Revenue and expenses
IFRS 15 · Revenue from contracts with customers
Revenue when the obligation is satisfied, at the expected amount.
Draft: not yet reviewed by a teacher
Why it exists
Cash and revenue often arrive at different times: customers pay in advance or on credit, take discounts, and pay a tax the seller only passes on to the state. The standard answers two questions: when to recognise revenue and how much.
Key rules
- Five steps: (1) identify the contract, (2) the performance obligations, (3) the transaction price, (4) allocate the price to the obligations, (5) recognise revenue as each obligation is satisfied.
- An obligation is satisfied at a point in time (goods handed over) or over time (a service delivered over months: revenue is recognised as it is performed).
- A trade discount reduces the price at once and is not recorded separately.
- A settlement discount: if the customer is expected to take it, recognise revenue net of it; if not, recognise the full amount and reduce revenue if the discount is taken after all.
- Sales tax (VAT) is not revenue: the seller collects it for the state (Cr Sales tax payable).
- Cash received before the obligation is satisfied is not revenue but a liability (deferred income, a contract liability).
Examples
List price 10,000, trade discount 10%, sales tax 18%, sold on credit.
- Price after discount: 10,000 × 90% = 9,000
- Tax: 9,000 × 18% = 1,620; invoice total 10,620
- Dr Receivables 10,620
- Cr Revenue 9,000
- Cr Sales tax payable 1,620
An invoice for 5,000 with 3% off for payment within 14 days (ignore sales tax).
- The customer is expected to take the discount: revenue and receivable 5,000 × 97% = 4,850
- If they pay 5,000 after all: Dr Bank 5,000, Cr Receivables 4,850, Cr Revenue 150
- If the discount was not expected: revenue 5,000; if it is then taken, revenue is reduced by 150
How it works
The transaction price is what the seller expects to receive in exchange for the goods or service. So anything the customer will probably not pay (discounts) is deducted, and amounts collected for third parties (tax) are excluded.
If the estimate of a settlement discount proves wrong, the difference is adjusted in revenue when the customer pays.
Traps
Taught in the course
- The sales tax accountFA 2 · Documents, systems, sales tax and discounts
- Sevda's invoiceFA 2 · Documents, systems, sales tax and discounts
- Exam-format practiceFA 2 · Documents, systems, sales tax and discounts
- Chapter bossFA 2 · Documents, systems, sales tax and discounts
- Four journal entriesFA 6 · Accruals, prepayments, accrued income and deferred income