9. Revenue (IFRS 15) (FRS 102 s23)

Question 1

How is income defined in the conceptual framework?

Answer 1

Income is defined in the conceptual frame work as ‘increases in assets or decreases in liabilities, that result in increase in equity, other than those relating to contributions from holders of equity claims’ (Conceptual Framework: para 4.68)

Question 2

Define revenue. (3)

Answer 2

Income arising in the course of an entity’s ordinary activities (IFRS 15: Appendix A), which includes:
Sales
Turnover
Royalties

Revenue includes both credit and cash sales, net of trade and early settlement discounts, refunds or VAT.

Question 3

How do gains from the disposal of assets affect revenue?

Answer 3

Gains such as the profit made on the disposal of tangible non-current assets, are not included in the definition of revenue.

The profit on disposal of tangible non-current assets may instead form part of ‘other income’ which is presented after gross profit, or be netted of against the relevant expense category when preparing the statement of profit or loss.

(The long form question in the Accounting exam will indicate where such profits on disposal should be presented).

Question 4

How is interest received linked to income and revenue?

Answer 4

Interest received, for example on bank balances, and dividends received from investments are both forms of income but are not presented in the revenue. They are presented as ‘finance income’ (sometimes referred to as ‘investment income’) in the statement of profit or loss.

Question 5

How does IFRS 15 prescribe the recognition of revenue?

Answer 5

IFRS 15 prescribes the accounting treatment of revenue.
Generally revenue is recognised when the entity has transferred promised goods or services to the customer (IFRS 15: para.2)

Question 6

According to IFRS 15, what is the process for recognising revenue?

Answer 6

1. Identify the contract with the customer
   - This is required in order to understand what has been agreed between the entity and the customer. In ‘Accounting’, this will be a simple sale of goods or provision of services.
2. Identify the separate performance obligations
   - A contract includes promises to provide goods or services to a customer. Those promises are called performance obligations. We will always assume that performance obligations are distinct and that the contract is for the delivery of one specified good or service. You can assume that performance obligations are satisfied when goods are delivered to a customer or a services is provided to a customer.
3. Determine the transaction price
   - The transaction price is the amount of consideration a company expects to be entitled to receive from the customer in exchange for transferring the promised good or service. Consideration is normally cash or a promise from the customer to settle in cash at a later date in a credit transaction.
4. Allocate the transaction price to the performance obligations
   - If a contract contains more than one performance obligation, the transaction price must be allocated to each performance obligation. For ‘Accounting’ we will always assume a single performance obligation with the whole transaction price allocated to that single performance obligation, so you will not need to allocate the transaction price.
5. Recognise revenue when (or as) a performance obligation is satisfied
   - The entity satisfies a performance obligation by transferring control of a promised good or service to the customer. A performance obligation can be satisfied at a point in time, such as when goods are delivered to the customer, or over time, such as for an ongoing maintenance agreement.