Users of financial statements rely on information about revenue to assess a company’s performance and prospects, and to compare that company with other companies. Although accounting for revenues would appear to be straight forward – the invoice amount should equal revenue – it is not that easy when the objective is to measure revenue in the amount an entity expects to receive in exchange for goods or services transferred to a customer.

In that case, some the variables that need to be taken into account are:

  • multiple deliverables
  • warranty
  • financing
  • collectibility, and
  • period covered.

Since all of these factors will impact the revenue generated by the sale or the performance, management needs to factor them into the revenue equation at the time of the transaction.

Current developments

Part I – IFRS

IFRS 15, Revenue from Contracts with Customers outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. It supersedes the IASB’s current revenue recognition guidance including IAS 18, Revenue, IAS 11, Construction Contracts, and related Interpretations.

The core principle is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The new Standard introduces far more prescriptive guidance than was included in IAS 18, IAS 11 and the related Interpretations and the majority of entities are likely to be affected by this, at least to some extent.

Furthermore, the new Standard may result in substantial changes to the timing of revenue recognition for some entities.

Entities will need to consider the extent to which changes, in some cases substantial, may be required to processes, IT systems and internal controls as a result both of the new model and of the increased disclosure requirements.

PSAS – Public Sector Accounting Standards

Although governments and government organizations may be involved in the sale of goods and receive revenues from the provision of services and long-term contracts, these transactions are rarely of an exchange nature (i.e., exchanges of equal value). Therefore, revenue recognition principles need to be developed to apply to revenues commonly encountered in the public sector and not addressed in standards for profit-oriented entities, such as government transfers, tax revenue, fines and penalties, royalties, license fees, other fees, sales and rental, etc.

In 2011, the PSAB received an analysis of the nature of government’s sources of revenue in relation to the nature of revenue being addressed in the IASB’s Revenue Recognition project. The PSAB concluded that a public sector focused revenue recognition standard was needed and it asked staff to develop a revised Project Proposal for the Board’s consideration. PSAB expects to approve a statement of principles in September 2012.

Consideration points

Reporting the following items may require significant management’s estimates and judgments. Directors should discuss with management its selection of assumptions to ensure that management has considered a variety of scenarios to reach a balanced approach:

  • Credit risk
  • Electronic commerce
  • Changes in rates of return
  • Changes in product/services offerings
  • Long-term arrangements