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Summary Financial Reporting 2 (ACC2012W) - REVENUE
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- University Of Cape Town (UCT)
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REVENUEINCOME
DEFINITION – IFRS15 APPENDIX A
Income is increases in economic benefits during the reporting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity investors.
∆𝐸 = ∆(𝐴 − 𝐿)
Income is divided into two categories, namely Revenue as per IFRS 15 and other gains.
Revenue Gains Income
REVENUE DEFINITION – IFRS 15 APPENDIX A
Revenue is income that arises in the course of the ordinary activities of an entity.
Therefore, in order to qualify as revenue, it must:
- First satisfy the income definition
- Then satisfy the revenue definition (i.e. through ordinary activities)
If it does not satisfy the revenue definition, then it is a gain.
The scope of IFRS 15 is narrower and determines what is considered revenue and what is
out of scope.
IN SCOPE OUT OF SCOPE
- All contracts with customers - Leases (IFRS 16)
(except…) - Insurance contracts (IFRS 4)
- Incremental costs to obtain - Financial instruments (IFRS 9)
contracts (not FR2) - Rights/obligations
- Costs to fulfill contract (if no other - Non-monetary exchanges that lack
IFRA applies) (not FR2) commercial substance
This shows that if there is no contract or no customer, there is no revenue recognised as
per IFRS 15.
, CONTRACT An agreement between two or more parties that creates enforceable
rights and obligations.
CUSTOMER A party that has contracted with an entity to obtain goods or services
that are an output of the entity’s ordinary activities in exchange for
consideration.
CONTRACT DEFINITION – IFRS15.9
A contract, within IFRS 15, has the following characteristics:
- the parties to the contract have approved the contract (in writing, orally or in
accordance with other customary business practices) and are committed to
perform their respective obligations;
- the entity can identify each party’s rights regarding the goods or services to be
transferred;
- the entity can identify the payment terms for the goods or services to be
transferred;
- the contract has commercial substance (ie the risk, timing or amount of the
entity’s future cash flows is expected to change as a result of the contract); and
- it is probable that the entity will collect the consideration to which it will be entitled
in exchange for the goods or services that will be transferred to the customer.
COLLECTABILITY - IFRS15.10
In evaluating whether collectability of an amount of consideration is probable, an entity
shall consider only the customer’s ability and intention to pay that amount of consideration
when it is due.
- The amount of consideration to which the entity will be entitled may be less than
the price stated in the contract if the consideration is variable because the entity
may offer the customer a price concession.
This is in line with what we know from the Conceptual Framework: that assets and liabilities
can only be recognised if they are probable. Revenue, as an income, arises from an
increase in an asset or decrease in a liability.
- When cash is received, the criterion are satisfied, and it is revenue.
- When a credit sale is made, IFRS 15 should not be applied unless the payment is
probable.
WHEN TO RECOGNISE REVENUE – IFRS 15.2
Revenue is recognised when a performance obligation is satisfied.
Recognise revenue to depict the transfer of promised goods or services to a customer in
an amount that reflects the consideration to which the company expects to be entitled
in exchange for those goods and services.
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