customized product, and the company cannot easily use the product for other purposes, and has irreplaceable uses. The key to determining whether the third situation under the time period method is applicable is whether the condition of "qualified right to collection" is met. In this regard, the Accounting Standard for Business Enterprises No. 14 - Revenue (Application Guide) (revised in 2018) points out that the amount that an enterprise is entitled to receive should be roughly equivalent to the selling price of the goods that have been transferred to customers so far, that is, the amount should be able to compensate the costs and reasonable profits that the enterprise has incurred, and the amount that the enterprise is entitled to receive is a margin or only to compensate the enterprise for the costs that have been incurred or the profits that may be lost, this condition is not met;In addition, when making a judgment, an enterprise should not only consider the terms of the contract, but also fully consider the applicable laws and regulations, past judicial practice, and the results of similar cases. Based on the contract agreement of Company A, for the first type of contract, although the contract stipulates that when the contract is terminated, the company and the customer will settle according to the amount of work completed, but the specific settlement method is not specified, that is, whether the settlement amount corresponds to the contract price or the cost, and it is impossible to judge whether the settlement amount can compensate for the costs incurred and reasonable profitsFor the second type of contract, the contract only stipulates that the breaching party shall pay liquidated damages according to a certain amount of profits, and does not specify whether the costs incurred and reasonable profits stipulated in the guidelines are met, and the company cannot directly rely on the breach clause as the basis for meeting the "qualified right to collection". In summary, since Company A did not expressly stipulate in the contract that the amount of money it was entitled to receive could compensate for the costs and reasonable profits it had incurred, it could not be directly considered to meet the requirements of the "qualified right to receive payment". In addition, even if the contract has been expressly agreed, if past judicial practice shows that the terms of the contract are not legally binding, and the company's claim for rights is not supported in the current legal environment, then it is still impossible to apply Scenario 3 under the time period method to recognize revenue.
Refer to the regulatory documents:
Accounting Standards for Business EnterprisesNoIncome(Revised on January 1, 2018).
Article 11If one of the following conditions is met, the performance obligation shall be fulfilled within a certain period of time;Otherwise, it is a performance obligation at a certain point in time:
1) The customer obtains and consumes the economic benefits brought by the performance of the enterprise at the same time as the performance of the enterprise.
2) The customer is able to control the goods under construction in the process of enterprise performance.
3) The goods produced by the enterprise in the course of performing the contract have irreplaceable uses, and the enterprise has the right to receive payment for the part of the performance that has been completed so far during the entire contract period.
Irreplaceable use means that the enterprise cannot easily use the goods for other purposes due to contractual restrictions or practical feasibility restrictions.
The right to receive payment for the part of the performance that has been completed so far means that in the event of termination of the contract due to reasons attributable to the customer or other parties, the enterprise has the right to receive payment for the part of the performance that has been completed so far that can compensate for the costs and reasonable profits it has incurred, and this right is legally binding.
Question[Accounting treatment of old shareholders buying shares at a low price]: How to judge whether the old shareholders buy shares at a low price in different proportions?How to calculate the share-based payment fee if it constitutes a share-based payment?
Case:
Company A has a share capital of RMB 20 million, and there are 2 natural person shareholders A and B, holding 70% and 30% of the shares respectively. In 20x1, Company A issued 2 million additional shares to the original shareholders A and B, as well as the company's senior executive C, and A, B and C subscribed for 1.3 million shares, 300,000 shares and 400,000 shares respectively, and the capital increase was 10 yuan shares. It is assumed that the fair value of Company A's shares at the time of the capital increase is $20 shares. After the completion of the capital increase, the shareholding ratios of A, B and C are .82%。Company A accounted for C's share of capital increase at a low price as a share-based payment. Does the share of A and B's low-price capital increase constitute a share-based payment?How to calculate the share-based payment expense if it constitutes a share-based payment?
Analysis:
According to the Guidelines for the Application of Regulatory Rules - Issue No. 5, the new shares obtained by the actual controller of the issuer who provide services to the issuer shall be regarded as share-based payment if the existing shareholder increases his capital at a capital increase lower than the fair value of the shares, and exceeds his original shareholding ratio. In this case, the original shareholders are only A and B, and only the relative shareholding ratios of A and B should be considered when determining whether there are new shares obtained in excess of their original shareholding ratios. After the capital increase, A's shareholding ratio became 7083% (=(1400+130) (2000+160)), which is 70% higher than the original shareholding ratio, satisfying the "new shares obtained in excess of its original shareholding ratio", so it constitutes a share payment, and the excess part should be 083% of the corresponding shares of 180,000 shares (= (2000 + 160) * 083%) multiplied by the difference of $10 between the fair value on the date of the capital increase and the shareholding**, and the share-based payment expense of $1.8 million was recognized. B's shareholding ratio becomes 2917% (=(600+30) (2000+160)), which is lower than before the capital increase, and does not meet the "new shares acquired in excess of its original shareholding ratio", so there is no need to recognize the share payment expense.
At the same time, the same conclusion can be reached by comparing the capital increase shares of A and B with the number of shares that can be obtained according to the original shareholding ratio. A increased its capital by 1.3 million shares, which is higher than the capital increase share of 1.12 million shares (=160*70%) that it can obtain according to the original shareholding ratio, so the excess 180,000 shares should be recognized as a share to pay 1.8 million yuan. B's capital increase of 300,000 shares, which is lower than the 480,000 shares (=160*30%) that it can obtain according to its original shareholding ratio, does not meet the "new shares obtained in excess of its original shareholding ratio", so there is no need to confirm the share payment fee.
Refer to the regulatory documents:
Guidelines for the Application of Regulatory Rules – Issuance CategoryNo(Effective February 17, 2023).
5-1 Share-based payment resulting from capital increase or transfer of shares.
1. Specific applicable circumstances.
For the issuer to add new shares to employees (including shareholding platforms), consultants, customers, businessmen and other stakeholders, as well as the transfer of shares by major shareholders and their affiliates to employees (including shareholding platforms), customers, businessmen and other stakeholders, the issuer shall, according to the level of materiality and the principle of substance over form, make a comprehensive judgment on the relevant agreements, transaction arrangements and actual execution, and carry out corresponding accounting treatment. If there is sufficient evidence to support the share-based payment that is implemented under the same equity incentive plan, decision-making procedure and relevant agreement, it shall be considered and applied together in principle.
1.The actual controller and the old shareholders increased their capital.
If there is sufficient evidence to support the change of shares caused by regulatory measures such as nominee shareholding, the change of shares caused by non-trading behaviors such as property division, inheritance and gift within the family, and the change of shares caused by asset restructuring, business mergers and acquisitions, conversion of shareholding methods, and placement of new shares to old shareholders in the same proportion, etc., and there is sufficient evidence to support that the acquisition of relevant shares is unrelated to the issuer's access to its services, the Accounting Standard for Business Enterprises No. 11 - Share-based Payment shall not apply.
The actual controller of the issuer who provides services The new shares obtained by the old shareholders by increasing their capital to a capital of less than the fair value of the shares and exceeding their original shareholding ratio shall be regarded as share-based payment. If the capital increase agreement stipulates that all shareholders are entitled to obtain new shares according to their original shareholding ratios, but the transfer of the right to transfer the new shares between shareholders constitutes a share payment within the group, resulting in the actual controller The old shareholders obtain the new shares in excess of their original shareholding ratio, which is also a share payment. The actual controller The original shareholding ratio of the old shareholders shall be calculated according to the proportion of shares directly held by the relevant shareholders and indirectly held by the relevant shareholders after penetrating the holding platform.
II. II. II, case studies
QuestionMarketing Service FeeAccounting treatment]: If the dealer provides marketing services, the relevant expenses should be offset by the operating income or included in the sales expenses
Case:
Company A is a listed company, mainly engaged in the production and sales of liquor. In 20x2, Company A's operating income was 300 million yuan, and its sales expenses were 100 million yuan, of which 50 million yuan was promotion service fees. Company A signed the Promotion Service Agreement with some buyout distributors, stipulating that the distributors would provide promotion services for Company A's liquor products, and the form of promotion services would be determined by the distributors. In fact, the promotion service provided by the dealer is only a poster display in the store, which is a daily promotion method for the dealer to improve its own performance. After reaching the procurement target agreed by both parties during the agreement period, Company A will settle the relevant promotion service fee to the dealer. Is it appropriate for Company A to include the promotion service fee in the sales expense?
Analysis:
According to the relevant provisions of the Accounting Standard for Business Enterprises No. 14 - Revenue (Revised in 2017), if an enterprise pays consideration to a customer, it shall offset the consideration payable against the transaction**, unless the consideration payable to the customer is to obtain other clearly distinguishable commodities from the customer. If the consideration payable by the enterprise to the customer exceeds the fair value of the goods or services that can be clearly distinguished from the customer, the excess amount shall be offset by the transaction**. If the fair value of goods or services obtained from customers that can be clearly distinguished cannot be reasonably estimated, the enterprise shall offset the full amount of the consideration payable to the customer against the transaction**. The Guidelines for the Application of Regulatory Rules – Accounting No. 2 (Accounting No. 2) provide that if an enterprise obtains clearly distinguishable goods or services from a customer and is able to benefit from the dominant use of the relevant goods or services, the payment made by the enterprise to the customer should generally be treated as the purchase of goods or services from the customer (rather than the consideration payable to the customer).
In this case, firstly, the agreement stipulates that the form of promotion services shall be determined by the dealers themselves, and the poster display is a daily promotion method for the dealers to improve their own performance, and Company A cannot lead the use of the promotion services, and does not meet the situation of leading services and benefiting from the accounting services in Accounting No. 2. Secondly, the amount of promotion service fees paid by Company A to dealers is relatively large, which is significantly higher than the fair value of promotion services, and according to the settlement conditions, whether Company A pays promotion service fees is premised on whether the dealers achieve the relevant procurement targets, and has no direct relationship with the promotion services actually provided by the dealers, and the main purpose of the above-mentioned fees paid by Company A to dealers is to motivate dealers. To sum up, the promotion services provided by the distributor did not meet the requirements of "in order to obtain other clearly distinguishable goods from customers", and Company A should write off the part of the promotion service fee in excess of the fair value to the operating income for the current period. If the fair value cannot be reasonably estimated, the operating income will be reduced in full.
Refer to the regulatory documents:
Accounting Standards for Business EnterprisesNoIncome(Revised on January 1, 2018).
Article 19If an enterprise pays consideration to a customer (or a third party who purchases its goods from a customer, the same as in this article), it shall offset the consideration payable against the transaction** and reduce the current income at the later point when the relevant revenue is recognized and the consideration paid (or promised to be paid) to the customer, unless the consideration payable to the customer is for the purpose of obtaining other clearly distinguishable goods from the customer.
If the consideration payable by an enterprise to a customer is to obtain other goods that can be clearly distinguished from the customer, it shall confirm the purchased goods in a manner consistent with other purchases by the enterprise. If the consideration payable by the enterprise to the customer exceeds the fair value of the goods that can be clearly distinguished from the customer, the excess amount shall be offset by the transaction**. If the fair value of the goods obtained from the customer cannot be reasonably estimated, the enterprise shall offset the full amount of the consideration payable to the customer against the transaction**.
Guidelines for the Application of Regulatory Rules – Accounting CategoryNo(Effective December 24, 2021).
2-3 Judgment of the consideration payable to the customer.
If an enterprise needs to pay consideration to a customer while transferring goods or providing services to a customer, it shall offset the consideration payable against the transaction**, unless the consideration payable to the customer is for the purpose of obtaining other goods or services from the customer that can be clearly distinguished.
Regulatory practice has found that some companies have misunderstandings and disagreements on whether payments to customers should be offset by sales revenue. The comments on this matter are as follows:
A business should analyse the purpose for which it pays consideration to a customer, and if a business obtains clearly distinguishable goods or services from a customer and is able to benefit from the dominant use of the relevant goods or services, the amount it pays to a customer should generally be treated as a purchase of goods or services from the customer (rather than a consideration payable to the customer). For example, for the promotion expenditure that the enterprise needs to pay to customers such as supermarkets based on its own publicity, if there is clear evidence that the enterprise pays the consideration to the customer in order to obtain clearly distinguishable promotion services, and can lead the use of promotion services (such as the area where the goods are put on the shelves, the location of the stacks, and the display time, frequency, method, etc.), the enterprise shall treat it as the purchase of promotion services from customers, recognize the sales expenses according to the part of the consideration paid that is equivalent to the fair value of the promotion services, and offset the sales revenue for the part of the consideration paid that exceeds the fair value of the promotion services.
Question[Timing of equity transfer of subsidiaries with financial assistance repayment conditions]: If the parent company has financial assistance to the subsidiary, can the long-term equity investment of the subsidiary be terminated if the counterparty fails to fully pay the financial assistance when the equity of the subsidiary is transferred?
Case:
Company A is a listed company, Company B is a wholly-owned subsidiary of Company A, and Company A has provided financial assistance to Company B such as shareholder loan support and bank credit guarantee to support the development of Company B. Based on various considerations, Company A intends to list Company B**. After the public transfer procedure, Company A and Company C signed an equity transfer agreement stipulating that the base date of equity transfer is March 30, 20x2, the date of approval and signing of the equity transfer agreement is June 30, 20x2, and the equity transfer is priced at 200 million yuan. At the same time, the agreement stipulates that in addition to the payment of 200 million yuan for the equity transfer, Company C shall also pay Company A the financial assistance of 400 million yuan owed by Company B to Company A, and change the guarantor of the bank loan of Company B, from Company A to Company C.
The transfer of assets and business of Company B was completed on July 6, 20x2, and Company C has paid the equity transfer price of 200 million yuan. However, as of December 31, 20x2, Company C had not paid the financial assistance of RMB 400 million owed by Company B to Company A, nor had it completed the procedures for the change of bank guarantor, so the two parties had not gone through the equity transfer procedures. At the same time, the articles of association and industrial and commercial registration of Company B have not been changed, and the directors and senior management personnel are still appointed by Company A.
Is it appropriate for Company A to take July 6, 20x2 as the time for the completion of the equity transfer and terminate the recognition of its long-term equity investment in Company B?
Analysis:
In this case, it is first necessary to determine whether the equity transfer transaction and the payment of financial assistance between Company A and Company C constitute a package transaction. According to the terms of the equity transfer agreement, in addition to paying the equity transfer price of 200 million yuan, Company C also needs to pay the financial assistance of 400 million yuan owed by Company B to Company A. Company C's payment of RMB 200 million for the equity transfer and repayment of RMB 400 million in financial assistance should have been concluded with consideration of each other's influences, and the two transactions as a whole could achieve complete commercial results, which should be treated as a package transaction according to the relevant provisions of Accounting Standards for Business Enterprises No. 33 - Consolidated Financial Statements.
Second, it is necessary to determine whether the transfer of control satisfies the five conditions in the Application Guide of Accounting Standard for Business Enterprises No. 20 - Business Combination. Among them, the fourth condition is that the merging party or the purchaser has paid the majority of the merger price (generally more than 50%), and has the ability and plan to pay the remaining amount. In this case, although Company C had paid the equity transfer price of RMB 200 million, the financial assistance owed by Company B to Company A had not yet been paid. If considered as a package transaction, the financial assistance of $400 million will also be required as part of the transaction consideration. Therefore, the total transaction price was $600 million, and Company C paid a relatively low proportion of the price, most of which had not yet been paid.
The fifth condition is that the merging party or the purchaser has actually controlled the financial and operational policies of the merged party or the acquiree, and has enjoyed the corresponding benefits and assumed the corresponding risks. In this case, although the assets and business transfer have been completed by both parties, the articles of association and industrial and commercial registration of Company B have not been changed, the directors and senior management personnel are still appointed by Company A, and Company A still enjoys shareholders' rights and interests and can control the financial and operational policies of Company B.
Therefore, Company A failed to meet the fourth and fifth conditions for the transfer of control, and without considering other conditions, it could not terminate the recognition of long-term equity investment solely because it had handled the business and asset transfer, and July 6, 20x2 could not be used as the time point for the completion of the equity transfer.
Refer to the regulatory documents:
Accounting Standards for Business EnterprisesNoConsolidated Financial Statements(Effective July 1, 2014).
Article 51If an enterprise disposes of its equity investment in a subsidiary in a step-by-step manner through multiple transactions until it loses control, if the transactions in which the equity investment in the subsidiary is disposed of until it loses control is a package transaction, the transactions shall be accounted for as a transaction in which the subsidiary is disposed of and the company loses controlHowever, the difference between the disposal price and the share of the subsidiary's net assets corresponding to the disposal investment before the loss of control shall be recognized as other comprehensive income in the consolidated financial statements, and shall be transferred to the profit or loss for the period of loss of control when the control is lost.
The terms, conditions, and economic impact of each transaction for the disposal of an equity investment in a subsidiary that meet one or more of the following conditions generally indicate that multiple transactions should be accounted for as a package transaction:
a) The transactions were entered into at the same time or with regard to each other's influence.
and ii) the transactions as a whole in order to achieve a complete commercial outcome.
c) The occurrence of one transaction depends on the occurrence of at least one other transaction.
iv) A transaction is not economical when considered alone, but it is economical when considered in conjunction with other transactions.
Accounting Standards for Business EnterprisesNoBusiness combinationsApplication Notes(Effective 1 January 2007).
2. Determination of the date of merger or purchase
The enterprise shall recognize the assets and liabilities acquired as a result of the business combination on the merger date or the acquisition date. According to Articles 5 and 10 of these Standards, the merger or acquisition date refers to the date on which the merging party or the purchaser actually obtains control over the merged party or the acquiree, that is, the date on which the net assets of the merged party or the acquiree or the control of production and operation decisions are transferred to the merging party or the purchaser. A transfer of control is generally considered to have been achieved if the following conditions are met at the same time:
1) The business combination contract or agreement has been approved by the general meeting of shareholders, etc.
2) If the business combination needs to be examined and approved by the relevant competent state departments, it has been approved.
3) The parties involved in the merger have gone through the necessary procedures for the transfer of property rights.
4) The merging party or the purchaser has paid the majority of the merger price (generally more than 50%), and has the ability and plan to pay the remaining amount.
5) The merging party or the purchaser has actually controlled the financial and operational policies of the merged party or the acquiree, and enjoys the corresponding benefits and bears the corresponding risks.
Question[When recognized by the net income method.]Presentation of cash flows]: Company by netHow should the relevant cash flows be presented in the cash flow statement?
Case:
Company A has **procurement** business, and the revenue is recognized according to the net method, and the specific business model is that when the downstream customer designates the upstream ** business, Company A signs a contract with the upstream and downstream counterparties respectively, and Company A pays the payment to the ** merchant first, and Company A collects the payment after the customer receives the goods. For the cash flow of the above-mentioned business, is it necessary to report the cash received from the sale of goods and services, and the cash received from the purchase of goods and the payment of labor services in the cash flow statement?
Analysis:
According to the Accounting Standard for Business Enterprises No. 31 - Cash Flow Statement and related regulations, cash flow should be reported according to the total cash inflow and cash outflow respectively. However, the following items may be reported on a net basis: (i) cash received or paid on behalf of a customer. (2) Cash inflow and cash outflow of projects with fast turnover, large amount and short term. (3) The relevant items of financial enterprises, including the loan principal issued and recovered by short-term loans, the absorption and payment of demand deposits, the deposit and withdrawal of interbank deposits and deposited interbank funds, the borrowing and lending of funds from other financial enterprises, and the sale and sale of funds.
*The fact that a business recognizes revenue on a revenue standard net basis does not necessarily mean that it automatically meets the cash flow standard net method at the same time. In this case, Company A's ** business is a normal business with a real trading background, and Company A advances funds and bears the corresponding credit risk in the course of the transaction with the upstream and downstream counterparties. Company A is presented in the cash flow statement by the total amount, and the relevant cash inflows and outflows are included in other cash related to operating activities according to the total amount, which can better reflect the cash flow of Company A under the *** model.
Refer to the regulatory documents:
Accounting Standards for Business EnterprisesNoCash Flow Statement(Effective 1 January 2007).
Article 5Cash flows should be reported separately as total cash inflows and cash outflows.
However, the following items may be reported on a net basis:
a) Cash collected or paid on behalf of the customer.
(2) Cash inflow and cash outflow of projects with fast turnover, large amount and short term.
(3) The relevant items of financial enterprises, including the loan principal issued and recovered by short-term loans, the absorption and payment of demand deposits, the deposit and withdrawal of interbank deposits and deposited interbank funds, the borrowing and lending of funds from other financial enterprises, and the sale and sale of funds.