Section 3400 – Revenue (ASPE) UFE Study Guide

Revenue (IFRS)
Last Updated: October 3, 2012

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Revenue is covered under

  • IFRS – IAS 18 (Revenue); and
  • ASPE – Section 3400 (Revenue)

Determine first whether the entity is a public entity required to use IFRS or private entity opting to use IFRS. Private entities opting to use ASPE should use the ASPE guidance. This standard covers the sale of goods and the rendering of services by an entity in the ordinary course of business.

This section excludes the following types of transactions:

  • Revenues from investments accounted under the equity method (Section 3051)
  • Revenues from lease agreements (Section 3065)
  • Revenues from Government grants (Section 3800)

 

Under ASPE (Section 3400)

Definitions

  • Revenue is the cash, receivables and other consideration coming into the business from its ordinary business activity such as sale of goods or provision of services.
  • Revenue collected on behalf of another party (sales tax for example) is not an economic benefit for the entity and is excluded from Revenue.
  • The Completed Contract Method recognizes revenue when the good or service has been sold/rendered and the contract is substantially complete.
  • The Percentage of Completion Method recognizes revenue proportionately with the degree of completion of the service/product.

 Recognition

 Sales of Goods

Performance is considered complete when:

  • Significant risks and rewards of ownership are transferred.
    • No liability for unsatisfactory performance remains to seller
    • Purchaser cannot rescind the transaction
    • Goods are not sold under consignment
  • All significant acts for the transaction are complete
  • Seller retains no continuing managerial involvement or control of the goods
  • The amount of consideration for the transaction is measurable considering possible returns

Service Contracts

Performance is determined using whichever method relates the revenue to work completed best and once measurement of the consideration is known:

  • Percentage of Completion Method –
    • When there is more than one act, must use rational and consistent basis such as sales value, associated costs, progress, number of acts, etc.
    • When unknown number of acts over a known period of time you could use straight-line basis unless evidence of a better method exists.
    • Amounts billed are not an appropriate basis for measurement.
  • Completed Contract Method –
    • Only appropriate when performance is a single act or when there is no reasonable way to estimate the extent of progress towards completion.

Additional Performance Criteria (Applies to Goods and Services)

Performance is considered complete when:

  • Persuasive evidence of an arrangement exists, consider:
    • Customary business practices
    • Side arrangements
    • Consignment arrangements
    • Rights of return
    • Requirements to repurchase the product
  • Delivery has occurred or services rendered, consider:
    • Bill and hold arrangements
    • Customer acceptance of the product
    • Layaway sales arrangements
    • Non-refundable fee arrangements
    • Licensing and similar fee arrangements
  • Sellers’ price to the buyer is fixed and determinable, consider:
    • Cancellable sales arrangements
    • Right of return arrangements
    • Price protection and/or inventory credit arrangements
    • Refundable fee for service arrangements

Multiple-Deliverable Transactions

Recognition criteria are usually applied to individual transactions but there are many cases when there are separately identifiable components of a single transaction. This is sometimes referred to as multiple-deliverable transactions. When this occurs (use judgment) then the recognition criteria should be applied to each individual component. An example of this is the sale of software where there is also an identifiable amount of separate servicing for a given amount of time.

Interest, Royalties and Dividends

Interest, Royalties and Dividends shall be recognized when it’s probable that the economic benefits will flow to the entity and the amount of revenue is measurable.

Revenue is recognized for each as follows:

  •  Interest: On a time-proportion basis
  • Royalties: Accrual basis based on the substance of the agreement
  • Dividends: When the right to receive the payment is established

 

 Effect of Uncertainties

 In order to recognize revenue, collection must ultimately be assured. When there is uncertainty regarding ultimate collection then revenue should be recorded only when case is received.

When it’s uncertain that you will collect from an entity after revenue is recognized this is treated as a bad debt expense not a reduction in revenue.

Revenue would not be recognized in cases when the amount of consideration is not clearly known (depends on resale) or when returns are not predictable.

Reporting Revenue Gross vs. Net

In more complex situations you would have to determine whether the entity is acting as a principal or an agent in an agency relationship.

An entity is acting as a principal when it has exposure to the significant risks and rewards. Consider:

  • The entity has the primary responsibility for providing the goods or service to the customer.
  • Entity has inventory risk in the process.
  • Entity has flexibility in establishing the price.
  • Entity bears credit/collection risk.

Principal = Use Gross Revenue, Agent = Use Net Revenue


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