IFRS 15 was issued in May 2014 and applies to an annual
reporting period beginning on or after 1 January 2018. For the syllabus between
September 2017 and August 2018, IFRS 15 will be examined and IAS 18 Revenue
will no longer be examined.
This new standard considers there to be a five step
approach when recognising revenue:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the
contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance
obligations in the contract
Step 5: Recognise revenue when (or as) the entity
satisfies a performance obligation
The significant area in which the F3/FFA syllabus will be
affected is the recognition of revenue for sales where a cash/settlement
discount allowed is offered to the customer.
ACCOUNTING FOR DISCOUNTS
Prompt payment discounts (also known as settlement or
cash discounts) are offered to credit customers to encourage prompt payment of
their account. It is not guaranteed that customers will take advantage of
prompt payment discounts at the point of sale as it is dependent upon whether
or not credit customer pays within the settlement window.
Historically, and in accordance with IAS 18 Revenue,
income from a credit sale in which a settlement discount has been offered has
been recognised in full at the point of sale. Accounting for the settlement
discount only takes place if the customer pays within the required settlement
period (thus accepting the discount). The discount allowed would be recorded as
an expense in the seller’s statement of profit or loss and revenue would remain
at the full amount.
Example: Freezy Ltd sold goods with a list price of $2,000
on credit to a customer. A Ltd has a 30-day payment period and has offered the
customer a 5% prompt payment discount if payment is made within 14 days.
Solution: In accordance with IAS 18 Revenue, the initial
sale would have been recorded as debit Receivables $2,000 credit Revenue $2,000.
If the customer pays within the 14-day settlement period, the accounting entry
would be Debit Cash $1,900 Debit Discounts Allowed $100 Credit Receivables $2,000.
If the customer pays out with the 14-day period, Freezy Ltd would record the
receipt as Debit Cash $2,000 Credit Receivables $2,000.
IMPACT OF IFRS 15 ON ACCOUNTING FOR PROMPT PAYMENT
DISCOUNTS
The five step approach to recognising revenue as outlined
above will change the way in which prompt payment discounts are accounted for.
In order to recognise revenue, an entity must determine the amount of consideration
it expects to be entitled to in accordance with the criteria of IFRS 15.
Per IFRS 15, the third step of the five step approach
requires an entity to 'Determine the transaction price', which is the amount to
which an entity expects to be entitled in exchange for the transfer of goods
and services. When making this determination, an entity will consider past
customary business practices. [IFRS 15:47]
When prompt payments discounts are offered, it means that
the expected consideration is variable (variable consideration) as the amount
the entity will actually receive is dependent upon the customer choice as to
whether it will take advantage of the discount.
Where a contract contains elements of variable
consideration, the entity should estimate the amount of variable consideration
to which it will be entitled under the contract. [IFRS 15:50]
The standard deals with the uncertainty relating to
variable consideration by limiting the amount of variable consideration that
can be recognised. Specifically, variable consideration is only included in the
transaction price if, and to the extent that, it is highly probable that its
inclusion will not result in a significant revenue reversal in the future when
the uncertainty has been subsequently resolved. [IFRS 15:56]
When an entity enters into a sale with a customer and a
prompt payment discount has been offered, the amount of revenue to be
recognised initially will need to be estimated taking into account the
probability of the discount being accepted. When the entity expects that the
customer will accept the discount, revenue should be recorded net of the
discount.
Example: J Ltd sold goods with a list Price of $2,000 on
credit to a customer. J Ltd has a 30 day payment period and has offered the
customer a 3% prompt payment discount if payment is made within 15 days. Based
on past experience the customer is expected to take up the 3% discount.
Solution:
The initial sale will be recorded as
|
$
|
$
|
Receivables
|
1,940
|
|
Revenue
|
|
1,940
|
If the customer pays within the 14-day settlement period,
the accounting entry would be
|
$
|
$
|
Cash
|
1,940
|
|
Receivables
|
|
1,940
|
If the customer does not pay within the 14-day period,
|
$
|
$
|
Cash
|
2,000
|
|
Receivables
|
|
1,940
|
Revenue
|
|
60
|
Refer to same example if based on past experience the
customer is not expected to take up the 3% discount.
Solution:
The initial sale will be recorded as
|
$
|
$
|
Receivables
|
2,000
|
|
Revenue
|
|
2,000
|
If the customer pays within the 14-day settlement period,
the accounting entry would be
|
$
|
$
|
Cash
|
1,940
|
|
Revenue
|
60
|
|
Receivables
|
|
2,000
|
If the customer pays as expected date
|
$
|
$
|
Cash
|
2,000
|
|
Receivables
|
|
2,000
|
As the above example highlights, the introduction of IFRS
15 will have a significant impact on the reported revenue. Offering prompt
payment discounts will result in lower revenue being recognised (when the
discount is accepted). This will have an impact on entities’ gross profit
margins. However, the net impact on profit as a whole will be the same as, by
recording revenue net of the prompt payment discount, there is no longer a
requirement to record a discount allowed expense in the statement of profit or
loss. Prompt payment discounts are examined in FA1, FA2 and FA and so an
appreciation of this impact is important.
source;
IFRS 15 is concerned with reporting the nature, amount, timing and uncertainty of revenue and cash flows resulting from contracts with customers.
revenue from contracts with customers arises from fairly common transactions:
- the sale of goods
- the rendering of services.
Generally revenue is recognised when the entity has transferred control over goods and services to the buyer. Control of an asset is described in the standard as 'the ability to direct use of, and obtain substantially all the remaining benefits from, the asset' (IFRS 15)
Revenue is generally recognised as earned at the point of sale, because at that point four criteria will generally have been met
- the product or service has been provided to the buyer
- the buyer has recognised his liability to pay for the goods or services provided. The converse of this is that the seller has recognised that the ownership of goods has passed from himself to the buyer.
- the buyer has indicated his willingness to hand over cash or other assets in settlement of his liability
- The monetary value of the goods or services has been established
Key definitions [IFRS 15: Appendix A]
Contract
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An agreement between two or more parties that creates
enforceable rights and obligations.
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Customer
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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.
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Income
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Increases in economic benefits during the accounting
period in the form of inflows or enhancements of assets or decreases of
liabilities that result in an increase in equity, other than those relating
to contributions from equity participants.
|
Performance obligation
|
A promise in a contract with a customer to transfer to
the customer either:
·
a good or service (or a bundle of goods or
services) that is distinct; or
·
a series of distinct goods or services that
are substantially the same and that have the same pattern of transfer to the
customer.
|
Revenue
|
Income arising in the course of an entity’s ordinary
activities.
|
Transaction price
|
The amount of consideration to which an entity expects
to be entitled in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties.
|
source: bpp interative text
[IFRS 15: Appendix A]
- An agreement between two or more parties that creates enforceable rights and obligations.
- 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.
- Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating to contributions from equity participants.
- A promise in a contract with a customer to transfer to the customer either:
- a good or service (or a bundle of goods or services) that is distinct; or
- a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
- Income arising in the course of an entity’s ordinary activities.
- The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
