[et_pb_section bb_built=”1″ admin_label=”Header – All Pages” transparent_background=”off” background_color=”#1e73be” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” custom_padding=”0px||0px|” next_background_color=”#000000″ custom_padding_tablet=”50px|0|50px|0″ custom_padding_last_edited=”on|desktop” global_module=”1221″][et_pb_row admin_label=”row” global_parent=”1221″ make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” custom_padding=”||5px|” allow_player_pause=”off” parallax=”off” parallax_method=”on” make_equal=”off” parallax_1=”off” parallax_method_1=”off” background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_post_title global_parent=”1221″ title=”on” meta=”off” author=”on” date=”on” categories=”on” comments=”on” featured_image=”off” featured_placement=”below” parallax_effect=”on” parallax_method=”off” text_orientation=”left” text_color=”light” text_background=”off” text_bg_color=”rgba(255,255,255,0.9)” module_bg_color=”rgba(255,255,255,0)” use_border_color=”off” border_color=”#ffffff” border_style=”solid” custom_padding=”10px|||” parallax=”on” background_color=”rgba(255,255,255,0)” /][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” custom_padding=”30px||0px|” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” background_color=”#1e73be” prev_background_color=”#000000″ next_background_color=”#ffffff” custom_padding_tablet=”0px||0px|” global_module=”1228″][et_pb_row global_parent=”1228″ make_fullwidth=”off” use_custom_width=”off” width_unit=”on” use_custom_gutter=”off” custom_padding=”30px||0px|” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” parallax_1=”off” parallax_method_1=”off” column_padding_mobile=”on” background_position=”top_left” background_repeat=”repeat” background_size=”initial”][et_pb_column type=”4_4″][et_pb_text global_parent=”1228″ background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid” background_position=”top_left” background_repeat=”repeat” background_size=”initial”] [breadcrumb] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section bb_built=”1″ fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″ custom_padding_tablet=”0px||0px|” custom_padding_last_edited=”on|desktop” prev_background_color=”#1e73be” next_background_color=”#000000″][et_pb_row][et_pb_column type=”4_4″][et_pb_toggle admin_label=”Index” _builder_version=”3.0.106″ title=”Index” open=”off”]
Section 23 – Revenue.
23.1.1 Exclusions from Section 23.
23.2.1 Extract from FRS 102-Section 23.3-23.4.
23.2.2.1 Revenue – definition and basic requirements.
23.2.2.1.1 Definition of revenue.
23.2.2.1.2 Recognition criteria.
23.2.2.1.2.1 Definition of probable.
23.2.2.1.2.2 Reliable measurement
23.2.2.1.2.3 Sales incentives/rebates/settlement
23.2.2.1.3 Principal versus agent
23.2.2.1.3.1 Definition of an agent
23.2.2.1.3.2 Definition of a person acting as principal
23.2.2.1.3.3 Indication that a party is acting as principal
23.3.1 Extract from FRS 102- Section 23.5.
23.4 Exchanges of goods or services.
23.4.1 Extract from FRS 102 – Section 23.6-23.7.
23.5 Identification of the revenue transaction.
23.5.1 Extract from FRS 102 – Section 23.8-23.9.
23.5.2.2 Assessing whether separable identifiable components exist
23.5.2.2.1 Methods of allocating total consideration between components.
23.5.2.2.1.1 The relative fair value basis.
23.5.2.2.1.2 Cost plus a reasonable margin method.
23.5.2.3 Customer loyalty awards.
23.5.2.3.1 Issues to consider when determining the fair value of an award.
23.6.1 Extract from FRS 102 – Sections 23.10-23.13.
23.6.2.2 Revenue recognition criteria.
23.6.2.1.1 Example of risk and rewards of ownership transferring.
23.6.2.2.2 Assessing whether ongoing managerial involvement exists.
23.6.2.3 Right of return in exchange for cash/vouchers.
23.6.2.7 Sale of extended guarantee.
23.6.2.9 Recognition where risk and rewards of ownership based on shipment terms.
23.6.2.10 Sale of goods with retention of title clause.
23.6.2.11 Bill and hold sales.
23.6.2.12 Goods shipped subject to conditions.
23.6.2.14 Payments in advance.
23.6.2.15 Sale and repurchase agreements.
23.6.2.16 Sales to intermediate parties, such as distributors, dealers or others for Resale.
23.6.2.17 Subscriptions to publications and similar items.
23.6.2.18 Instalment sales, under which the consideration is receivable in instalments.
23.7 Agreements for the construction of real estate.
23.7.1 Extract from FRS 102 – Section 23A.14-23A.15.
23.8.1 Extract from FRS 102 – Sections 23.14-23.16, 23.21, 23.23-23.24.
23.8.2.1 Service recognition criteria.
23.8.2.1.1 Costs that relate to future activity.
23.8.2.1.2 Reliable measurements not probable.
23.8.2.1.3 Collectability no longer profitable.
23.8.2.1.4 Changes in estimates in revenues.
23.8.2.2 Intermediate number of acts over specified period.
23.8.2.3 Service with a significant act
23.8.2.4 Stage of completion method – 3 methods.
23.8.2.4.1 Proportion of costs method.
23.8.2.5 Other specific examples as extracted from the Appendix to Section 23 of FRS 102.
23.8.2.5.2 Servicing fees included in the price of the product
23.8.2.5.3 Advertising commissions.
23.8.2.5.4 Insurance agency commissions.
23.8.2.5.5 Financial services fees.
23.8.2.5.8 Initiation, entrance and membership fees.
23.8.2.5.9.1 Franchise fees: Supplies of equipment and other tangible assets.
23.8.2.5.9.2 Franchise fees: Supplies of initial and subsequent services.
23.8.2.5.9.3 Franchise fees: Continuing franchise fees.
23.8.2.5.9.4 Franchise fees: Agency transactions.
23.8.2.5.10 Fees from the development of customised software.
23.9.1 Extract from FRS 102 – Sections 23.17-23.27.
23.9.2.1 Definition of construction contract and its importance.
23.9.2.1.1 Requirements of length of a construction contract
23.9.2.2 Combination and segmentation of contracts.
23.9.2.3 Recognition of Contract revenue and contract costs.
23.9.2.4.1 Changes in fair value – reasons.
23.9.2.4.2 Penalties and variations – recognition and impact
23.9.2.4.3 Incentive payments.
23.9.2.5.1 Directly related contract costs.
23.9.2.5.2 Incidental income from directly related costs.
23.9.2.5.3 Costs directly attributable to the contract in general – overhead costs.
23.9.2.5.3.1 Costs excluded from directly attributable overhead costs.
23.9.2.5.4 Directly attributable costs to be excluded (specific costs)
23.9.2.6 Percentage of completion.
23.9.2.6.1 Methods to determine the percentage of completion.
23.9.2.6.1.1 Preparation of costs incurred over total expected costs.
23.9.2.6.1.2 Surveys of work performed.
23.9.2.6.1.3 Completion of physical preparation of contract work.
23.9.2.6.2 Assessment of which method to use.
23.9.2.7 Reliable measurement – stage of completion cost to complete.
23.9.2.8 Loss expected on contract
23.10.1 Extract from FRS102 – Section 23.29(a)
23.11.1 Extract from FRS102 – Section 23.29(b)
23.11.2.2 Assignment of rights.
23.11.2.3 Licence fee or royalty contingent on future events.
23.11.2.4 Points to consider when deciding recognition initially or over a period of time.
23.12.1 Extract from FRS102 – Section 23.29(c)
23.13.1 Extract from FRS102 – Section 23.30.
23.13.2.1 Accounting policies.
23.13.2.1.2 Acconting policy for insuracne broker
23.13.2.1.4 Accountig policy note where turnover is derived from investments.
23.13.2.1.5 Accounting policy for a software company.
23.13.2.1.6 Extract from accounting policy showing royalty income.
23.13.2.1.8 Contracting work – accounting policy.
23.13.2.2 Note to the financial statements.
23.13.2.2.1 Turnover and segmental analysis.
[/et_pb_toggle][/et_pb_column][/et_pb_row][et_pb_row][et_pb_column type=”3_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color_all=”off” module_alignment=”left” _builder_version=”3.0.101″]
23.2 Measurement of Revenue
23.2.1 Extract from FRS 102-Section 23.3-23.4
23.3 An entity shall measure revenue at the fair value of the consideration received or receivable. The fair value of the consideration received, or receivable takes into account the amount of any trade discounts, prompt settlement discounts and volume rebates allowed by the entity.
23.4 An entity shall include in revenue only the gross inflows of economic benefits received and receivable by the entity on its own account. An entity shall exclude from revenue all amounts collected on behalf of third parties such as sales taxes, goods and services taxes and value added taxes. In an agency relationship, an entity (the agent) shall include in revenue only the amount of its commission. The amounts collected on behalf of the principal are not revenue of the entity.
23.2.2 OmniPro comment
23.2.2.1 Revenue – definition and basic requirements
23.2.2.1.1 Definition of revenue
Appendix 1 of FRS 102 defines revenue as the ‘gross inflow of economic benefits during the period arising in the course of the ordinary activities of the entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants’.
From the above definition it is evident that an item will only be shown as revenue where it is incurred in the ordinary course of business. As an example, a short-term car hire company who rents cars to customers and at the end of the cars life disposes of these cars. These cars would be classed as property, plant and equipment in the company’s financial statements. In this case the items that are sold in the ordinary course of business is the provision of car services in return for a fee. Therefore, the fee charged to customer for the provision of the car would be recorded as revenue. However, on the sale of the vehicle the proceeds from the sale would not be shown in revenue instead this would be posted below the revenue line to be shown as a profit/loss on disposal. The sale of the vehicles is not the trade of the company. If in this example, the company also sold second hand cars, then it is possible for the sale of the car to be shown in revenue as the sale of cars is also a business which the company is engaged in.
23.2.2.1.2 Recognition criteria
Revenue within the scope of Section 23 shall only be recognised at the fair value of the consideration received or receivable less trade discounts, prompt settlement discounts and volume rebates allowed by the entity at a minimum, when all of the following criteria are met (Section 23.3 and 23.4 of FRS 102):
- Revenue can be measured reliably; and
- It is probable that the economic benefits associated with the transaction can flow to the entity.
Note the above is the minimum requirements, additional requirements apply to the sale of goods and rendering of services. These are discussed further below.
23.2.2.1.2.1 Definition of probable
Probable is defined as ‘more likely than not’ in Appendix I of FRS 102. Until the probable threshold has been past no revenue can be recognised. Note where at the time of sale where credit is provided by the entity, the likelihood of receiving payment was probable and subsequently after issuing the invoice it now looks like there is doubt about receiving all or some of the sale recognised, the provision booked against the receivable balance should be posted to expenses in the profit and loss and should not be debited against sales. See example 1.
Example 1: Probable or possible criteria on sale
Company A sold goods to customer B regularly on 2 months credit. There was no history of nonpayment in the past. On 1 February due to financial difficulties customer B contacted Company A and all its creditors to enter into an arrangement to restructure its debts. On 4 February Company A ships a product to Customer B which was ordered in January. For this sale, the revenue should not be recognised until the money is received from Customer B as it is not probable that it will be paid for.
For the balance outstanding on the trade debtors listing in relation to sales made pre-1 February any provision required should be posted as a debit to expenses in the profit and loss account as opposed to a debit to revenue.
23.2.2.1.2.2 Reliable measurement
The reliable measurement should be very straight forward for a sale of goods as they would be sold at an agreed sales price. However, issues may arise in relation to measuring services or construction activities reliably as there is more judgement involved.
23.2.2.1.2.3 Sales incentives/rebates/settlement
As detailed in Section 23.3 of FRS 102, revenue should be measured at the fair value of the consideration received or receivable which is the total sales value less any discounts and rebates given to the customer, less any sales taxes which has to be paid over to a third party. Usually the fair value will be the invoiced value however there may be instances where discounts and rebates are provided after the sale is recognised based on volumes sold to the customer or early settlements.
In relation to sales incentives provided to customers when entering into a contract, these are usually treated as rebates and will be deducted from revenue on initial recognition. See example 2 and 3 below.
Example 2: Sales incentives/rebates
Company A provides to customer’s sales incentives to purchase its goods as follows. Where sales for the year are:
CU0-CU50,000 a sales rebate of 0% is applied
CU50,000-CU75,000 a sales rebate of 2% is applied
>CU75,000 a sales rebate of 5% is applied
The listed sales price for Company A product is CU100 plus VAT of CU23. Company A sells goods to customer B. In the past Customer B has always purchased between CU50,000-CU75,000 from Company A and it is probable a similar level will be purchased from Company A for the coming year. When recognising the sale on delivery to the customer the expected rebate to be issued at the end of the year should be incorporated. The journal to be posted on recognition is:
| CU | CU | |
| Dr Debtors | 123 | |
| Cr Revenue | 100 | |
| Cr VAT Liability | 23 |
Being journal to recognise the sale
| CU | CU | |
| Dr Revenue
(CU100 * 2% being the most probable rate that will be achieved) |
2 | |
| Cr Rebate Accrual | 2 |
Being journal to reflect estimated rebate payable to the customer based on current sales
If during the year, it looks like the total sales will exceed CU75,000 then the higher rebate of 5% should be applied so a catch up charge on the rebate should be posted to sales to increase the rebate of 2% previously recognised on sales prior to that date to 5%.
Example 3: Early settlements
Company A sells goods on credit to customers. It gives customers a 5% settlement discount if the invoices are paid within 7 days. From past experience 30% of customers take up this option. If we assume sales for the month were CU100,000 which occur at month end, the total revenue to be recognised should be:
CU100,000 * (30%* 5%) = CU1,500. Hence the journal required is to Cr settlement discount accrual and Dr revenue.
23.2.2.1.3 Principal versus agent
Section 23.4 of FRS 102 deals with the revenue recognition for a company acting as principal or agent.
23.2.2.1.3.1 Definition of an agent
‘An entity is acting as an agent when it does not have the exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. One feature indicating that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer’ (Appendix I FRS 102).
23.2.2.1.3.2 Definition of a person acting as principal
An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. Features that indicate that an entity is acting as a principal include:
23.2.2.1.3.3 Indication that a party is acting as principal
- the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer;
- the entity has inventory risk before or after the customer order, during shipping or on return;
- the entity has latitude in establishing prices, either directly or indirectly, for example by providing additional goods or services; and
- the entity bears the customer’s credit risk for the amount receivable from the customer.’ (FRS 102 Appendix I).
Example 4: Principal vs Agent
Company A purchases goods from Company B as part of a distribution agreement. The distribution agreement states that:
- Company A takes the inventory into its warehouse and transports and invoices the goods to the final customer but also packages these
- Where Company A has excess stock it can be returned to Company B without any penalty
- Company A is responsible for insuring the goods while in inventory however obsolete stock can be returned
- Company A has no right in determining the selling price, this is dictated by Company B. The mark up included in the sales price by Company A is dictated by Company B – markup is set at 50% of the sales price.
- In the event of default in payment by the customer after all avenues have been exhausted Company B bears the risk of bad debts
During the month Company A sold CU100,000 of the products. The company purchased CU80,000 in stock from Company B which existed at year end.
Based on the evidence available, Company A is acting as agent as it has no say in determining the selling price, bears no inventory risk nor credit risk. Company A would therefore only recognise the net amount as revenue (i.e. the sales price less the cost of purchase of the goods). Company B is the principal and should not recognise any revenue until the Company A sells the goods on to the final customer, it should continue to carry these in stock as it is akin to a consignment stock agreement.
The journals required in the month for Company A are:
| CU | CU | |
| Dr Debtors | 33,333 | |
| Cr Revenue
(CU100,000 being the sales price less CU66,667 being the purchase price as Company A earns a 50% mark-up) |
33,333 |
Being journal to recognise the net commission earned on the sale
The journals required in the month for Company B are:
| CU | CU | |
| Dr Debtors | 100,000 | |
| Cr Revenue | 100,000 |
Being journal to reflect the amounts owed from Company A. Note the inventory of CU53,333 (CU80,000- mark up of CU26,667) is kept in the books of Company B as this inventory is still under the control of Company B.
If in the above example, Company A held the inventory risk in full or could determine the selling price this would usually indicate that it is acting as principal and Company A would then show inventory on the balance sheet and the gross revenue in the revenue line and the cost of the products in cost of sales.
Example 5: Principal vs agent
Company A is a retailer that deals in cash so there is no credit risk. The company sells the following products:
Classification
Mobile phone e-top up’s which are printed from a machine as required. Agent
Stamps (bought in bulk by the retailer and bears the risk if they are
not sold) Principal
National lottery tickets which are printed from a machine as required Agent
Scratch cards (bought in bulk by the retailer and bears the risk if
they are not sold) Principal
As can be seen where the retailer sells items which are sold in electronic form the seller is acting as an agent as it bear no risk i.e. it does not need to hold inventory of the items and there is no risk of obsolescence, it bears no credit risk as cash is received when sold. In these instances, the sales commission received should be recognised as turnover.
Where there is a tangible product and where the retailer is required to hold stock and bears the risk of loss if these are damaged or stolen then they are acting as a principal. Therefore the gross sales should be recognised in revenue and the cost of the products shown in cost of sales.
[/et_pb_text][/et_pb_column][et_pb_column type=”1_4″][et_pb_toggle _builder_version=”3.0.106″ title=”Practical Examples” open=”off”]
Examples
Example 1: Probable or possible criteria on sale.
Example 2: Sales incentives/rebates.
Example 6: Deferred payment example.
Example 7: Deferred payment example.
Example 8: Identifying separable components and allocating relative fair value.
Example 9: Identifying separable components and allocating relative fair value – goods.
Example 10: Relative fair value results in a loss.
Example 11: Cost plus a reasonable margin.
Example 12: Customer loyalty awards
Example 13: Right of return in exchange for cash/vouchers.
Example 15: Discount coupons – buy one get one free.
Example 17: Sale of extended guarantee.
Example 18: Interest free credit
Example 19: Construction real estate – buyer has the right to specify structural design.
Example 20: Construction real estate – buyer has no right to specify structural design.
Example 20A: Reliable measurement
Example 20B: Reliable measurement
Example 21: Stage of completion – detailed in the contract
Example 22: Stage of completion.
Example 23: Proportion of costs method.
Example 24: Insurance agency commissions.
Example 25: – Proportion of cost basis.
Example 26: Inability to reliably measure the contract
Example 28: Application of change in estimate.
Example 29 – Extract from the Accounting policy notes.
Example 32: Extract from notes to the financial statements for revenue derived by brokers.
Example 33: Extract from notes to the financial statements for construction contracts
[/et_pb_toggle][/et_pb_column][/et_pb_row][/et_pb_section]