NEW OIC 34: STRATEGIES AND TECHNIQUES FOR AN EFFICIENT TRANSITION

Effective January 1, 2024, the new OIC 34 accounting principle comes into force.

Revenues from the sale of goods are recognized when the significant transfer of risks and benefits associated with the sale occurs. The preparer of the financial statements must analyze the contract to identify the elementary accounting units (so-called “segmentation”), that is, the individual goods, services or other benefits that are promised to the customer through the contract, which must be accounted for separately.

The new accounting principle governs the criteria for recognizing and valuing revenues, as well as the information to be presented in the notes to the financial statements, with a significant impact on the qualification, quantification and allocation of the items shown in the financial statements.

OIC 34 applies to companies that prepare their financial statements in accordance with the provisions of the Civil Code and to all transactions that involve the entry of revenues related to the sale of goods and the provision of services, regardless of their classification in the income statement (Items A1 and A5). Excluded are revenues from work in progress on order and revenues from the sale of businesses, rental income, reimbursements, and transactions that do not have a sales purpose.

The document contains simplifications for companies that prepare their financial statements in abbreviated form and micro-enterprises and is accompanied by an application guide with some specific cases (sale with warranty, assignment of licenses, sales with repurchase obligation, companies acting for their own account or for third parties, sales with repurchase and conditional options) and several illustrative examples that facilitate its application.

The technical rule provides that the first application is retroactive (as if OIC 34 had always been in force) but also allows application to only contracts entered from January 1, 2024.

One of the main innovations concerns, in the presence of a single sales contract from which multiple rights and obligations arise, the need to identify the individual goods and services promised to the customer that constitute “units” to be accounted for and valued separately. For example, in the case of the sale of a car for € 30,000 with four annual services included in the price, it is necessary to separate the sale of the asset from the provision of the service and proceed to value the sale of the car (for example for € 28,000, to be recognized upon delivery) and the performance of the services (for example for € 500 each, to be recognized upon performance of the service), making the accounting allocation of the price not provided for in the contract.

Four phases are foreseen for the recognition of revenue.

1. Determination of the overall contract price: it is derived from the contractual clauses. The payment terms (within or beyond 12 months) must be considered, proceeding to discount future financial flows and value variable components. Discounts, allowances, penalties, and returns must be accounted for as a reduction of revenue. By virtue of the prudence postulate, variable components that result in an increase in revenue are included in the overall contract price only when they become reasonably certain.

2. Identification of the elementary unit of accountancy: among the main innovations introduced is the introduction of accounting techniques aimed at identifying and valuing the elementary units, since from a single sales contract more rights and obligations may arise that require separate accounting. The segregation is relevant when each of the performances provided for in the sales contract is carried out in different ways and times, as for example in the case of the sale of a car with the execution of free services in the following years. It is not necessary if the different performances are carried out in the same period or when it does not involve a substantial representation of the operation.

3. Valuation of the elementary units of accountancy: after having identified them, it is necessary to proceed with the valuation of each of them. The overall contract price is allocated to each individual unit based on the ratio between the price of the same and the sum of the selling prices of all the units included in the contract, as provided for in the contract, unless this is significantly different from the list price, considering the discounts normally practiced. In the absence of a reference price, the accounting principle provides for several estimation methods.

4. Recognition of revenue: following the determination of the “quantum” of the individual elementary units of accountancy, the phase of identifying the time when to recognize revenue in the balance sheet based on the principle of economic competence follows. The current distinction between sale of goods and provision of services is confirmed.

Considering what is provided for by the new accounting standard, it is necessary to start the transition activity by mapping and analyzing the contract provisions typically applied in relationships with customers to determine whether the related accounting treatment should be modified (or not) to make it compliant with the provisions of OIC 34.