M03CH4 Revenue Recognition

• Revenue is typically recognized when goods are dispatched or services are provided.

Introduction to Revenue Recognition

• Revenue is a business's income from its primary trading activities, mainly from the sale of goods or services.
• Accruals accounting matches costs with the revenue they generate.
• Determining when revenue is recognized is important for accurate cost treatment.
• Costs to produce finished goods are assets until sold, and then charged to the trading account.
• Decisions about these treatments hinge on identifying when the sale occurs.
• Profit recognition should align with when a sale takes place.

IFRS 15: Revenue from Contracts with Customers

• IFRS 15 governs revenue recognition.
• Revenue recognition occurs when control of goods or services transfers to the customer.
• A five-step model ensures correct revenue recognition:
  • Identify the contract with a customer
  • Identify separate performance obligations in the contract
  • Determine the transaction price
  • Allocate the transaction price to the performance obligations
  • Recognize revenue when the entity satisfies a performance obligation

Performance Obligations Example

• Thomas receives an order on May 1, 20X4, for 10 bikes at $10,000, to be supplied on June 1, 20X4.
• The bikes delivered to the customer on June 1, 20X4, and payment is made on June 30, 20X4.
• Applying the five-step model:
  • The contract was entered on May 1, 20X4
  • The contract's performance obligation is delivering 10 bikes.
  • The transaction price is $10,000.
  • $10,000 is allocated to the single performance obligation in the contract.
  • Revenue is recognised as $10,000 on June 1, 20X4, when control of the bikes transfers to the customer.

Measurement of Revenue

• Revenue is measured at the transaction price allocated to each performance obligation.
• Revenue excludes sales taxes, value-added taxes, and goods and services taxes.
• These taxes are collected for third parties and aren't an economic benefit to the entity.
• For agents, revenue is the commission received for acting as an agent.
• Revenue is what goods are sold for or services provided to customers, accounting for trade discounts.
• Settlement discounts are an exception and count as variable consideration.

Revenue Question Example

• A training company receives an order in May 20X7 for a training course in December 20X7
• The client pays $900 at booking and cannot cancel.

Discounts Overview

• A trade discount is a reduction in the list price, common for bulk orders.
• A settlement discount (or cash discount) is a reduction for immediate or prompt payment.
• A discount allowed is one given to a customer on a sale.
• A discount received is one from a supplier on a purchase.

Types of Discount

• A discount reduces the price of goods compared to the standard selling price.
• Two main types of discounts:
  • Trade discount
  • Settlement discount
• Definition: Trade discount is a cost reduction from the nature of the trading transaction and buying goods in bulk.