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Introduction

The Dutch Accounting Standards Board (DASB), also known as Raad voor de Jaarverslaggeving, has recognized a practical necessity for additional direction on the accounting treatment of revenue within the framework of the Dutch Accounting Standards (referred to as ‘Standards’ hereafter).

As per the Board, the motivation behind the revisions is the practical demand for more specific guidelines concerning revenue recognition under Title 9, Book 2 of the Dutch Civil Code (DCC) and the Dutch Accounting Standards (DAS). The explicit consideration of IFRS 15 ‘Revenue from Contracts with Customers’ guided the amendments to DAS 270 and DAS 221. Nevertheless, the DASB intentionally opted against fully embracing IFRS 15.

The decision not to fully adopt IFRS 15 within the DAS stems from the DASB’s assessment of its target audience, coupled with the associated implementation expenses. Consequently, the DASB has chosen to implement distinct modifications to the standards governing revenue recognition.

The decision of the DASB not to fully incorporate IFRS 15 into the DAS implies that, under NL GAAP, the conceptual foundation for revenue recognition continues to be the transfer of risks and rewards. This stands in contrast to IFRS 15, where the transfer of control serves as the basis for revenue recognition. This notable disparity in the conceptual foundation may result in variations in the application of specific requirements.

The updated Standards have become applicable for reporting years commencing on or after January 1, 2022.

Guidelines for Annual Reporting (RJ and RJk)

A project in progress (construction contract) on behalf of third parties (hereinafter referred to as ‘projects in progress’) is a project that has been agreed with a third party, for the construction of an asset or combination of assets where the execution usually extends over more than one reporting period. The question often arises as to whether a project falls under RJ 221 when the duration is shorter than 12 months. Paragraph 316 of RJ 221 talks about the possibility that projects in progress may have a lead time shorter than 12 months. All in all, it can be concluded that the nature of the contract prevails over the duration of the project.

Valuation and determination of results

Two methods are used to distinguish between profit-taking on projects in progress:

• Profit-taking in proportion to the services provided in the execution of the project.
• Profit-taking on delivery or completion of the project.

As regards the way in which the profit from a project in progress is to be allocated to the financial year, the starting point is that the result of a project can be reliably estimated. If yes, the project revenues and project costs related to the project in progress must be recognised as income and expenses in the income statement in proportion to the performance performed at the balance sheet date.

If a project in progress is expected to be loss-making, a provision must be made for the entire loss to be charged to the result for the period in which the expectation of this loss arises.

For a private limited company, which qualifies as medium or large, or for a small private limited company, which prepares annual accounts on the basis of ‘commercial principles’, the ‘percentage of completion’ method must be applied if the conditions set out in the RJ 221 are met.

Summary of Key Changes

This section outlines the primary modifications in the new Standards as opposed to the existing ones:

Performance obligations

The DASB observes variations in the practical application of revenue recognition criteria and has consequently introduced more explicit guidelines for discerning distinct elements, termed “performance obligations.” A performance obligation is defined as a commitment in a contract to deliver:

• A distinct good or service or a combination of goods or services that are collectively distinct from other commitments in the contract; or
• A series of distinct services that are substantially identical.

To be considered a performance obligation, it must be identified separately (i.e., distinct), meeting both of the following criteria (refer to DAS 270.109 and DAS 221.112):

1. The customer can derive benefit from the goods or services either independently or in conjunction with other resources that the customer has obtained or can readily obtain.
2. The entity’s commitment to transfer the goods or services to the customer is distinctly identifiable from other commitments in the contract.

Determining the transaction price

The entity is required to recognize revenue based on the amount expected to be entitled for the transfer of promised goods or services, known as performance obligations (DAS 270.106). This transaction price does not include amounts collected on behalf of third parties. The transaction price can be fixed, variable, or a combination of both, with credit risk not factored into its determination.

The transaction price calculation considers variable consideration, significant financing components, and consideration payable to a customer (DAS 270.106). Variable consideration may arise from discounts, refunds, price concessions, or performance bonuses.

The DAS emphasizes the potential uncertainty in estimating variable considerations, especially in contracts where payment depends on achieving a specific result. Construction contracts are subject to similar principles.

The allocation of the transaction price to performance obligations is now guided by principles, requiring proportional allocation based on the value of the obligations (DAS 270.109c and DAS 221.112). This can be done using individual sales prices or fair values.

For contract modifications, new principles have been introduced. Modifications may be treated as a separate contract, a termination and creation of a new contract, or a modification to the existing contract (DAS 270.130 and DAS 221.205). The treatment depends on factors such as the addition of promised goods or services, distinctness, and remaining promised goods and services. Agreed contract reductions are also accounted for as modifications.

Presentation of construction contracts

Presentation in the Profit and Loss Account

Previously, DAS allowed presenting the revenue from incomplete construction contracts as “net turnover” or “change in work in progress on construction contracts.” However, this option is no longer available. As per the revised DAS 220, contract revenue must now be presented solely as “net turnover” in the profit and loss account (DAS 221.401). This change aims to enhance transparency and comparability in financial statements by providing a clearer view of contract revenue. Notably, this modification does not impact the criteria for determining the size of an entity (small, medium-sized, or large), where the line item “change in work in progress on construction contracts” had to be included in net turnover (formerly DAS 221.402).

It is crucial to distinguish this presentation from the item “Change in inventory of finished goods and work in progress” in the Decree on financial statements format, which pertains to inventories under DAS 220 ‘Inventories’ and is not related to construction contracts within the scope of DAS 221.

Presentation in the Balance Sheet

Previously allowed as an alternative, presenting the net amount of all construction contracts as a single total in the balance sheet is no longer considered acceptable by the DASB. Instead, the net amount of each construction contract is now to be separately recognized. If the net amount is a debit, it is recognized as an asset, and if it is a credit, it is recognized as a liability (DAS 221.409). Consequently, two separate balance sheet line items, ‘work in progress on construction contracts,’ may be presented under assets and liabilities. This departure from the previous practice of netting all construction contracts in one line item can impact total assets, potentially influencing the entity’s categorization as small, medium-sized, or large. Additionally, certain balance sheet ratios, particularly solvency ratios, may undergo changes, potentially decreasing.

Transitional provisions

To ease out the implementation, the DASB has introduced transitional provisions, offering entities three options for accounting policy changes related to the recognition and measurement of revenue (DAS 270.7 and DAS 221.6):

Prospective:

The amended standards are applied only to contracts entered into or modified on or after the beginning of the financial period in which the amendments are initially applied.

• For example, if the initial application is on January 1, 2022, the amended standards only affect contracts entered into or modified on or after January 1, 2022.
• Previous standards continue to apply to contracts entered into or modified before the initial application date.

 Partially Retrospective:

• Entities can apply the amendments to contracts entered into or modified on or after a date chosen by the entity itself, preceding January 1, 2022, or the relevant effective date on earlier application.

Fully Retrospective:

• All contracts, irrespective of when entered into or modified, are subject to the amended standards.

Entities must disclose the chosen transitional provision in the notes, along with an explanation of the differences between the previous and amended standards.