On April 19th 2023, the Italian Accounting Institute (so called "Oic"), published the final version of the accounting principle no. 34, which regulates the criteria for the recognition and the evaluation of revenues, as well as the information to be presented in the notes to the accounts. The document will come into force for financial statements relating to each financial year, starting from January 1st 2024.

The new principle concerns all operations that involve the recognition of revenues deriving from the sale of goods and the provision of services, regardless of their classification in the P&L (item A1 or item A5). Company transfers, active rents, refunds and work in progress contract, for which Oic Principle no. 23 will continue to apply and, in general, transactions that do not have sales or acquisition purpose are excluded.

The document contains some exemption for companies that adopt simplified balance sheets (i.e. abbreviato and micro) and is accompanied by an appendix with some specific cases (sale with guarantee, transfer of licenses, etc.).

The OIC Principle no. 34 identifies four steps for the accounting recognition of revenue.

  1. The determination of the overall price of the contract

The total sales price is determined by the contractual clauses. Payment terms must be kept into account, proceeding with the present value calculation of future financial flows and of the variable components.

Discounts, allowances, penalties and rebates must be accounted as a reduction of revenues. The variable components that lead to an increase in revenues are included in the overall price of the contract only when they become reasonably certain.

  1. Identification of the accounting unit

Identifying the basic accounting units, through the analysis of the sales contract, represents the second step. Each contract's unit must be treated separately. Segmentation of the contract is necessary because a single contract can give rise to multiple rights and obligations to be accounted separately.

Simplified financial statements (pursuant to art. 2435-bis and art. 2435-ter of the Italian Civil Code) are exempt from the segmentation provisions, unless the units are formally identified and separately valued in the contract itself or in other documents anyhow linked to the sale. Simplified accounting, if adopted, must be applied to all transactions that generate revenue.

  1. Pricing of the accounting units

After segregating the accounting units, it is necessary to proceed with pricing each of them, by the allocation of the overall price of the contract to each identified accounting unit. The price of the unit generally descends from the contract, unless this is significantly different from the price list of the seller, taking into account the discounts normally applied. In the absence of a reference price, the Oic Principle provides for various estimation methods:

  • market price method;
  • expected costs plus margin method;
  • residual method.
  1. Timing of the revenue recognition

The fourth step is the recognition of the revenue, on the basis of the accrual principle. The revenue recognition method varies between the sale of goods and the procurement of services.

Regarding the sale of goods, revenues are booked when all the following conditions are met:

  • the transfer of substantial risks and benefits associated with the sale has occurred;
  • the amount of the revenue can be determined reliably and
  • the production process of the goods is completed.

The OIC Principle also provides that, in case of sales with return's right, the revenue is recognized only if there is a good chance that the customer will not return the goods.

However, revenues deriving from the procurement of services are recognized on the basis of the portion of the service which is rendered if both of the following conditions are met:

  • the agreement between the parties provides that the seller's right to remuneration accrues in proportion of the procurement of services;
  • the amount of the relevant revenue can be reliably measured.

In the event that the company cannot recognize the revenue according to such criterion, the revenue it must be recorded upon full service provision.

With reference to the information required for the inclusion in the notes to the accounts, reference is made to the provisions of art. 2427 of the Italian Civil Code.

Finally, the OIC Principle no. 34 appendix identifies some more complex transactions involving the revenue recognition. A summary is provided below with the related accounting rule.

  1. Sale with legal guarantee: the customer assistance guarantee required by law does not constitute an elementary unit, separate from the goods. Revenue is recognized for the entire sale and it is possible to book a provision for charges equal to the cost of replacement and/or repair.
  1. Assignments of licenses: the transfer of a license generates a revenue in the P&L when the supplier transfers the license to the customer over a specific period of time. The accounting recognition takes place proportionally over the contractual duration, through the recognition of the deferred income, unless other criteria are identifiable.
  1. Sales with buy-back obligation for the seller: in this case the transfer of risks and benefits does not occur, for accounting purposes it is necessary to verify whether the sale price is lower or higher than the re-purchase price:
  • if the sale price is lower than the buy-back price, the transaction has a financial nature and the seller books a debt towards the seller in return of the sum received for the initial sale. The difference between the two prices is booked in the P&L on an accrual basis as a financial charge (item C17 - Interest and other financial charges), in counterpart to the debt.
  • if the sale price is higher than the buy-back price, the operation has an operational nature and the seller records, as a counterpart to the sum received for the initial sale, a debt towards the seller equal to the agreed price for the future purchase, as well as a deferred income for the (positive) difference between the sales price and the purchase price. This deferred income will be released in the P&L on an accrual basis.
  1. Sales with buy-back options and conditional sales: in transactions with a buy-back option held by the seller or in sales in which the customer can force the seller to re-purchase the asset, for accounting purposes, the seller is required to evaluate the chance of exercising the option.
    If the seller is reasonably certain that he will not exercise the buy-back option, the operation is accounted as a regular sale.
    Otherwise, accounting rules of sales with buy-back obligation for the seller are applied.
    In case of a sale with a condition precedent, the revenue is recognized only when it is reasonably certain that the condition occurs and the service has been performed.
    In the case of a sale with winding up condition, the revenue is recognized only when it is reasonably certain that the condition will not occur.
  1. Acting on behalf of third parties: in transactions involving a third party (in addition to the seller and the buyer), the seller must determine whether or not he is acting on behalf of the third party.
    If the case occurs, he will have to book the service provided to the customer as if he were acting on behalf of a third party. In this case the revenue for the sale is accounted net of the costs incurred for the purchase of the goods, thus identifying the value of the intermediation commission.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.