The new Italian accounting principle OIC34 on revenues: how to get ready

published on 15 November 2023 | reading time approx. 4 minutes

Starting from financial statements for reporting periods beginning on or after 1 January 2024, a new accounting standard on revenue recognition (OIC 34) shall be applicable

This accounting standard applies to all revenues from sales of goods and services, regardless of their classification (items A1 and A5 in the income statement). No amendment is expected in relation to the accounting for construction contracts and work in progress, as OIC23 remains applicable for such cases, nor for revenues from the sale of businesses, rental income, dividends on sales or purchases by cooperatives, and transactions not carried out for sales purposes.

The accounting standard in hand adopts an approach that is very similar to the one already envisaged within IFRS 15 with its “five-steps model framework”, declined as follows.

Grouping of contracts

A group of contracts is treated as a single contract in cases in which they are negotiated simultaneously with the same customer and where there is a single business purpose or in any case the price of one contract depends on the prices or performance of the others.

Determining the overall contract price

To the extent that the price contains elements of variability, it is necessary to proceed with the valuation of these variable components. Accordingly:

additional charges (variable upward charges) are included in the overall price only when they are reasonably certain;
price reductions (discounts, including cash discounts, rebates, penalties, premiums and returns) should always be accounted for as a reduction of revenue based on estimates reflecting the company's history.

In case of payment terms longer than twelve-months, without interest payments or with an interest rate significantly different from market interest rates, the total price is determined by discounting the cash flows expected from the contract using a market interest rate.

Identification and assessment of the performance obligations in the contract

Individual goods, services, or other performance obligations that have been promised to the customer through the contract are identified as “Basic Units of Accounting” and are to be treated separately.

Basic units of accounting are not to be regarded as separately identifiable if:

the individual goods or services are highly interrelated or highly interdependent (in other terms, when the individual goods or services cannot be used separately by the customer);
the performance obligations provided in the contract do not fall under the activities generally carried out by the company and are provided free of charge (reward-based transactions);
the sale comes with a legal warranty, which cannot be separated from the good being sold. Therefore, in cases as such, revenue recognition occurs upon substantial transfer of the risks and rewards to the customer and the seller must create a provision for charges equal to the estimated cost of replacement and/or repair.All other warranties, instead, must be regarded as distinct basic units of accounting and the pertaining revenues must be recognised separately.

Allocation of overall price in the presence of several basic units of accounting

The overall price is allocated to each basic unit of accounting based on the ratio between the sales price of the specific basic unit of accounting and the sum of the sales prices of all basic units of accounting included in the contract. Sales prices are to be considered net of discounts normally applied according to the contract, unless the contract price net of the discount significantly diverges from the price lists generally applied by the seller.

Revenue recognition: revenue is to be recognised when all conditions are met

Sales of goods:

the substantial transfer of the risks and rewards relating to the sale has taken place (also considering the company's past experience, e.g., for returns);
the amount of revenue can be measured with reliability;
the production process of the goods is completed.

Service supplies: these are recognised based on the stage of completiononly if:

the agreement between the parties provides that the consideration is only payable upon performance of the service;
the amount of revenue can be measured with reliability.

Please be aware that if the company cannot recognise revenue according to the stage-of completion principle, revenue for the supply of services may only be recognised once the service has been fully performed.

As far as smaller companies are concerned, those that prepare their financial statements in a short or minimal format, certain simplifications are provided for and, in particular, the following exceptions apply:

the possibility of not discounting future cash flows at the market interest rate (even if payment terms are due in more than twelve-months, without interest payments or with interest significantly different from market rates)
the possibility of not proceeding with the identification of the basic units of accounting if this separation would be insignificant in terms of effects. In this context, smaller companies will be able to recognise the entire proceeds at the time of sale and recognize a provision for future expenses against the cost that they are expected to incur in subsequent years in connection with such proceeds;
accounting for sales with rights of return in a simplified manner, avoiding the reinstatement among inventories of goods sold that are expected to be returned.

It is worth noting that the new principle on revenue recognition carries tax implications as well (whenever accounting policies are deemed relevant for tax purposes).

In order to be ready for the upcoming 1 January 2024 deadline, it is essential that you start carrying out an analysis of your standard contracts and understand the potential impact of the adoption of accounting principle OIC 34.